BackMacroeconomics Final Exam Study Guide: Aggregate Demand, Aggregate Supply, Money, and Monetary Policy
Study Guide - Smart Notes
Tailored notes based on your materials, expanded with key definitions, examples, and context.
Chapter 11: Economic Growth
11.1 Economic Growth over Time and around the World
Economic growth refers to the increase in the value of goods and services produced by an economy over time. It is typically measured by the growth rate of real Gross Domestic Product (GDP).
Key Point: Economic growth rates vary significantly across countries and historical periods.
Example: Developed countries tend to have higher and more stable growth rates compared to developing countries.
11.2 What Determines How Fast Economies Grow?
The speed of economic growth is influenced by several factors, including capital accumulation, technological progress, labor force growth, and institutional quality.
Key Point: Investment in physical and human capital, innovation, and sound economic policies promote faster growth.
Formula: , where is output, is technology, is capital, and is labor.
11.3 Economic Growth in the United States
The United States has experienced sustained economic growth due to high rates of innovation, capital investment, and a flexible labor market.
Key Point: U.S. growth has been driven by technological advances and productivity improvements.
11.4 Why Isn’t the Whole World Rich?
Global disparities in income and wealth are due to differences in growth rates, which stem from variations in resources, institutions, and policies.
Key Point: Barriers such as poor governance, lack of access to capital, and limited education hinder growth in many countries.
11.5 Growth Policies
Governments can influence economic growth through policies that encourage investment, innovation, and education.
Key Point: Effective growth policies include infrastructure investment, support for research and development, and stable macroeconomic environments.
Chapter 13: Aggregate Demand and Aggregate Supply
13.1 Aggregate Demand
The aggregate demand (AD) curve shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.
Key Point: The AD curve slopes downward due to the Wealth Effect, Interest Rate Effect, and International Trade Effect.
Example: As the price level falls, consumers feel wealthier and spend more, increasing real GDP demanded.
Variables That Shift the Aggregate Demand Curve
An increase in... | Shifts AD curve... | Because... |
|---|---|---|
Interest rates | Left | Higher rates raise borrowing costs, reducing consumption and investment. |
Government purchases | Right | Government purchases are a component of aggregate demand. |
Personal income taxes/business taxes | Left | Higher taxes reduce disposable income and investment. |
Growth rate of domestic GDP relative to foreign GDP | Left | Imports rise faster than exports, reducing net exports. |
Exchange rate ($US value) | Left | Stronger dollar makes exports more expensive, reducing net exports. |
13.2 Aggregate Supply
Aggregate supply refers to the total quantity of goods and services that firms are willing and able to supply at different price levels.
Key Point: The relationship between output and price level differs in the short run and long run.
Short-Run Aggregate Supply (SRAS) Curve
The SRAS curve shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms.
Key Point: The SRAS is upward sloping because input prices adjust more slowly than output prices.
Long-Run Aggregate Supply (LRAS) Curve
The LRAS curve is vertical, indicating that in the long run, output is determined by resources and technology, not the price level.
Key Point: LRAS occurs at the level of potential or full-employment GDP.
Variables That Shift the SRAS Curve
An increase in... | Shifts SRAS curve... | Because... |
|---|---|---|
Labor force or capital stock | Right | More output can be produced at every price level. |
Productivity | Right | Costs of producing output fall. |
Expected future price level | Left | Firms expect higher costs and raise prices/wages. |
Price of important natural resource | Left | Higher input costs reduce output. |
13.3 Macroeconomic Equilibrium in the Long Run and the Short Run
Macroeconomic equilibrium occurs where the AD and SRAS curves intersect. In the long run, equilibrium is at the LRAS level, representing full employment.
Key Point: Short-run equilibrium can differ from long-run equilibrium due to price and wage stickiness.
13.4 A Dynamic Aggregate Demand and Aggregate Supply Model
The dynamic AD-AS model incorporates continual increases in real GDP, shifting LRAS and AD to the right, and accounts for inflation.
Key Point: Inflation occurs when total spending increases faster than production.
Example: If AD shifts further right than LRAS, the price level rises.
Chapter 14: Money and the Federal Reserve System
14.1 What Is Money, and Why Do We Need It?
Money is any asset that is widely accepted as payment for goods and services. It serves as a medium of exchange, unit of account, and store of value.
Key Point: Money facilitates trade and economic activity by eliminating the need for barter.
14.2 How Is Money Measured in the United States Today?
The money supply is measured using different aggregates:
M1: Currency in circulation + checking account deposits + savings account deposits.
M2: M1 + small-denomination time deposits + noninstitutional money market fund shares.
14.3 How Do Banks Create Money?
Banks create money through the process of accepting deposits and making loans, known as fractional reserve banking.
Key Point: When banks lend out a portion of deposits, new money is created in the form of checking account deposits.
Example: A $1,000 deposit can lead to a $1,900 increase in deposits through multiple rounds of lending.
14.4 The Federal Reserve System
The Federal Reserve (Fed) is the central bank of the United States, responsible for regulating banks and conducting monetary policy.
Key Point: The Fed acts as a lender of last resort to prevent bank panics and manages the money supply.
Definitions: Bank run (many depositors withdraw funds simultaneously); Bank panic (multiple banks experience runs).
14.5 The Quantity Theory of Money
The quantity theory of money relates the money supply to the price level and real output.
Formula:
Key Point: If the money supply grows faster than real GDP, inflation results; if slower, deflation occurs.
Chapter 15: Monetary Policy
15.1 What Is Monetary Policy?
Monetary policy refers to the actions taken by the Federal Reserve to manage interest rates and the money supply to achieve macroeconomic objectives.
Key Point: The Fed pursues goals of price stability, high employment, financial stability, and economic growth.
15.2 The Federal Funds Rate and How the Fed Conducts Monetary Policy
The federal funds rate is the interest rate banks charge each other for overnight loans. The Fed influences aggregate demand primarily through changes in interest rates.
Key Point: The Fed sets targets for the federal funds rate to influence economic activity.
Type of monetary policy | Purpose | Method |
|---|---|---|
Expansionary | Increase AD, real GDP, employment | Lower federal funds rate target |
Contractionary | Decrease AD, real GDP, employment | Raise federal funds rate target |
15.3 Monetary Policy and Economic Activity
Changes in interest rates affect consumption, investment, and net exports, thereby influencing aggregate demand.
Key Point: Lower interest rates encourage borrowing and spending; higher rates discourage it.
15.4 Monetary Policy in the Dynamic Aggregate Demand and Aggregate Supply Model
Monetary policy can shift the AD curve, affecting output and the price level in both the short run and long run.
Key Point: Expansionary policy shifts AD right, increasing output and price level; contractionary policy shifts AD left.
15.5 A Closer Look at the Fed's Setting of Monetary Policy Targets
The Fed uses various tools to manage the federal funds rate and achieve its policy goals.
Interest on reserve balances (IORB): Manages the federal funds rate.
Overnight reverse repurchase agreements (ON RRP): Sets a lower bound on the federal funds rate.
Open market operations: Buying and selling Treasury securities to adjust reserves.
Discount rate: Interest rate for loans to banks from the Fed.
Reserve requirements: Minimum percentage of deposits banks must hold as reserves (not actively used since 2020).
Chapter 16: Fiscal Policy
16.1 What Is Fiscal Policy?
Fiscal policy involves changes in government purchases, transfer payments, and taxes to achieve macroeconomic objectives.
Key Point: Fiscal policy can be automatic (stabilizers) or discretionary (intentional changes).
Example: Unemployment insurance payments increase during recessions.
16.2 The Effects of Fiscal Policy on Real GDP and the Price Level
Expansionary fiscal policy increases aggregate demand, raising output and the price level; contractionary policy does the opposite.
Key Point: Fiscal policy effectiveness depends on the multiplier effect and potential crowding out.
16.4 The Government Purchases, Tax, and Transfer Payment Multipliers
The multiplier effect describes how an initial change in autonomous expenditure leads to a larger change in real GDP.
Formula: , where is the marginal propensity to consume.
16.6 Deficits, Surpluses, and Federal Government Debt
A budget deficit occurs when government expenditures exceed tax revenue; a budget surplus is the opposite.
Key Point: Persistent deficits lead to accumulation of government debt.
Chapter 18: Open Economy Macroeconomics
18.1 The Balance of Payments
The balance of payments records a country's trade in goods, services, and assets with other countries. It consists of the current account, financial account, and capital account.
Key Point: The sum of the current account and financial account balances is zero.
Formula:
18.2 The Foreign Exchange Market and Exchange Rates
The foreign exchange market determines the equilibrium exchange rate, where the quantity of currency supplied equals the quantity demanded.
Key Point: Changes in demand for a currency shift the exchange rate.
18.4 The International Sector and National Saving and Investment
National saving equals domestic investment plus net foreign investment.
Formula:
Key Point: When a country spends more than its income, it borrows or sells assets to finance the difference.
18.5 The Effect of a Government Budget Deficit on Investment
Government budget deficits reduce national saving, leading to lower domestic investment and/or net foreign investment.
Key Point: Deficits can cause higher interest rates and "twin deficits" (budget and trade deficits).
18.6 Monetary Policy and Fiscal Policy in an Open Economy
Monetary and fiscal policies have different effects in open versus closed economies due to the impact on exchange rates and net exports.
Key Point: Expansionary monetary policy is more effective in an open economy; fiscal policy is less effective due to crowding out of net exports.
