Change in GDP = Multiplier X Initial Change In

Review Study Guide

1.  The Multiplier Effect

2.  Spending Multiplier:

Change in GDP = Multiplier X initial change in

spending.

MPC and the Multiplier:

3.  MONEY MULTIPLIER

1/Reserve Ratio

This is the maximum multiple $$$ Money Expansion

4.  Balance Budget Multiplier = 1

This is the NET result on GDP

5.  TAX Multiplier; shown as a – negative#

Leakages are Savings.

Injections are Investment, Government spending and XN

Crowding Out: Govt is deficit spending- borrows money to pay for spending- this increases demand for loanable funds and increases real interest rates; thus crowding out private investors and consumers.

To counter act this the FED can increase the Money Supply which lowers nominal interest rates.

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Types of Unemployment

Frictional, Structural and Cyclical

Natural rate of Unemployment:

NRU= Structural + Frictional (around 4-6%)

** Go back and find these in the textbook

Rational Expectations Theory:

Quantity theory of Money:

Say’s Law:

Loanable Funds Graph

What changes Supply What changes Demand

*Increase in household *Increase in household

savings. borrowing.

*Increase in Govt. *Increase in business

savings. Investment.

*Increase in Bus. *Increase in Foreign

savings. borrowing.

*Increase in *Increase in Govt

Foreigner’s Borrowing /deficit

savings Spending= Crowding

Out.

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Price Indexes

Consumer Price Index:

GDP Deflator:

Nominal Interest Rate = Real Interest Rate + Inflation Rate.

Real Interest Rate= Nominal – Inflation Rate

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Cost—Push Inflation happens when AS shifts left

Demand –Pull inflation happens when AD shifts right.

(Always in short run for both types)

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Exam Tips for Free Response:

·  Don’t restate the question

·  Draw graphs big enough so the grader can read it.

·  Label all parts clearly.

·  Even if one is not required drawing a graph is helpful

·  Use correct terminology

·  Use same outline as question

·  Calculate means to show math work

Remember the rules:

·  If the Aggregate Supply curve is shifting

On the AS/AD model then the Phillips
SRPC curve will shift in the opposite direction

·  If the aggregate demand curve is shifting then you are moving on the SPRC curve.

·  If inflation is going up then unemployment must be coming down, and vice versa.

The Laffer Curve

Supply Side economics supports:

Tax credits for businesses

Investment in research and development

Free Trade-elimination of trade barriers

Tax cuts for businesses and consumers

Deregulation of over burdensome regulations

Investment in infrastructure

Remember the rule:

If the FED uses Expansionary Monetary Policy and buys bonds that shifts the MS curve to the right and that in turns shifts the Aggregate Demand curve out to the right on the AS/AD model. That raises the price level and increases GDP in the short-run. The vice versa happens when the FED uses Contractionary Monetary Policy.

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