Macroeconomics Final Exam Study Guide: Aggregate Demand, Aggregate Supply, 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 sustained increase in a country's output of goods and services over time, typically measured by real GDP per capita. Differences in growth rates across countries lead to significant disparities in living standards.

Key Point: Long-term growth is essential for improving living standards and reducing poverty.
Example: The United States has experienced higher average growth rates than many developing countries, resulting in higher income levels.

11.2 What Determines How Fast Economies Grow?

Key Factors: Labor force growth, capital accumulation, technological progress, and institutional quality.
Formula: The Solow growth model expresses output as a function of capital, labor, and technology:

11.3 Economic Growth in the United States

The U.S. has maintained steady growth due to high investment in human and physical capital, innovation, and strong institutions.

11.4 Why Isn’t the Whole World Rich?

Barriers to Growth: Poor governance, lack of access to capital, low education levels, and political instability can hinder growth.

11.5 Growth Policies

Policies that promote education, infrastructure, property rights, and technological innovation can foster economic growth.

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).

Downward Slope Reasons:
1. Wealth Effect: As the price level falls, the real value of money increases, boosting consumer spending.
2. Interest Rate Effect: Lower price levels reduce interest rates, encouraging investment and consumption.
3. International Trade Effect: Lower domestic prices make exports more attractive and imports less attractive, increasing net exports.

Shifts of the Aggregate Demand Curve vs. Movements Along It

Movement along AD: Caused by a change in the price level, holding other factors constant.
Shift of AD: Caused by changes in components of GDP (C, I, G, NX), such as fiscal policy or changes in expectations.

Variables That Shift the Aggregate Demand Curve

An increase in...	Shifts the AD curve...	Because...
Interest rates	Left	Higher interest rates raise the cost of borrowing, reducing consumption and investment spending.
Government purchases	Right	Government purchases are a component of aggregate demand.
Personal income taxes or business taxes	Left	Higher taxes reduce disposable income and profits, lowering consumption and investment.
Growth rate of domestic GDP relative to foreign GDP	Left	Imports rise faster than exports, reducing net exports.
Exchange rate (value of the dollar)	Left	Stronger dollar makes exports more expensive and imports cheaper, 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. It is upward sloping because input prices adjust more slowly than output prices.
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 LRAS is vertical at potential GDP.

The Long-Run Aggregate Supply Curve

Determined by the number of workers, technology, and capital stock.
Not affected by the price level; LRAS is a vertical line at potential or full-employment GDP.

The Short-Run Aggregate Supply Curve

Upward sloping due to sticky wages and prices, and slow adjustment by some firms.

Shifts of the SRAS Curve vs. 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, expectations, technology, 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 (technology)	Right	Costs of producing output fall.
Expected future price level	Left	Firms expect higher costs and raise prices and wages.
Supply shock (e.g., oil price spike)	Left	Input prices rise, increasing production costs.

13.3 Macroeconomic Equilibrium in the Long Run and the Short Run

Short-run equilibrium: Occurs where AD and SRAS intersect.
Long-run equilibrium: Occurs where AD, SRAS, and LRAS all intersect; GDP is at its full-employment level.

13.4 A Dynamic Aggregate Demand and Aggregate Supply Model

Incorporates continual increases in real GDP (shifting LRAS right), AD shifting right, and SRAS shifting right except when inflation expectations are high.
Inflation: Usually caused by total spending (AD) increasing faster than production (LRAS).

Chapter 14: Money, Banking, and the Federal Reserve

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

Money: Any asset that can be used to purchase goods and services or to settle debts.
Functions: Medium of exchange, unit of account, store of value.

14.2 How Is Money Measured in the United States Today?

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 operate under a fractional reserve banking system, keeping less than 100% of deposits as reserves.
When a deposit is made, banks keep a fraction as reserves and lend out the rest, creating new deposits and expanding the money supply.
Example: A $1,000 deposit with a 10% reserve requirement allows $900 to be lent out, which can be redeposited and re-lent, leading to a multiple expansion of deposits.

14.4 The Federal Reserve System

The Federal Reserve (Fed) is the central bank of the United States, responsible for monetary policy and financial stability.
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 relates the money supply to the price level and output.
Equation:
If the money supply grows faster than real GDP, there will be inflation; if slower, deflation; if equal, price stability.

Chapter 15: Monetary Policy

15.1 What Is Monetary Policy?

Monetary policy: Actions by the Fed 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 aggregate demand mainly through interest rates, especially the federal funds rate.
The Fed sets targets for the federal funds rate and uses policy tools to achieve them.

How the Fed Uses the Federal Funds Rate

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

Lower interest rates encourage consumption, investment, and can affect net exports by influencing the exchange rate.
Higher interest rates have the opposite effect.

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

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 Targets

The Fed uses a variety of tools, including interest on reserves, open market operations, discount rate, and reserve requirements.
At the zero lower bound, the Fed may use quantitative easing and forward guidance.

15.6 Fed Policies during the 2007–2009 and 2020 Recessions

The Fed used unconventional tools such as quantitative easing and forward guidance to stimulate the economy when traditional tools were limited.

Summary Table: Key Monetary Policy Tools

Tool	Purpose	Notes
Interest on reserve balances (IORB)	Manage the federal funds rate	Most important in ample-reserves regime
Open market operations	Adjust reserves and money supply	Main tool in scarce-reserves regime
Discount rate	Lender of last resort	Penalty rate, above federal funds rate
Reserve requirements	Set minimum reserves	Rarely used since 2020
Quantitative easing	Stimulate economy at zero lower bound	Unconventional tool
Forward guidance	Signal future policy intentions	Unconventional tool

Expansionary vs. Contractionary Monetary Policy

Expansionary monetary policy: Also called "loose" or "easy" policy; increases money supply and lowers interest rates to stimulate aggregate demand.
Contractionary monetary policy: Also called "tight" policy; decreases money supply and raises interest rates to reduce aggregate demand.

Additional info:

These notes are based on slides and outlines from a college-level Macroeconomics course, covering core topics such as economic growth, aggregate demand and supply, and monetary policy.
Tables have been reconstructed to summarize key relationships and policy tools.