Macroeconomics Cheat Sheet Flashcards

Questions and Answers

What is the formula for the Labor Participation Rate?

Unemployed / Labor force

Employed / Population

Unemployed + Employed / Population (correct)

Labor force / Population

What is the Unemployment Rate formula?

Unemployed / Labor force

What is the Spending Multiplier?

1/MPS

What is the Tax Multiplier?

-MPC/MPS Signup and view all the answers

What is the Money Multiplier?

1/reserve requirement Signup and view all the answers

What is the Real Interest Rate?

Nominal interest rate - inflation rate Signup and view all the answers

What happens to the equilibrium price when demand increases?

Equilibrium price increases Signup and view all the answers

What is the effect of an increase in supply on the equilibrium price?

Equilibrium price decreases Signup and view all the answers

What does consumer spending increase lead to?

Real GDP increases Signup and view all the answers

What happens to investment when interest rates increase?

Investment decreases Signup and view all the answers

What is the result of an increase in inflation?

Real wages decrease Signup and view all the answers

What effect does an increase in aggregate demand have on the price level?

Price level increases Signup and view all the answers

What happens to the price level when SR aggregate supply increases?

Price level decreases Signup and view all the answers

What is the impact of increasing government spending on Real GDP?

Real GDP increases Signup and view all the answers

What effect does an increase in taxes have on disposable income?

Disposable income decreases Signup and view all the answers

What does an increase in MPC do to the spending multiplier?

Increases spending multiplier Signup and view all the answers

What happens to bond prices when interest rates increase?

Bond prices decrease Signup and view all the answers

What occurs to nominal interest rates when the money supply increases?

Nominal interest rates decrease Signup and view all the answers

What happens to the money supply when reserve requirements increase?

Money supply decreases Signup and view all the answers

What is the relationship between discount rates and the money supply?

When discount rates increase, money supply decreases Signup and view all the answers

What is the effect of the Fed buying bonds on the money supply?

Money supply increases Signup and view all the answers

What is the result of increasing inflation on real interest rates?

Real interest rates decrease Signup and view all the answers

What does deficit spending increase lead to regarding real interest rates?

Real interest rates increase Signup and view all the answers

What is the consequence of an increase in capital stock?

Economic growth increases Signup and view all the answers

What effect does appreciation have on net exports?

Net exports decrease Signup and view all the answers

What happens to net capital inflow when interest rates increase?

Net capital inflow increases Signup and view all the answers

Define comparative advantage.

A country makes a good at a lower opportunity cost than another country Signup and view all the answers

What does investment refer to?

Business spending on physical capital Signup and view all the answers

What defines full employment?

Only frictional/structural unemployment with no cyclical unemployment Signup and view all the answers

What is Long-Run Self-Adjustment?

The SRAS shifts in response to output gaps Signup and view all the answers

What is fiscal policy?

Changing government spending and/or taxes Signup and view all the answers

What is monetary policy?

Changing the money supply to affect interest rates Signup and view all the answers

What are open market operations?

Central bank buys or sells bonds Signup and view all the answers

Define crowding out.

Deficit spending leads to higher interest rates Signup and view all the answers

What is capital inflow?

High interest rates attract more financial capital Signup and view all the answers

What does the Production Possibilities Curve represent?

Functionality of resource allocation and opportunity costs Signup and view all the answers

What is the relationship between supply and demand?

Interaction between the quantity of goods supplied and the quantity demanded Signup and view all the answers

What changes aggregate demand?

Exports, consumption, investment, government spending (ECIG) Signup and view all the answers

What changes aggregate supply?

Labor, technology, wages, production cost, inflation Signup and view all the answers

Study Notes

Formulas

Labor Participation Rate: Calculated as (Unemployed + Employed) / Population, measures the active workforce in an economy.
Unemployment Rate: Defined as Unemployed / Labor Force, indicates the percentage of the labor force that is not employed.
Spending Multiplier: Given by the formula 1/MPS (Marginal Propensity to Save), highlights the effect of spending changes on overall demand.
Tax Multiplier: Calculated as -MPC/MPS (Marginal Propensity to Consume and Save), reflects the impact of tax changes on aggregate demand.
Money Multiplier: Expressed as 1/reserve requirement, shows how much the money supply can grow with bank reserves.

Key Economic Rates

Real Interest Rate: The nominal interest rate adjusted for inflation, calculated as Nominal Interest Rate - Inflation Rate, affecting the true cost of borrowing.

Key Relationships in Economics

Demand Increases: Results in an increase in equilibrium price, affecting market prices and purchasing power.
Supply Increases: Leads to a decrease in equilibrium price, influencing consumer behavior and inventory levels.
Consumer Spending Increases: Associated with real GDP growth, indicating a healthy economic environment.
Interest Rates Increase: Generally results in decreased investment as borrowing costs rise.
Inflation Increases: Corresponds with decreasing real wages, affecting consumers' purchasing power and living standards.
Aggregate Demand Increases: Causes price levels to rise, indicating a shift in economic dynamics.
SR Aggregate Supply Increases: Results in a decrease in price levels, indicating more goods and services available in the economy.
Government Spending Increases: Drives a corresponding rise in real GDP, stimulating economic activity.

Effects of Changes

Taxes Increase: Leads to a decrease in disposable income, impacting consumer spending negatively.
MPC Increases: Results in a higher spending multiplier, indicating a stronger response to changes in income.
Interest Rates Increase: Generally leads to a decrease in bond prices, reflecting the inverse relationship between interest rates and bond values.
Money Supply Increases: Typically causes nominal interest rates to decrease, stimulating borrowing and spending.
Reserve Requirement Increases: Results in a decrease in the money supply, restricting lending capabilities of banks.
Discount Rate Increases: Also leads to a decrease in the money supply, affecting economic liquidity.
Fed Buys Bonds: Increases money supply, encouraging circulation and investment in the economy.
Inflation Increases: Corresponds with decreasing real interest rates, which can stimulate borrowing.
Deficit Spending Increases: Leads to higher real interest rates due to crowding out effects on private investment.

Economic Growth and International Trade

Capital Stock Increases: Contributes to economic growth, enhancing productivity and output.
Appreciation Increases: Results in a decrease in net exports, affecting trade balances.
Interest Rates Increase: Attracts net capital inflow, influencing currency values and investment patterns.
Comparative Advantage: Defined as a country's ability to produce a good at a lower opportunity cost than another, promoting trade benefits.

Employment and Economic Policies

Full Employment: Occurs when only frictional or structural unemployment exists, with no cyclical unemployment present.
Long-Run Self-Adjustment: Describes how the SRAS (Short-run Aggregate Supply) adjusts to close positive or negative output gaps over time.
Fiscal Policy: Involves altering government spending and/or taxes, shifting aggregate demand to influence economic performance.
Monetary Policy: Entails changing the money supply to impact interest rates, also shifting aggregate demand.
Open Market Operations: The central bank's activity of buying or selling bonds to regulate the money supply.

Supply and Demand Dynamics

Crowding Out: Refers to how deficit spending can increase interest rates, reducing private investment.
Capital Inflow: High-interest rates can deter domestic investment but attract foreign financial capital, influencing market dynamics.

Other Economic Concepts

Production Possibilities Curve: Represents the potential output combinations for two goods and the trade-offs involved.
Loanable Funds: The market for borrowing and lending, where savings and investments interplay.
Phillips Curve: Illustrates the inverse relationship between inflation and unemployment rates.
Foreign Exchange: The market for currencies, influencing international trade and economic relations.

Factors Influencing Aggregate Demand and Supply

Aggregate Demand Changes: Driven by exports, consumption, investment, and government spending (ECIG).
Aggregate Supply Changes: Affected by labor, technology, wages, production costs, and inflation dynamics.

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Description

Review essential macroeconomic formulas and concepts with these flashcards. This set covers important metrics such as the Labor Participation Rate, Unemployment Rate, and various multipliers. Perfect for students looking to grasp the basics of macroeconomic principles quickly.