1. GDP = C + I + G + NX MV = P Q (= $GDP)
Macro - Review
GDP = C + I + G + NX
MV = P Q (= $GDP)

2. GDP: Real and Nominal
Gross Domestic Product (GDP): the market value of all final goods and services produced within a country during a year.
GDP = C + I + G + Ex – Im
= C + I + G + NX
Real GDP adjusts for inflation
Nominal GDP = $GDP = P x Q
$ GDP = GDP Deflator x Real GDP
Real GDP = Q = $GDP/P
= Nominal GDP divided by
(deflated by) the GDP Price Deflator

3. Price Indexes (Base Year = 100)
Consumer Price Index (CPI)
cost over time of a typical bundle of goods and services purchased by households.
CPI = Cost of Typical Market Basket Now
divided by
Cost of the Same Basket in Base Year
Inflation Rate = {Change in CPI} ÷ {Initial CPI}
GDP Price Deflator (GDP Price Index)
measures average prices over time of all goods and services included in GDP.

4. Foreign Exchange Rate: Appreciation and Depreciation
A currency appreciates when it buys more of a foreign currency.
Appreciation makes foreign goods cheaper.
Appreciation  Imports Up and Exports Down.
A currency depreciates when it buys less of a foreign currency.
Depreciation makes foreign goods more expensive.
Depreciation  Imports Down and Exports Up.

5. Current Account vs. Financial Account
The balance of payments must balance
Current Account + Financial Account = 0
If we buy more goods and services from foreigners than they buy from us, we have to borrow the difference
 sell them our IOUs.
Capital inflows help finance domestic investment and the government’s deficit

6. Unemployment rate: % of labor force not working.
number unemployed
number in the Labor Force
Rate of Unemployment =
Unemployed persons: not working and looking
Labor force: Employed + unemployed noninstitutionalized persons 16+ years of age
Underemployed workers are treated as employed
Discouraged workers are not in the labor force
“Natural” or normal rate of unemployment (NAIRU)
Seasonal Unemployment
Frictional Unemployment: searching for jobs
Structural Unemployment: Imperfect match between employee skills and requirements of available jobs.
Cyclical Unemployment : Results from business cycle

7. Interest Rates: Nominal and Real
Nominal Interest Rate (i): the interest rate observed in the market.
Real Interest Rate (r): the nominal rate adjusted for inflation ().
Real Interest Rate = Nominal Interest Rate
– Inflation Rate
r = i - 
Low real interest rates spur business investment spending (the I in C + I + G + NX)

8. Aggregate Demand (AD): the economy-wide demand for goods and services.
Aggregate demand curve relates aggregate expenditure for goods and services to the price level
The aggregate demand curve slopes downward owing to price-level effects:
Wealth Effect (Real Wealth/Real Balances)
Interest Rate Effect
International Trade Effect (Substitution)

9. Shifting Aggregate Demand Curve

10. Factors that Affect AD  Shifts in AD
AD = C + I + G + NX
Consumption
Income
Wealth
Interest Rates
Expectations/Confidence
Demographics
Taxes
Investment
Technology
Cost of Capital Goods
Capacity Utilization
Government Spending
Net Exports
Domestic & Foreign Income
Domestic & Foreign Prices
Exchange Rates
Government Policy

11. Aggregate Supply Profits don’t rise with price in long-run
Aggregate Supply (AS): the quantity of real GDP produced at different price levels.
Short-run Aggregate Supply SRAS slopes upward
a higher price level (holding production costs and capital constant in the short-run)
higher profit margins
firms want to produce more.
Long Run Aggregate Supply LRAS is vertical: higher prices cannot elicit more output in the long-run.
Resource costs are NOT fixed in the long-run.
As prices rises, workers demand and get higher wages
Profits don’t rise with price in long-run
AS is set by production possibilities in the long-run

12. Aggregate Supply: Short – Run & Long – Run

13. Aggregate Demand and Supply Equilibrium: Short-run and long-run responses to increase in aggregate demand

14. Aggregate Expenditures = AE = GDP
Y = AE = C + I + G + NX
Disposable income = Yd = Y-T = after tax income.
Yd = Y - T = C + S
Consumption is related to disposable income (Y-T).
C = Ca +cYd
where c = Marginal Propensity to Consume = mpc
Ca = Autonomous consumption
Additional income not consumed is saved
mpc + mps =1

15. Aggregate Expenditures = AE = GDP
In a closed economy, saving either finances private investment (I) or the government’s deficit (G – T)
S = I + (G – T) at equilibrium
Investment can be crowded out by the deficit
I = S – (G-T)
Leakages from the spending stream (S + T)
= Injections to the spending stream (I + G)
S + T = I + G

16. Shifts in the Consumption Function
Expected Future Income
An increase in expected future income will cause current consumption to rise and your saving to fall.
Wealth
An increase in wealth raises current consumption and lowers current saving.
Expected Real Interest Rate
Higher real return  incentive to save more … but
Higher return to saving  less needs to be put aside to achieve the same desired future savings.
Net effect: increased real interest rates reduce consumption and increase saving.
Demographics
Taxes – Ricardian Equivalence: Anticipation of Future Taxes

17. Net exports is NX = EX – (IMa + mpi Y) or NX = NXa – mpi Y
Imports and Exports
The demand for imports depends on current economic activity, Y IM = IMa + mpi Y
“mpi” is the marginal propensity to import
Exports are exogenously determined
they depend on conditions in foreign economies, not our economy
Net exports is NX = EX – (IMa + mpi Y) or NX = NXa – mpi Y
Net expects decrease as the economy expands

18. Demand-Side Equilibrium and the Multiplier At equilibrium: Y = C + I + G + NX = AE Increase in Y = Spending Multiplier x {Increase in Autonomous Spending} Multiplier = 1/(mps + mpi)

19. From Aggregate Expenditure to Aggregate Demand: As price level rises, real money balances decrease and consumption function shifts owing to i) wealth effect ii) interest rate effect iii) international competition

20. Circular Flow