Macroeconomics Final Exam Study Guide: Aggregate Demand, Aggregate Supply, Money, and Monetary Policy

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Chapter 11: Economic Growth

11.1 Economic Growth over Time and around the World

Economic growth refers to the increase in a country's output of goods and services over time, typically measured by real GDP. Growth rates vary significantly across countries and historical periods.

Key Point: Economic growth is essential for improving living standards and reducing poverty.
Example: Developed countries have experienced sustained economic growth, while many developing countries have lagged behind.

11.2 What Determines How Fast Economies Grow?

The rate of economic growth is determined by several factors, including the accumulation of physical capital, improvements in technology, and increases in the labor force.

Key Point: Productivity growth, driven by technological innovation and human capital, is crucial for long-term economic growth.
Formula:

11.3 Economic Growth in the United States

The United States has experienced significant economic growth due to its large capital stock, technological advancements, and skilled labor force.

Key Point: Policies that encourage investment in education, infrastructure, and research have supported U.S. growth.

11.4 Why Isn’t the Whole World Rich?

Global disparities in income and wealth are due to differences in institutions, access to technology, education, and capital.

Key Point: Poor governance, lack of property rights, and limited access to markets hinder growth in many countries.

11.5 Growth Policies

Governments can promote economic growth through policies that foster innovation, investment, and efficient markets.

Key Point: Examples include tax incentives for research and development, investment in public education, and trade liberalization.

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.
Formula: , where C = consumption, I = investment, G = government spending, X = exports, M = imports.

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. The relationship differs in the short run and long run.

Short-run aggregate supply (SRAS) curve: Shows the relationship between the price level and real GDP supplied in the short run.
Long-run aggregate supply (LRAS) curve: Shows the relationship in the long run, where output is determined by resources and technology, not the price level.

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 GDP.

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 SRAS shifting except when inflation expectations are high.

Key Point: Inflation occurs when total spending (AD) increases faster than production (LRAS).

Variables That Shift the Aggregate Demand Curve

An increase in...	Shifts the AD curve...	Because...
Interest rates	Left	Higher rates raise borrowing costs, reducing consumption and investment.
Government purchases	Right	Government spending is a component of AD.
Personal income taxes/business taxes	Left	Higher taxes reduce disposable income and investment.
Growth rate of domestic GDP vs. 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.

Variables That Shift the Short-Run Aggregate Supply Curve

An increase in...	Shifts the SRAS curve...	Because...
Labor force/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, increase wages/prices.
Supply shock (e.g., oil price spike)	Left	Input costs rise, reducing output.

*Additional info: The tables above summarize the main determinants of shifts in AD and SRAS, as presented in the slides.*

Chapter 14: Money and the Federal Reserve System

14.1 What Is Money, and Why Do We Need It?

Money serves as a medium of exchange, a unit of account, and a store of value, facilitating transactions and economic activity.

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, operating under a fractional reserve banking system.

Key Point: When banks lend out a portion of deposits, new money is created via the multiple expansion of deposits.
Example: A $1,000 deposit can lead to $1,900 in total deposits after successive rounds of lending.

14.4 The Federal Reserve System

The Federal Reserve (the 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 is when many depositors withdraw funds simultaneously; bank panic is when many banks experience runs at the same time.

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.

Goals: Price stability, high employment, stability of financial markets, 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 this rate to affect aggregate demand.

Key Point: The Fed sets targets for the federal funds rate and uses policy tools to achieve these targets.

How the Fed Uses the Federal Funds Rate

Type of Monetary Policy	Purpose	Method
Expansionary	Increase AD, real GDP, employment	Lower the target for the federal funds rate
Contractionary	Decrease AD, real GDP, employment	Raise the target for the federal funds rate

Controlling the Federal Funds Rate

Situation	Name	Method
Banks keep few reserves	Scarce-reserves regime	Adjust supply of reserves
Banks keep more reserves	Ample-reserves regime	Adjust interest rate on reserve balances (IORB)

15.3 Monetary Policy and Economic Activity

Monetary policy affects aggregate demand through its impact on consumption, investment, and net exports.

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

In the dynamic AD-AS model, monetary policy can shift AD and influence inflation and output over time.

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 a variety of tools to manage the federal funds rate and achieve its policy goals.

Interest on reserve balances (IORB): Main tool for managing the federal funds rate.
Open market operations: Buying and selling Treasury securities to adjust reserves.
Discount rate: Rate charged for loans to banks.
Reserve requirements: Minimum reserves banks must hold (rarely used now).
Quantitative easing: Used when rates are near zero.
Forward guidance: Communicating future policy intentions.

Tables and Diagrams

Summary Table: Factors Shifting Aggregate Demand and Supply

Factor	AD Shift	SRAS Shift
Interest rates	Left (if increase)	—
Government purchases	Right (if increase)	—
Taxes	Left (if increase)	—
Labor force/capital	—	Right (if increase)
Productivity	—	Right (if increase)
Expected future price level	—	Left (if increase)
Supply shock	—	Left (if input prices rise)

*Additional info: All tables are reconstructed from the slides and notes, with logical entries inferred for completeness.*