Kayla's AP Macroeconomics Blog

Money Creation Process: (assume 10% required reserves) $1000 cash deposited in checking account => no immediate change in MS => Assets // reserves $1000 $1000 FED purchase of bonds from public (deposited into checking account) => immediate increase in MS of $1000 => Liabilities // demand deposits $1000 RR = $100 (.10 x 1000 deposit) Single Bank: of Money in single bank can create (loan out) = ER Actual Reserves-Required Reserves=Excess Reserves; $1000-$100=$900 in ER Banking System: create money by multiple of initial ER; monetary multitude=1/RR=1/.1=10 System New Money=deposit multiplier x initial excess reserves; 10 x $900 = $9000 Total change in MS as result of deposit; initial deposit of right now + Banking system = total change; $1000+$900=> $10000

Uses of Money: Medium of Exchange Unit of Account Store of Value Types of Money: Commodity money Representative money (IOU’s) Fiat money ($ bc govt says so) Characteristics of Money: Durability Portability Divisibility Uniformity Scarcity Acceptability Money Supply:     M1 Money) cash, coins, currency, traveler’s checks, demand or checkable deposits (largest component)     M2 Money) M1 Money + savings accounts     M3 Money) M2 Money + money market accounts + CDs Liquidity: easy to convert to cash Balance Sheet: summarizes finance decision of a bank at a certain time Liabilities = Assets Liabilities (owe): RR and ER; Assets (own): DD; net worth or owner’s equity Required Reserve + Excess Reserve = Demand Deposit RR: Bank holds a fraction of deposit back as reserve in bank ER: Held by a bank or financial institution in excess of what is required ...

MPC & MPS: Marginal propensity to consume: delta C / delta DI ; % of every extra dollar earned that is spent Marginal propensity to save: delta S / delta DI ; % of every extra dollar earned that is saved MPC+MPS=1 1-MPC=MPS 1-MPS=MPC Spending Multiplier Effect: initial change spending (C,Ig,G,Xn) causes larger change in aggregate spending or AD Formula: Multiplier = change in ad / change in spending Happens because expenditures and income flow continuously which sets off a spending increase in economy Formula: Multiplier = 1 / 1-MPC or 1 / MPS Multipliers are positive when there's increase in spending and negative when there's decrease Tax Multiplier: when government taxes, multiplier works reverse bc money leaves circular flow Formula: Tax Multiplier = -MPC / 1-MPC or -MPC / MPS if tax cut, multiplier is positive bc more money in circular flow *MPS, MPC, Multipliers: Fiscal Policy: changes in expenditures or tax revenues of federal gov...

Investment: money spent or expenditures on new plants (factories), capital equipment  (machinery), technology (hardware and software), new homes, inventories (goods sold by producers) Expected Rate of Return: -How does business make investment? Cost / benefit analysis -How does business determine benefits? Expected rate of return -How does business count the cost? Interest costs -How does business determine amount of investment they undertake? Compare expected rate of return to interest cost (return > interest cost : invest // return < interest cost: don't invest) -What determines cost of investment decision? Real Interest Rate (r%) Investment Demand Curve (ID) - What is the shape of investment demand curve? Downward sloping -Why? When interest rates are high, fewer investments are profitable; when low, more investments are profitable. Conversely, there are few investments that yield high rates of return, and many that yield low rates of return D...

Aggregate Supply: Level of real GDP  (GDPr) that firms will produce at each price level (PL) Long Run: period of time where input prices are completely flexible and adjust to changes in price level ; level of real GDP supplied is independent of price level Short Run: period of time where input prices are sticky and do not adjust to changes in the price level ; level of real GDP supplied is directly related to price level Long Run Aggregate Supply (LRAS): marks the level of full employment in economy (analogous to PPC) Short Run Aggregate Supply (SRAS): input prices are sticky in the short run, SRAS is upwards sloping. Changes in SRAS: increase is shift to the right & decrease is shift to the left ; key to understanding is per unit cost of production  ; formula: per unit production cost = total input cost / total output Determinants of SRAS  (all of following affect until production cost): input prices: domestic resource prices (wages <75% of a...

Aggregate Demand curve: -AD is demanded by consumers, businesses, government, and foreign countries -Changes in price level move along curve not shifts on curve Aggregate Demand (AD): Shows amount of real GDP that 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 purchasing power of $, decreases quantity of expenditures, lower price levels increase purchasing power and increase expenditures ; ex: price level goes up, gdp demand goes down Interest-Rate Effect: as price level increase, lenders need to charge higher interest rates to get REAL return on their loans, higher interest rates discourage consumer spending and business investment ; ex: increase in price leads to increase in interest rate from 5% to 25%. Less likely to take out loans to improve business Foreign T...