Abraham's AP MacroEconomics Blog

Measure of money in flows and out flows between the US and the rest of the world In flows referred to as credits Out flows referred to as debit The balance of payments is divided into 3 accounts 1. Current account Balance of trade or net exports Exports is known as a credit or asset. Debit is known as a debit or liability. Net foreign income or net investment Income earned by US owned foreign assets Encompasses income paid to foreign held US assets Net transfers Foreign aid ex. US giving money to another country for weather related disaster or famine ex. A worker sending money back home to family Tend to be unilateral 2. Capital/financial account Balance of capital ownership includes the purchase of real and financial assets Real assets are real estate. Financial assets are stocks and bonds.  Direct investment in the US is a credit to the capital account ex. Toyota factory in San Antonio Direct investment by US firms/individuals in a foreign country

Disinflation this also occurs when aggregate demand declines a reduction in inflation rate from yr to yr seen in LRPC Deflation general decline in the price level Hyperinflation when economy experiences a high and unusual rate of inflation which can decrease value of local currency Supply-side economics changes in AS not AD  to determine the level of inflation, unemployment rates, economic growth aka Reaganomics trickle-down effect economists support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payments (these transfer payments: unemployment compensation, welfare programs provide disincentives to work, invest, and undertake entrepreneurial ventures  Laffer-Curve depicts theoretical relationship between tax rates and government revenue as tax rates increase from zero, tax revenues increase from zero to some maximum level and then decline  3 criticisms of the laffer curve empirical eviden

UNIT 4 - MONETARY POLICY Uses of Money Medium of exchange Unit of account Store of value Store of Value Is this really a dollar? Is this actually worth a dollar? If you have money in an account and money in storage, are they the same value? No, because banks draw interest Types of Money Commodity money Gold, silver significant economic value Representative money IOUs Fiat money Characteristics of money Durability Cutting a dollar in half, going to the bank to exchange it Portability Divisibility Uniformity Scarcity Acceptability  Money Supply M1 Money Cash Coins Currency Traveler's checks (cheques) Demand or checkable deposits Checkable deposits are the largest component of M1 M2 Money M1 + savings accounts M3 Money M2 + money market accounts + CD's MMA = An account that grows interest CD = certificate of deposit: people deposit money to bank, interest grows, bank gives money back to you + interest Liquidity

AGGREGATE DEMAND CURVE Aggregate demand curves down. Y axis: Price Level X axis: Real GDP AD is the demand by consumers, businesses, government, and foreign countries.  Changes in price level cause a move along the curve, not a shift of the curve. Formula: AD = C + Ig + G + Xn AGGREGATE DEMAND (AD) 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 AD is downward sloping Wealth Effect Higher prices reduce the purchasing power of $. This decreases the quantity of expenditures. Lower price levels increase purchasing power and increase expenditures. Ex. If the balance in your bank account was $50,000, but inflation erodes your purchasing power, you will likely reduce your spending. So... Price Level goes up, GDP demanded goes down.  Interest - Rate Effect As price level increases, lenders

THE AD/AS MODEL The equilibrium of AD and AS determines the current output (REAL GDP) and the price level (PL) Full Employment Full employment equilibrium exists where AD intersects SRAS and LRAS at the same point. Recessionary Gap A recessionary gap exists when equilibrium occurs below full employment output. Inflationary Gap  An inflationary gap exists when equilibrium occurs beyond full employment output. CHANGES (𝚫) in AD CHANGES in SRAS INCREASE DECREASE THREE RANGES  Horizontal or Keynesian Range: A lot of unemployed resources which creates a recession or depression.  Includes only levels of real GDP that are less than the full employment output. Intermediate Range: Resources are getting closer to the full employment level, which creates pressure on wages and prices. Vertical/Classical Range: Where real GDP is at a level with unemployment at the full employment level, and where any increase in demand will result only in an

Fiscal Policy Expansionary and contractionary policy Deficits and Surpluses Built-in-Stability 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 spending Taxes and spending have an inverse relationship Fiscal policy is enacted to promote our nation's economic goals: full employment, price stability, and economic growth Deficits, Surpluses, 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 Corporations Financial institutions Foreign entities or foreign governments Fiscal Policy Two Options Discretionary Fiscal Policy (action) Expansionary fiscal policy - think

Disposable Income (DI) Income after taxes or net income DI = Gross Income - Taxes 2 Choices With disposable income, households can either Consume (spend money on goods and dervices) 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 housholds consume if 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/save APC + APS = 1 1 - APC = APS 1 - APS = APC APC >1 .: Dissaving -APS .: Dissaving MPC & MPS Marginal propensity to consume 𝚫C/𝚫DI % of every extra follar earned that is spent Marginal propensity to save 𝚫S/𝚫DI % of every extra dollar earned that is saved MPC + MPS = 1 1 - MPC = MPS