All Formulas & Graphs Needed for Macro Exam

1. ME = 1/MPS MT=MPC/MPS All Formulas & Graphs Needed for Macro Exam

2. Macroeconomic Formulas

3. Base year[$50/$50=1x100=100] $46/$50x100=92[deflation of 8%] Formulas Price of Market Basket(2001)[nominal GDP]$64 GDP Price Index = Price of sameMarket Basket(1998)x100;[Real GDP] $50x100=128 [GDP Deflator] in the base year (1998)[$64/128 x 100 = $50] $6,737[1994]/126.1[1987($4,540)]x100 =$5,343[+$803.] “RealGDP deflatesnominal GDPto actual value”[takes theairout of thenominal balloon] Unemployment5,655,000 Labor Force x 100 = unemployment rate;140,863,000 x 100 = 4% [Employed + unemployed][135,208,000+5,655,000] [2000] Okun’sLaw or GDP gap)=Unemployment Rate over 6% x 2%; 7.5%, so 1.5x2% =3%. Or, $3 billion GDP Gap[$100 billion nominal GDP x .03% = $3 billion]. (2000-later year) (1999-earlier year)[*Change/original x 100] Current year’s index – last year’s index172.2-166.6(5.6) C.P.I.= Last year’s index(1999-earlier year) x 100; 166.6 x100 = 3.4% _________________________ “Rule of 70”= % annual rate of increase (3%) = 23 years 70 “Real Income”measures the amount of goods/services nominal income will buy. [%change in real income = % change in nominal income -% change in PL.] 5%10%5%

4. Practice Macroeconomic Formulas Real GDP=NominalGDP/Index X 100 $9,299.2[1999]/104.77[1996] x 100 =$8,875.8[So,+$1,062.6] “Real GDPdeflatesnominal GDPto actual value” [takes the air out of thenominal balloon] $5,250.8$3,774.7$5,671.8 108.5 x 100=$_____ 108.1 x 100=$_____ 117.0 x100=$_____ “Nominal” “Real” 4,839 4,848 3,492 1.Using the above formula, what is the real GDP for 1994 if nominal GDP was $6,947 trillion and the GDP deflator was 126.1? ($6,611/$5,610/$5,509) trillion. 2. For 1996, what would real GDP be if nominal GDP were $7,636 trillion and the GDP deflator were 110.2? ($6,929/$9,628/$6,928). [$6,947/126.1 x 100 = $5,509 trillion [$7,636 trillion/110.2 x 100 = $6,929 trillion]

5. Unemployment Rate = Unemployment/Labor force X 100 Unemployment5,655,000 Unemployment Rate = Labor Force x 100; 4.0% = 140,863,000 x 100 [Employed + unemployed] [135,208,000+5,655,000] In Forney, 42 are unemployed & 658 are employed. The unemployment rate is __%. One mil. are unemployed & 19 mil. are employed. The unemploy. rate is __%. 6 5 1. If the total population is 280 million, and the civilian labor force includes129,558,000 with jobs and 6,739,000 unemployed but looking for jobs, then the employment rate would be ____%. 4.9 [6,739,000/136,297,000 x 100 = 4.9%]

6. AD/AS Primer - Recessionary Gap AD1 AS AD2 3% FE GDP“Bull’s Eye” 1% 6% Y*F YP YA $10 tr. [Frictional+Structural] 5% Cyclical(“real”) Unempl. 10%[5%x2=10%] Negative Gap 11% YR YA $9 Tr. [Okun’s Law] Arthur Okun [GDP Gap = unemployment rate over 6% x 2] E2 Recessionary Gap(YR) Potential output ($10)exceedsactual output($9). Actual unemploy. rate(11%)exceedsPotential unemp. rate(6%). • Unemployment [Let’s say that Nominal GDP is $100 billion.] [And if it were $200 billion?] • Rate • 1. 7%; real unemployment is __%; % gap is ___ %; output forgone is ___ bil. • 2. 8%; real unemployment is __%; % gap is ___ %; output forgone is ___ bil. • 3. 13%; real unemployment is __%; % gap is ___ %; output forgone is ___ bil. • 4. 14%; real unemployment is __%; % gap is ___ %; output forgone is ___ bil. 1 2 2 4 4 2 14 7 14 16 8 16

7. Figuring Inflation [Change/Original X 100 = inflation] (2006-later year) (2005-earlier year) Current year’s index – last year’s index199.1 – 192.7 [6.7] C.P.I. = Last year’s index(2006-earlier year) x 100; 192.7 x100 = 3.3% 130.7-124.0(6.7)116-120(-4)333-300(33) 124.0 x 100 = ____ 120 x 100 = ____ 300 x 100 = ____ So, 3.3% increase in Social Security benefits for 2007 5.4% -3.3% 11% 1.The CPI was 166.6 in 1999 and 172.2 in 2000. Therefore, the rate of inflation for 2000 was (2.7/3.4/4.2)% 2. If the CPI falls from 160 to 149 in a particular year, the economy has experienced (inflation/deflation) of (5/4.9/6.9)%. 3. If CPI rises from 160.5 to 163.0in a particular year, the rate of inflation for that year is (1.6/2.0/4.0)%. [5.6/166.6 x 100 = 3.4%] [-11/160 x 100 = -6.9%]

8. Figuring CPI Consumers in this economy buy only two goods–hot dogs & hamburgers. Step 1. Fix the basket. What percent of income is spent on each. Consumers in this economy buy a basket of: 4 hot dogs and 2 hamburgers Step 2. Find the prices of each good in each year. YearPrice of Hot DogsPrice of Hamburgers 2001 $1 $2 2002 $2 $3 Step 3. Compute the basket cost for each year. 2001 ($1 per hot dog x 4 = $4) + ($2 per hamburger x 2 = $4), so $8 2002 ($2 per hot dog x 4 = $8) + ($3 per hamburger x 2 = $6), so $14 Step 4. Choose one year as a base year (2001) and compute the CPI 2001 ($8/$8) x 100 = 100 2002 (14/$8) x 100 = 175 Step 5. Use the CPI to compute the inflation rate from previous year 2002 (175/100 x 100 = 175%) or to get actual %(175-100)/100 x 100 =75% Or, Change$14-$8 ($6) Original $8 x 100 = 75%

9. Figuring CPI For An Individual [2005 MC (42%)] (42%)18. Suppose that a typical consumerbuys the following quantities of these three commodities in 2000 and 2001. CommodityQuantity2000 perUnit Price2001 perUnit Price Food 5 units $6.00 $5.00 Clothing 2 units $7.00 $9.00 Shelter 3 units $12.00 $19.00 Which of the following can beconcluded about the CPI for this individual from 2000 to 2001? a. It remained unchanged. c. it decreased by 20% b. It decreased by 25%. d. It increased by 20% e. It increased by 25%. (Answer) Year 1 [2000]: [5 food x $6 = $30; 2 clothing x $7 = $14; 3 shelters x $12 = $36, for dollar value of $80. CPI = 100 ($80/$80 x 100 = 100 for 2000)] Year 2 [2001]: [5 food x $5 = $25; 2 clothing x $9 = $18; 3 shelters x $19 = $57, for dollar value of $100. CPI =125 Change$100-$80 [$20] Original = $80 x 100 = 25%; so the CPI for this individual is 25%.

10. “Rule of 70” __________________________ “Rule of 70”= % annual rate of increase (3%) = 23 years [Inflation(prices to double)] 707070[Investments to double] 10 = ______ 12= _____ 9= _____ [GDP(standard of living) to double] 70 8 years 6 years 7 years 70

11. 6% 16% 10% Real Income [Nominal income –inflation rate=Real Income] - = Inflation Premium Nominal Income Real Income

12. APCandAPS APC - percentage of income (“Y”) consumed. APC = C/Y(DI)=$48,000/$50,000 = .96 APS = S/Y(DI)= $2,000/$50,000 = .04 APS – percentage of income (“Y”) saved. AE=GDP APC=C/Y 1 APC = C/Y=$52,000/$50,000 = 1.04 APS = S/Y= -$2,000/$50,000 = -.04 1 What in the world is AE? “Econ, Econ, APS=S/Y “High maintenance Econ teacher”

13. ME=1/MPS MPC,MPS, & theMultiplier MPC - % change in Y consumed. MPS - % change in Y saved. MPC = C/ Y = $750/$1,000 = .75 MPS = S/ Y = $250/$1,000 = .25 Multiplier [1/MPS]=1/.25=$1/.25 = “ME” of 4 [MPC is important for G in policy making decisions.] *The ME is the reciprocal of the MPS. The “ME” works like a concentric circle. 15bil. 8.5 bil. 11.25 bil. $20billion“G” [with ME of 4]

14. MPC 1/MPS = ME .90 1/.10 = 10 .80 1/.20 = 5 .75 1/.25 = 4 .60 1/.40 = 2.5 .50 1/.50 = 2 ME ME [Change in C, Ig, G, or Xn] = 1/MPS

15. MT MT [Change in Taxes] = MPC/MPS MPC -MPC/MPS = MT .90 -MPC/.10 = -9 .80 -MPC/.20 = -4 .75 -MPC/.25 = -3 .60 -MPC/.40 = -1.5 .50 -MPC/.50 = -1 When the G gives a tax cut, the MT is smaller than the ME because a fraction [MPS] is saved and only the MPC is initially spent. So, the MT = -MPC/MPS.

16. TheME,MT, &MBB Multipliers ME[C, Ig, G, or Xn] =1/MPS=1/.25=4 So,G increase of $20 bil.willincr Y by $80 bil.[$20x4=$80] And aG decrease of $20 bil.willdecrease Y by $80 bil.[-$20x4=-$80 bil.] MT = -MPC/MPS = -.75/.25 = -3 So,Tdecreaseof $20 bil.willincr Y by $60 bil.[-$20x-3=$60] And aT increase of $20 bil.willdecr Y by $60 bil.[$20x-3=-$60] MBB = 1 X (G) So, anincrease in G&T of $20 bil.will incr Y by $20 bil.[1X$20=$20] And adecrease in G&T of $20 bil.willdecr Y by $20 bil.[1X-$20=-$20] Anyincrease in expenditures x theM will increase GDP. Any decrease in expenditures x the M will decrease GDP.

17. Dennis Rodmandeposits $1with A 10% RR Rodman’s .10 90 cents Excess Reserves RR Total (Actual) Reserves One Dollar One bank’s loan becomes another bank’s DD. PMC = M x ER, so 10 x .90 =$9 TMS = PMC[$9] + DD[$1] = $10 [MS= Currency+ DD of Public]

18. Rodman’s Bank Borrows $1 From The Fed [10% RR] Rodman’s Bank Fed One Dollar 0 Excess Reserves RR Total(Actual) Reserves One Dollar PMC = M x ER, so 10 x $1 = $10 TMS [$10] = PMC[$10] [MS = Currency+ DD of Public]

19. Amount bank can lend - New money created Acquired reserves and deposits Required reserves Excess reserves Bank $80.00 64.00 51.20 40.96 32.77 26.22 20.98 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.57 A B C D E F G H I J K L M N Other banks $100.00 80.00 64.00 51.20 40.96 32.77 26.22 20.98 16.78 13.42 10.74 8.59 6.87 5.50 21.97 $20.00 16.00 12.80 10.24 8.19 6.55 5.24 4.20 3.36 2.68 2.15 1.72 1.37 1.10 4.40 $80.00 64.00 51.20 40.96 32.77 26.22 20.98 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.57 MULTIPLE DEPOSIT EXPANSION PROCESS RR= 20% Paris Hilton 1st 10 $357 of the $400 Susie RahRah I’m doing the econ rap. Ronald McDonald $400.00 PMC in the banking system [MxER] Reese Witherspoon TMS = $500.00

20. PPC

21. A Production Possibilities C A P I T A L G O O D S B More or better resources or better technology G C F D E Consumer Goods 40. At what letter is there unemployment [recession]? 41. What letters represent resources being used in their most productive manner? [full employment, full production, and best available technology] 42. What letter represents an improvement in technology, therefore a new PPC frontier line? 43. The (straight line/curve) illustrates the “law of increasing cost”? 44. The (straight line/curve) illustrates the “law of constant cost.” 45. At what letter would there be the most economic growth in thefuture if a country were producing there now? 46. What is the opportunity cost when moving from “C” to “D”; when moving fromE to B; & do we have to give anything up when moving from F to D? F A,B,C,D,E G A Capital Consumer no

22. Appreciation/Depreciation

23. Appreciation of the Dollar Increase in tastefor U.S. goods Increase in U.S.Interest Rates Decreasein U.S.Price Level Decrease in U.S. Growth Rate Foreign Exchange Market The Market for Dollars Exchange Rate: $1 = ¥100 Decrease in U.S. Currency Price D1$ S$ D2 P Y looking for$’s $’s looking for Y Y150 E2 D Yen Price of Dollar Yen depreciates Y100 E1 A Yen appreciates Y50 E3 D3 Depreciation of Dollar Decrease in Taste Decrease in In. Rates Increase Price Level Increase Growth Rate 0 QE D A Quantity of Dollars Increase in Currency Price

24. Appreciation/Depreciation S$ D1$ [Exchange Rate: $1 = Y100] Price D2 Japan will supply less yen for dollars. ¥/$ $’s looking for ¥ ¥ looking for $’s S2¥ U.S. will supply more $s for ¥. D¥ $/¥ S$ E2 ¥150 D$ S$ ¥/$ S1¥ D ¥150 S$ S2¥ E2 $1.50 Yen depreciates D E2 D ¥100 $1 E1 ¥100 A Yen appreciates A .50 A E2 ¥50 E2 ¥50 A # of ¥ D E3 Japan will supply more yen for dollars. A # of Dollars D D3 U.S. will supply fewer $s for ¥. Quantity of Dollars MX A D XM +- Taste [products/assets] + - +- Interest Rates + - +- Price Level + - +- Growth Rate + - Currency Price +- + -

25. AD/AS

26. AD/AS Model SRAS AD [CIG-X] [REP] [Production cost] Price Level PLe Ye Real Domestic Output

27. Increase in AD [caused by “C+Ig+G+Xn”] SRAS AD2 LRAS AD1 • Increase in AD • Increase in Consumption • Increase in Investment • Increase in Gov. spending • A. On military spending • B. On the infrastructure • C. On health care • 4. Increase in Net exports [Xn] • A. Dollar depreciates • B. Trade partners Y’s rise Price Level YF YR Real Domestic Output, GDP

28. Decrease in AD [caused by “C+Ig+G+Xn”] SRAS AD1 LRAS AD2 • Decrease in AD • Decrease in Consumption • Decrease in Investment • Decrease in Gov. spending • A. On military spending • B. On the infrastructure • C. On health care • 4. Decrease in Net exports [Xn] • A. Dollar appreciates • B. Trade partners Y’s fall Price Level YF YR Real Domestic Output, GDP

29. Increase in AS [caused by “REP”] Increase in AS [“REP”] Resource Cost [domestic] a. More land, labor, capital & entrepreneurs b. # of sellers increase Resource Cost [overseas] c. Imported inputs decrease in price d. Dollar appreciates Environment [legal-institutional] a. Increase in subsidies b. Decrease in bus. regulations c. *Decrease in business taxes Productivity Increase in productivity AD AS1 AS2 PL RGDP

30. Decrease in AS [caused by “REP”] Decrease in AS [“REP”] Resource Cost [domestic] a. Land, labor, & capital become more scarce b. Number of sellers decrease Resource Cost [overseas] c. Imported inputs increase in price d. Dollar depreciates Environment [legal-institutional] a. Decrease in subsidies b. Increasein bus. regulations c. *Increase in business taxes Productivity Decrease in productivity AD AS3 AS1 PL RGDP

31. Change in AQD AD PL1 [Inverse] PL2 AQD1 AQD2 AQD PL

32. Change in AQS AS PL1 PL2 [DIRECT] AQS2 AQS1

33. C Change in AD 1. “Non price Level” change-either C, Ig, G, or Xn 2. “Whole AD curve” shifts [There is a change in AQD but it is not caused by a change in price level.] Consumption Mariah Carey Concert Ig AD2 AD1 AD3 G PL Let there be more military weapons XN AQD1 RDO AQD3 AQD2 Chevy Ferrari [Exports-Imports]

34. Change in AS 1. “Non price level change”. Either R, E, or P 2. “Whole AS curve” shifts. 3. AQS changes but is not caused by a change in PL Anything that lowers the cost of production will shift AS right. AS Shifters(REP) 1. Resource cost 2. Environment [legal-institutional environment for businesses change, affecting production costs [subsidies, bus. taxes, regulations] 3. Productivity AS3 AS1 AS2 So – AS Shifters are REP Increase in the availability ofResources PL You save money. We don’t require dental or medical insurance. You don’t have to pay us a pension and we don’t take sick days. And – we can dance. 1. Lower business taxes 2. Decrease in regulations 3. Increase in subsidies Environment [Legal-institutional] AQS1 AQS3 AQS2 Increase inProductivity

35. The Aggregate Expenditures Model

36. o 45 Building Aggregate Expenditures AD/AS Model AE Model [C+Ig+G+Xn] [C+Ig+G+Xn] SRAS LRAS AD2 S AD1 AE2[C+Ig+G] AE[C+Ig+G] AE1[C+Ig] PL PL YR Y* Real GDP YR Y* Real GDP [If there is a recession] [and Fiscal Policy]

37. o 45 Building Aggregate Expenditures AE Model AD/AS Model [C+Ig+G+Xn] [C+Ig+G+Xn] [If there is inflation] LRAS SRAS S AD1 AE1[C+Ig1] AD2 AE2[C+Ig2] PL AE[C+Ig+G] PL Y* RGDP YI Y* RGDP YI Weaknesses [Limitations] of the AE Model • Does Not Show Price Level Changes • Does not show Demand-Pull Inflation • Does Not Deal With Cost-Push Inflation [Stagflation] • It ignores premature demand-pullinflation[Inflation just before FE GDP] • It does not allow for “self-correction”

38. o 45 AE[C+Ig] [“Basic” or “Simple” economy] Building the AE Model S C + Ig Multiplier=4 Private - Closed Consumption Equilibrium 470 AE[C+ Ig](billions ofdollars) Ig = $20 Billion 450 C =$450 Billion 390 + 20 Ig +60 more +20 370 [increase 80] o Real GDP 370 390410 430 450 470 490 510 530 550 GDP will increase by a “multiple” of 4 & that is why it is called the “multiplier”.

39. o 45 Equilibrium GDP after X of $10 & M of $10 (C[450] +Ig[20] +M[10]+X[10]= GDP[470]) S $530 510 490 470 450 430 410 Open Private C + Ig+Xn Consumption Equilibrium AE[C+Ig+Xn](billions of dollars) Ig = $20 Billion C = $450 Billion 390 o 370 390 410 430 450470490 510 530 550 Real domestic product, GDP (billions of dollars)

40. o 45 ADDING THE PUBLIC SECTOR [“G”] $20 Billion Government Spending & Impact on Equilibrium Y S Government Spending of $20 Billion C +Ig+Xn +G C + Ig + Xn $20 bil. on National Defense $550 Consumption $470 Increases Y by $80 [$20 x 4 = $80] Private-public - ROW $390 Mixed - Open AE (billions) o RGDP 550 390 470

41. o 45 ADDING THE PUBLIC SECTOR [“G”] Incr. T by $20 billion [MT = 3] Equilibrium GDP[-60] S C +Ig + Xn+G Ca+ Ig + Xn+G $550 $20 bil. incr in T $490 Mixed-Open -20 x 3 = -$60 o RGDP $550 $490 Real domestic product, GDP (billions of dollars)

42. Loanable Funds Market

43. [*Use this graph if there is a chg in savings by consumers or chg in fiscal policy] [*Use theMoney Market graphwhen there is achange in MS] Loanable Funds Market D2 S Use the “real interest rate” with LFM, because it is long-term. Use “nominal interest rate” with money market, as it isshort-term. D1 Borrowers Lenders Starting from a balanced budget, if the G incr spending or decr T to get out of a recession, they would now be running a deficit and have to borrow, pushing up demand in the LFM and increasing the interest rate. r=8% Real Interest Rate, (percent) E2 r=6% E1 $2.2 T $2 T $2 T T G F1 F2 Quantity of Loanable Funds Balanced Budget [G&T=$2 Tr.]

44. [*Use this graph if there is a chg in savings by consumers or chg in fiscal policy] [*Use theMoney Market graphwhen there is achange in MS] Loanable Funds Market S1 D1 S2 Borrowers Lenders Real Interest Rate, (percent) • The following would cause an • increase in supply in the LFM • and lower real interest rates: • Fed increases MS • HH save more • Business save more • Government saves more • Foreigners save more here r=6% E1 r=4% E2 F1 F2 Quantity of Loanable Funds

45. Fiscal and Monetary Policy

46. Expansionary Fiscal Policy Loanable Funds Market D2 S [Incr G; Decr T][But we get negative Xn] D1 r=8% SRAS Real In. Rate PL r=6% Start from a Balanced Budget G & T = $2 Trillion AD2 LRAS F1 F2 AD1 “Now, this is better.” $2.2 tr. “I can’t get a job.” PL2 $2 tr. $2 tr. PL1 E2 GT E1 YR YF Real GDP $2.2 $2.2 G G I.R. AD Y/Empl./PL; LFM $1.8 $1.8 T Y/Emp/PL; DI C AD T LFM IR

47. Expansionary [Easy] Money Policy DM DI MS1 MS2 Investment Demand 8% 6% 4% 0 8 4 0 Nominal Interest Rate 6% Buy If there is a RECESSION MS will be increased. Money Market QID1 QID2 AS AD1 AD2 PL I want a job as a Rockette PL2 E2 PL1 E1 YR Y* Real GDP Fed Buy Bonds I.R. QID MS Y/Emp/PL AD

48. Contractionary Fiscal Policy Loanable Funds Market D1 [Decr G; Incr T ] [Again, we get negative Xn] D2 S r=6% PL r=3% SRAS Real In. Rate Start from a Balanced Budget G & T = $2 Trillion LRAS AD2 F2 F1 PL1 $2.2 Ttril. E1 $2 tril. $2 Ttril. $1.8 tril.. PL2 GT AD1 E2 YI YF [like we have “money trees”] Real GDP $1.8 $1.8 G G I.R. AD Y/Empl./PL; LFM $2.2 $2.2 T Y/Emp/PL; DI C AD T LFM IR

49. Contractionary [Tight] Money Policy Dm MS1 MS2 DI “It’s cheaper to burn money than wood.” Investment Demand 10% 8% 6% 0 10 8 6 0 Nominal Interest Rate Sell If there is INFLATION, MS will be decreased. Money Market QID1 QID2 AS like “money trees” AD1 AD2 PL PL1 E1 PL2 E2 YI Y* Fed Sell Bonds MS I.R. AD Y/Empl./PL QID

50. Extreme Keynesian View Think “Great Depression” MS2 MS1 DI(K) 7% 5% 1% 0 7% 5% 1% 0 SRAS AD1 LRAS Dm(K) PL YDY* QID1QID2 Money Market Investment Demand Keynesian viewis thatDMisflat[liquidity trap during a depression] and DIis rathersteep so monetary policy is not that strong. Fiscal policy is “top banana.” Also, the Keynesians don’t think the lower interest rate is asimportantas “profit expectations.”