Macroeconomics Final Exam Study Guide: Aggregate Demand, Aggregate Supply, Money, and 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 per capita. Growth rates vary significantly across countries and historical periods.

Key Point: Sustained economic growth leads to higher living standards and improved well-being.
Example: The Industrial Revolution marked a period of rapid economic growth in Western Europe and North America.

11.2 What Determines How Fast Economies Grow?

The rate of economic growth is determined by several factors, including increases in labor, capital, and technological progress.

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 over the past two centuries, with fluctuations due to business cycles, wars, and policy changes.

Key Point: Institutions, innovation, and investment have played major roles in U.S. economic growth.

11.4 Why Isn’t the Whole World Rich?

Not all countries experience the same growth rates due to differences in resources, institutions, policies, and access to technology.

Key Point: Barriers such as poor governance, lack of education, and inadequate infrastructure can hinder growth.

11.5 Growth Policies

Governments can influence economic growth through policies that promote education, innovation, investment, and stable institutions.

Key Point: Effective growth policies focus on improving productivity and fostering a favorable business environment.

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 (both domestic and foreign).

Key Point: The AD curve slopes downward due to the Wealth Effect, Interest Rate Effect, and International Trade Effect.
Example: A decrease in the price level increases the real value of money, encouraging more spending (Wealth Effect).

Shifts of the Aggregate Demand Curve versus Movements Along It

Movement along AD: Caused by a change in the price level, holding all else constant.
Shift of AD: Caused by changes in components of real GDP (e.g., government purchases, investment, net exports).

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 purchases are a component of aggregate demand.
Personal income taxes or business taxes	Left	Higher taxes reduce disposable income and consumption/investment.
Growth rate of domestic GDP relative to foreign GDP	Left	Imports rise faster than exports, reducing net exports.
Exchange rate ($US relative to foreign currencies)	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. The relationship differs in the short run and long run.

Short-run aggregate supply (SRAS) curve: Shows the relationship between the price level and the quantity of real GDP supplied by firms 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.

The Long-Run Aggregate Supply Curve

Key Point: LRAS is vertical at the level of potential or full-employment GDP.
Determinants: Number of workers, technology, and capital stock.

The Short-Run Aggregate Supply Curve

Key Point: SRAS is upward sloping because input prices (like wages) adjust more slowly than output prices.
Example: If the price of final goods rises but wages are sticky, firms increase production.

Shifts of the SRAS Curve versus Movements Along It

Movement along SRAS: Caused by a change in the price level, holding other factors constant.
Shift of SRAS: Caused by changes in input prices, technology, expectations, or supply shocks.

Variables That Shift the Short-Run Aggregate Supply Curve

An increase in...	Shifts the 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 or supply shock	Left	Costs of production rise or firms are forced to close.

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 (full employment GDP).

Key Point: Short-run equilibrium can differ from long-run equilibrium due to sticky prices and wages.

13.4 A Dynamic Aggregate Demand and Aggregate Supply Model

The dynamic AD-AS model incorporates ongoing growth in real GDP, inflation, and shifts in AD, SRAS, and LRAS over time.

Key Point: Inflation is usually caused by total spending (AD) increasing faster than production (LRAS).
Example: If AD shifts right more than LRAS, the price level rises.

Chapter 14: Money, Banking, and the Federal Reserve

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

Money is any asset that is generally accepted in exchange for goods and services or for repayment of debt. It serves as a medium of exchange, unit of account, and store of value.

14.2 How Is Money Measured in the United States Today?

M1: The sum of currency in circulation, checking account deposits, and savings account deposits in banks.
M2: Includes M1 plus small-denomination time deposits and noninstitutional money market fund shares.

14.3 How Do Banks Create Money?

Banks create money through the process of accepting deposits and making loans, which leads to the multiple expansion of deposits.

Fractional reserve banking system: Banks keep less than 100% of deposits as reserves, lending out the rest.
Example: A $1,000 deposit can lead to $1,900 in deposits through repeated lending and redepositing.

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.

Bank run: When many depositors withdraw funds simultaneously due to loss of confidence.
Bank panic: When many banks experience runs at the same time.

14.5 The Quantity Theory of Money

The quantity theory of money links the money supply to the price level and inflation.

Formula:
Key Point: If the money supply grows faster than real GDP, inflation occurs; if slower, deflation occurs.

Chapter 15: Monetary Policy

15.1 What Is Monetary Policy?

Monetary policy refers to actions 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.

Expansionary policy: Lowers the federal funds rate to increase aggregate demand.
Contractionary policy: Raises the federal funds rate to decrease aggregate demand.

How the Fed Uses the Federal Funds Rate

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

Controlling the Federal Funds Rate

Situation	Name	Method for controlling the federal funds rate
Banks keep as few reserves as regulations allow	Scarce-reserves regime	Adjust the supply of reserves
Banks keep more reserves than required	Ample-reserves regime	Adjust the 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.

Consumption: Lower interest rates encourage borrowing and spending.
Investment: Lower rates make capital investment and new housing more attractive.
Net exports: Lower U.S. rates reduce the exchange rate, increasing exports.

15.4 Monetary Policy in the Dynamic Aggregate Demand and Aggregate Supply Model

Monetary policy can shift the AD curve, influencing output and the price level in both the short and long run.

Expansionary policy: Shifts AD right, increasing output and price level.
Contractionary policy: Shifts AD left, reducing output and price level.

15.5 A Closer Look at the Fed's Setting of Monetary Policy Tools

Interest on reserve balances (IORB): Used to manage the federal funds rate.
Overnight reverse repurchase agreements (ON RRP): Provide a lower bound on the federal funds rate.
Quantitative easing: Used when rates are near zero to increase reserves and lower long-term rates.
Forward guidance: Communicates the Fed's intentions to keep rates low for an extended period.
Open market operations: Buying/selling Treasury securities to adjust reserves.
Discount rate: Rate charged for loans to banks; usually above the federal funds rate.
Reserve requirements: Minimum reserves banks must hold; rarely used as a policy tool.

15.6 Fed Policies during the 2007–2009 and 2020 Recessions

The Fed used unconventional tools such as quantitative easing and forward guidance to stabilize the economy during major recessions.

Additional info:

These notes are based on class slides and outlines, covering key macroeconomic concepts relevant for a college-level final exam.
Tables have been reconstructed for clarity and completeness.