Bernard 's AP Macroeconomics Blog

Balance of Payments Measure of money inflows and outflows between the Unites States and the Rest of the World (ROW) Inflows: are referred to as Credit Outflows are referred to as Debits  The Balance of Payments is divided into 3 accounts  Current account Balance of trade or Net Export Formula: Exports of Goods/Services - Imports of goods/ Services Exports create a Credit to the balance of payments imports create a Debit to the balance of payments Net Foreign Income  Income earned by U.S owned foreign assets - Income paid to foreign held US assets EX. Interest payments on US owned Brazilian bonds - Interest payment on German owned US treasury bonds  Net Transfers (tend to be unilateral) Foreign Aid→ a Debit to the current account EX. Mexican migrant workers send money to family in Mexico  Capital/ Financial account The balance of capital ownership Includes the purchase of both real and financial assets Direct investment in the United States is a credi

Monetary Policy: Expansionary  Used to fight a recession OMO=Fed buys bonds; MS↑ Required Reserves (RR)=↓ Discount rate (DR)=↓  Federal Funds Rate(FFR)=↓ Contractionary Used to fight inflation  OMO=Fed sells bonds;MS↓ Required Reserves (RR)=↑ Discount rate (DR)=↑  Federal Funds Rate(FFR)=↑ Sell bonds = money supply decrease Buy bonds = increase on money supply  Open Market Operations Fed can buy bonds = MS ↑ Fed can sell bonds =MS ↓ Discount Rate FDIC member banks and other eligible institutions may borrow short term loans directly from the Federal Reserve Reserve Requirement Banks must keep this certain amount in vault Federal Funds Rate FDIC member banks loan each other overnight funds Bank borrow from FED = Discount rate Bank borrow from other banks = Federal Funds Rate Prime Rate  Interest rate that banks charge to their most credit worth customers Single Bank  Can create money through loans by the amount of it exc

Loanable Funds Market Market where savers and borrowers exchange funds (Q) at the real rate of interest (r%) Demand for loanable funds, or borrowing comes from households, firms, government and the foreign sector. The demand for loanable funds is in fact the supply of bonds.  The supply of loanable funds, or savings comes from households , firms, government and the foreign sector. The supply of loanable funds is also the demand for bonds.  Changes in the Demand for Loanable Funds Remember that demand for loanable funds = borrowing (i.e. supplying bonds) More borrowing = more demand for loanable funds(→) less borrowing = less demand for loanable funds(←) Examples  Government deficit spending = more borrowing = more demand for loanable funds  ∴DLF →  r% ↑ Less investment demand  = less borrowing = less demand for loanable funds ∴DLF ← r% ↓ Changes in Supply of Loanable Funds Remember that supply of loanable funds = saving (i.e. demand for bonds)

Money Market The market where the FED ad the users of money interact thus determining the nominal interest rate (i%) Money Demand (MD) comes from households, firms, government and the foreign sector. The Money Supply (MS) us determined only by the Federal Reserve Money Demand  Transaction Demand: demand for money as a medium of exchange (independent of the interest rate) Asset Demand: demand for money as a store of value (dependent on the interest rate) Total Money Demand: (MD) is downward sloping because at high interest rates people are less inclined to hold money and more inclined to hold stocks and bonds. At lower interest rates people sacrifice less when they hold money  Money Supply  The money supply is determined by the Federal Reserve because the FED has monopoly control over the supply of money 

Uses of money  Medium of exchange  Serve to trade on product for another.  Unit of Account   Establish economical worth. Store of value  Money holds its value over a period of time where products may not. Type of Money Representative Money  Paper money that is backed by something tangible that gives it values  EX: IOU Commodity Money  Gets its value from the taste of materialized from which it is made  EX: Gold , Sliver  Flat Money  It is money because the government say so.  Characteristics of money  Durability  Is money durable? Yes  Portability You can carry money in different places   Divisibility Money can be broken down in many ways Acceptability Money is accepted anywhere  Uniformity Scarcity and limited supply Money supply  M1  Liquidity: easily convert to cash  Currency(coins & cash ) Checkable deposits/Demand accounts/Checking Account   Traveler's check M2  Consists of M1 money, saving accounts

Changes in the expenditures or tax revenues of the federal government 2 tools of fiscal policy Taxes: government can increase or decrease taxes Spending: government can increase or decrease If government increase taxes then they decrease spending and vice versa depending on if recession or not. If in recession then spend money  Fiscal policy is enacted to promote our nation's economic goals: full employment, price stability, economy grown Deficits, Surplus, and Debt Balanced budget Revenues = expenditures Budget deficit Revenues < Expenditures Budget Surplus Revenues > Expenditures Government Debt Sum of all deficits - Sum of all surpluses Government must borrow money when it runs a budget deficit Government borrows from Individuals (taxes) Corporations (taxes) Financial institutions foreign entities or foreign governments Fiscal Policy Two Options Discretionary Fiscal Policy (ACTION) Expansionary Fiscal Policy - think defi

Disposable Income (DI) Income after taxes or net income (take home) What you have left over after you've payed all your bills 2 Choices With disposable income, households can either Consume (spend money on goods and services) Save (not spend money on goods and services) Consumption Household spending The ability to consume is constrained by The amount of disposable income  The propensity to save Do households consume is DI = 0?? Autonomous consumption Dissaving Saving Household NOT spending The ability to save is constrained by The amount of disposable income The  propensity to consume Do households save if DI = 0? NO APC % APS (average propensity to consume and average propensity to save) APC + APS = 1 1 - APS = APC 1 - APC = APS APC > 1 is Dissaving -APS is Dissaving MPC & MPS (Marginal propensity to consume and marginal propensity to save) Marginal propensity to Consume The fraction of any change in dispo

Investment Money spent or expenditures on: New plants (factories) Capital equipment (machinery) Technology (hardware and software) New Homes Inventories (goods sold by producers) Expected Rates of Return How does business make investment decisions?? cost / benefit analysis How does business determine the benefits Expected rate of return  How does business count the cost?? Interest costs How does business determine the amount of investment they undertake?? Compare expected rate of return to interest cost If expected return > interest cost then invest If expected return < interest cost then do not invest  Real(r%) Nominal (i%) What's the difference?? Nominal is the observable rate of interest. Real subtracts out inflation (π%) and is only known ex. post facto How do you compute the real interest rate (r%) r% = i% - π% What then, determines the cost of an investment decision? The real interest rate (r%) Investment Demand Curve

The equilibrium of AS &AD determines current output (GDPr) and the price level Full employment - equilibrium exists where AD intersects SRAS & LRAS at the same point  Recessionary Gap- a recessionary gap exists when equilibrium occurs full employment output. Inflationary Gap- an inflationary gap exists when equilibrium occurs beyond full employment output  U% - unemployment 𝝅% - inflation  3 Ranges of AS   Keynesian of horizontal range Not fully using all of the resources Could be a recession or depression (not where need to be) below full employment  Intermediate Resources are getting closer to full employment, which creates upward pressure on wages and price  Classical or vertical range Real GDP is at a level with unemployment  at the full employment level where any increase in demand  will result only in an increase in prices Demand pull inflation (Always increasing ) Increase in price level resulting from increase in total

The level of Real GDP(GDPr) that firms will produce at each price level (PL) Long run v Short run  LR  - period of time where input prices are completely flexible and adjust to changes in the price level . in the price level of Real GDP supplied is independent of the price level. Short run - period of time where input prices are sticky and do not adjust to changes in the price level . In the SR the level of Real GDP supplied is directly related to the price level. Long run aggregate supply (LRAS)  The long-run aggregate supply or LRAS marks the levels of full employment in the economy (analogs to ppc) Because input prices are completely flexible in the long-run , changes in price level do not change firms real profits and therefore do not change firms level of output. This means that the LRAS is vertical at the economy's level of full employment. Changes in SRAS An increase in SRAS is seen as a shift to the right . SRAS → A decrease in SRAS is se

AD- is the demanded by consumers , business , government ,and foreign countries  AD=C+Ig+G+Xn Changes in price level cause a move along the curve not a shift on the curve. Shows the amount of Real GDP that the private, Public , and foreign sector collectively desire to purchase at each possible price level. The relationship between the price level and the level of real GDP is inverse. 3 Reasons why is AD downward sloping Wealth Effect  Higher prices reduce purchasing power of $ This decreases the quantity of expenditures  Lower price levels increase purchasing power and increase expenditures  (Ex.If the balance in your balance in your bank was $50k , but inflation erodes ) 2.Interest rate effect  As price level increases , lenders need to charge higher interest rates to get a real return on their loans. Higher interest rates discourage consumer spending and business investment . (Ex. Increase in prices leads to an increase in the int

Population - number of people in a country . Labor force - number of people in a country a country that are classify as employed or unemployed. Employed - people who are 16 year of age or older that have a job . Unemployed - people who are 16 year of age or older who did not have a job , but have actively searching for a job in the last 2 weeks. Unemployment - failure to use a viable resources particularly labor to produce desire good and services. Unemployment rate:   # of unemployed/ Total labor force x 100 (# of employed + # of unemployed) 4 to 5% = unemployment rate Not in the labor force Students Retired People institutionalized (mental) Prisoners Military  Disabled People who given up looking for a job                                                        Type of Unemployment  Frictional - between jobs ( temporally unemployed ) - individual are qualified workers with transferable skills but they are not working. High school or college graduates l

Inflation - a general rise in the price level ( $1 can buy less in general than a $1 in the past due to inflation ) Deflation - decline in the general price level Disinflation - occurs when the inflation rate it self declines. Real interest rate-  the cost of borrowing or lending money that has been adjusted for inflation(%) Nominal interest rate-   expected rate of inflation Nominal interest rate-   the un-adjusted cost of borrowing money (real interest rate+ expected rate of inflation) Inflation rate  new year - old year / old year x100                                         Demand(pull inflation ) vs Cost(push inflation) Demand - to many dollars chasing too few goods Trigger by an increased of aggregate demand  Output and employment rise while the price level is rising Spending increase faster then production  Cost push - cost by arise by per unit production cost due increasing research cost. Trigger by a decrease of aggregate supply  Output and employm

Gross Domestic Product (GDP) - Total market value of all final goods and services produce within the country border within a given year . Gross Natural Product(GNP)  - It's a measure what the citizens product and whether they produce these items in their border. C= Consumption Expenditures(67%) IG= Gross Private Domestic Investment(17%) G= Government Spending (20%) Xn= Net Exports(exports-imports)(-4%) C+IG+G+Xn=GDP IG Factor equipment maintenance  New  factor equipment  Construction of housing  Unsold inventory of product built in a year                                            Not Counted in GDP Used or second second hand goods - avoid double or multiple counting  Gifts or transfer payments (Public- social security, welfare or Private- scholarships ) Stocks or bonds ( not counted ) Purely financial transaction , Their is no output being produce Unreported business activities (tips) Illegal activities( Underground) Non-market activities(ex. babysittin

Circular Flow - Shows the flow of money goods and services and factor of production throughout the economy . 3 entries  Household - person or group of people who share income. Household owns the Factor of Production  Firms - is an organization that produces goods and services . Firms produce goods by taking imports, which is your FOP product and turning them into output , which is your finished product. Government - Their provider of public goods and services and demanders of both private good and services and the factor of production. 2 market  Product market - this is where goods and services are bought and sold ; exchange finish good for money  Factor market(Resource market) - where resources especially capital and labor are bought and sold . Exchange factor of production for money. 

Business Cycle - fluctuation in economic activity that an economy experiences over a period of time.  4 phases  Expansion - Spending increases ↑ Unemployment decreases ↓ best phase to be in ( ex . Construction ) Peak - The highest point of real GDP greatest spending lowest unemployment, however inflation becomes a problem. Contraction/Recession - real GDP decline for 6 months (reduction of spending level , increase in unemployment) Trough - lowest point of real GDP least amount of spending highest unemployment.

Price Ceiling - a legal maximum price meant to help buyers . It keeps the price for getting to high. 4 Consequence when Price Ceiling set too low   lower prices for some consumer  shortages  long lines for buyers  illegals sales above the equilibrium price  Price floor - the legal minimum price to help seller ;it keeps the product price from falling . 4 Consequence when Price Floor set too high   higher product prices help few sellers surplus  higher taxes waste

Supply   - the quantity that suppliers are willing and able to produce at various prices . The law of  Supply   - there is a direct relationship between price and quantity supply . what causes a change in quantity supplied  ? △  in price Determinants  △ in # of sellers  △ in the cost of production resources ( current price ) △ in  weather △ in technology △ in taxes or subsidies △ in exceptions ( future) Increase in supply = curve shift right ; price increase quantity increase  Decrease in supply = curve shift left ; price decrease quantity decrease 

Demand   - the quantity that people are willing and able to buy at various prices . The law of  Demand   - there is a inverse relationship between price and quantity demanded . what causes a change in quantity demanded ? △  in price Determinants  △ in # of buyers ( population ) △ in buyer's taste ( achievement / preferences ) △ in income - inferior goods , normal goods △ in the price of related goods - substitute goods , complimentary goods  △ in exceptions ( future )   inferior goods - goods that buyers buy less of when their income rises   normal goods - goods that buyer buy more of when their income rises   substitute goods - goods that serve roughly the same purposes ( coke, Pepsi )   complementary goods - goods that other consume together ( cereal & milk ) Increase in demand = curve shift right ; price increase quantity decrease Decrease in demand = curve shift left ; price decrease quantity increase

Fixed costs - a cost that does not change no matter how much is produce ( ex. mortgage ) Variable costs - a cost that raises or falls demanding upon how much is produce ( ex. Electricity bills) Total costs : Fixed cost + Variable costs = Total cost Marginal revenue - the additional income from selling one more unit of a good Marginal costs - the cost of producing one more unit of good Total Revenue = Price x Quantity (Terms for cost of production) Total fixed cost - TFC Total variable cost - TVC Total cost - TC Average Fixed cost - AFC Average Variable cost - AVC Average Total cost - ATC Marginal cost - MC (Calcualtions for cost of production ) TFC+TVC=TC AFC+AVC=ATC TFC/Q=AFC TVC/Q=AVC TC/Q=ATC AFCXQ=TFC  AVCXQ=TVC

Price Elasticity of Demand : a measure how consumer react to a change in price . Elastic demand - demand that is very sensitive to a price There are substitutes ; they are not a necessity  E > 1  ex : soda , steak , fur coat  Inelastic demand - demand that is not very sensitive to a change in price ( there are few to no substitutes; it is a necessity) E < 1  ex .insulin , milk , gas  Unitary elastic -  E = 1  PED  ( Calculations ) Step 1 : Quantity            ( new- old / old ) Step 2 : Price            (new- old / old ) Step 3: PED = %  Δ in quantity/% Δ   in price 

Trade-offs : alternative chooses that people face while making an economical decision Opportunity Cost : the most desirable alternative giving b making a decision. PPG- Production Possibilities Graph : show  alternative ways to use resources PPC - Curve PPF- frontier    Inside of the curve - under-utilization , unemployment , recession, underemployment    On the curve - Point A- E ; efficient & Attainable Outside of the curve - Point G Economic growth technology                3 type of movement of the PPC    Inside the PPC      Along the PPC Shifts of the PPC Key Assumptions        2 goods are produce  Fixed resources Fixed technology  Full employment  Full employment        4 to 5% unemployment       90% factory capacity         5. No international trades 

                                                  Macroeconomics vs Microeconomics  Macroeconomics - the study of the economy as a whole. Microeconomics - the study of individual parts of the economy.                                                 Positive vs Normality economics  Positive -  claims that attempt to describe the world as is ( ex. minimum wages law causes unemployment) Normality - claims that attempt to prescribe how the world should be (ex . the government should raise the minimum wage)                                                               Wants vs Needs Wants - desires of citizens  Needs - basic requirement for survivor                                                                                                        Scarcity vs Shortage   Scarcity - the most fundamental economy problems that all society face. ( how to satisfy limited wants with limited resources ) Shortage - are temporary ; when quantity demand is greater than quanti