AP MACROECONOMICS

Factors of Production Land: all non-manmade natural resources Ex: water, sunlight, cows Labor: human activity that produce something Capital: any manmade machine and tools used to produce things Ex: buildings, factories, tractors, computer Entrepreneur: Three basic questions How to produce What to produce For whom to produce Economic systems Command economies [socialism/communism]: central government decides the 3 economic questions; government owns societys productive resources Advantages-ability to change major economic directions quickly, little career uncertainty Disadvantages-inefficient, consumer wants ignored, little incentive to work hard Market economies [capitalism]: individual and firms answer the three basic questions; private property Ex: Japan, US, EU Advantages: freedom of choice, efficiency; higher level of consumer satisfaction Disadvantages: basic needs of many are not met, market can become corrupt; more economic uncertainty, less job security Opportunity Cost The amount of one good that must be sacrificed to obtain another good GDP Gross Domestic Product Total value of all final goods and services produced within a given country in a given period of time Consumption: household spending Investment: capital goods, all construction, changes in inventories Government Spending: public works, goods/ services, salaries Net Exports INTERMEDIATE GOODS [flour, fabric] , STOCKS, TRANSFER PAYMENTS (WELFARE), SECOND HAND SALES ARE NOT COUNTED. ONLY FINAL GOODS AND SERVICES, CURRENTLY PRODUCED ITEMS, PRODUCTION WITHIN OUT BORDERS ARE COUNTED. Nominal GDP VS Real GDP Nominal GDP: production of goods and services at current prices [current dollars] Real GDP: nominal GDP adjusted for inflation [constant dollars] Price Index 100 = Price index in year z

GDP Price Index (GDP deflator) 100 = Real GDP If NGDP > RGDP, inflate If RGDP > NGDP, deflate Consumer Price Index How much consumer price changes Inflation rate is based on the CPI CPI is used to adjust past amounts into current dollars Price in earlier year = Current dollars Types of Unemployment Frictional [ ]: new entrants, qualified workers with transferable skills who change jobs Structural [ ]: geographic industry shifts, workers lack of required skills, technological innovation and consumer preferences Cyclical [ ]: during recessions or times of slow macroeconomic demand Seasonal: workers laid off during slow months Natural Rate of Unemployment NRU = + = U NRU If is zero, we are at the NRU, full employment. Aggregate Demand/ Aggregate Supply AD: total demand for goods and services Shifts occur from changes in C, I, G, NX AS Shifts occur from changes in availability of resources, cost of resources, technology and productivity, taxes, subsides, regulations LRAS: the economy is operating in its long run equilibrium Shifts occur when there is an increase in our potential output [capital, resources, technology] The Multiplier Multiply amount spent/invested/consumed by MPC to reflect total impact on AD Multiplier = Multiplier = MPC = MPS =

Tax Multiplier

Changes in T have smaller impact on AD than changes in G Tax multiplier = =

Tax multiplier is always (multiplier) + 1 Balanced Budget Multiplier is 1; if G and T both increase by the same amount, AD increases by that same amount. Fiscal Policy Government attempt to regulate the economy through the budget Recession (Low GDP, high unemployment): increase government spending, decrease taxes [expansionary fiscal policy] Inflation (High GDP, but price levels increasing too fast): decrease government spending, increase taxes [contractionary fiscal policy]

Federal Reserve System Central bank of the US Conducts monetary policy and regulates the banking system Head of the Reserve: Ben Bernanke Monetary Policy Reserve Requirement Percentage of each deposit that must be held as reserves rr decrease, SM increase Discount Rate What the Fed charges banks when they loan them money Dr decrease, SM increase Open Market Operations The Fed buys or sells government bonds Buy bonds, SM increase Sell bonds, SM decrease Money Multiplier Money Multiplier = Comparative Advantage and Absolute Advantage Absolute advantage Compares the productivity of one person Comparative advantage The person (or country) that can produce an item at a smaller opportunity cost has the comparative advantage in producing that item Link between currency prices and NX When the dollar appreciates.. imports increase because foreign goods seem cheaper, but exports decrease because our goods seem more expensive to foreigners