Macroeconomics Crash Course - Key Points

Jul 22, 2024

Introductory Macroeconomics Crash Course

Lecture Overview

  • Presenter: Jacob Clifford
  • Purpose: Help students prepare for AP macroeconomics or final exams
  • Structure: Fast-paced review focusing on key macroeconomics concepts
  • Additional Resources: Ultimate review pack with practice questions and hidden videos

Unit 1: Basics of Economics

Core Concepts

  • Scarcity: Unlimited wants vs. limited resources
  • Opportunity Costs: Every decision has a cost
  • Production Possibilities Curve (PPC):
    • Efficient points (on curve), inefficient points (inside curve), impossible points (outside curve)
    • Shapes: Straight line (constant opportunity cost), Bowed outwards (increasing opportunity costs)

Shifts in PPC

  • Impact of more/less resources, technology, and trade
  • Trade shifts consumption possibilities beyond the PPC

Comparative Advantage

  • Specialization and lower opportunity cost
  • Absolute advantage: Who produces more
  • Calculations for specialization
  • Terms of trade for mutual benefit

Economic Systems

  • Free market (capitalism), command economy, mixed economy
  • Circular flow model:
    • Interaction between businesses, individuals, government
    • Product market and resource market
    • Government roles: transfer payments, subsidies, factor payments

Supply and Demand

  • Demand: Downward sloping, price ↑ quantity demanded ↓, price ↓ quantity demanded ↑
  • Supply: Upward sloping, price ↑ quantity supplied ↑, price ↓ quantity supplied ↓
  • Equilibrium: No shift in curves, only movement along curve, understanding shortage and surplus

Unit 2: Macro Measures

Goals of Economy

  • Growth
  • Low unemployment
  • Stable prices (inflation control)

GDP (Gross Domestic Product)

  • Definition: Dollar value of all final goods/services produced within borders in a year
  • GDP Per Capita: GDP divided by population
  • Percent Change Calculation: Analyze changes over years

Components Excluded from GDP

  • Intermediate goods
  • Non-production transactions (e.g., stocks)
  • Non-market transactions (illegal goods/services)

Calculating GDP

  • Expenditure Approach: C + I + G + Xn
    • Business spending β‰  stocks/bonds
  • Income Approach: Sum of rent, wages, interest, profit
  • Nominal vs Real GDP: Adjusting for inflation

Business Cycle

  • Four phases: Peak, recession, trough, expansion
  • States of Economy: Full employment, recessionary gap, inflationary gap

Unemployment

  • Definition: Actively looking, can't find work
  • Types: Frictional, Structural, Cyclical
  • Natural Rate of Unemployment: Frictional + Structural (~5% in USA)
  • Discouraged Workers: Not counted but want jobs
  • Part-time Workers: Counted as fully employed

Inflation

  • Definition: Money loses purchasing power
  • Types: Inflation, deflation, disinflation
  • Impact on wages, interest rates
  • Consumer Price Index (CPI): Measure changes in price levels
  • GDP Deflator: Broader measure including all goods/services

Causes of Inflation

  • Printing too much money
  • Demand-pull Inflation: Increased demand
  • Cost-push Inflation: Increased production costs

Unit 3: Aggregate Demand and Supply

Aggregate Demand (AD)

  • Downward sloping: Wealth effect, interest rate effect, foreign trade effect
  • Shifters: Changes in consumer/investment spending, government policies

Aggregate Supply (AS)

  • Short-run (SRAS): Upward sloping
  • Long-run (LRAS): Vertical, full employment GDP
  • Shifters: Resources, technology, government regulations, taxes/subsidies

Economic Gaps

  • Stagflation: High inflation + low output
  • Adjustments from short-run to long-run

Economic Growth

  • Increase in investment and capital shifts PPC and LRAS

Phillips Curve

  • Short-run: Negative relationship between inflation and unemployment
  • Long-run: Vertical, no relationship between inflation and unemployment

Fiscal Policy

  • Expansionary: Increase government spending, cut taxes
  • Contractionary: Increase taxes, decrease government spending
  • Spending Multiplier: MPC and MPS influence total changes in spending

Issues in Fiscal Policy

  • Deficits and national debt
  • Crowding Out: Government borrowing impacts private investment

Unit 4: Monetary Policy

Nature of Money

  • Commodity vs. Fiat Money: Intrinsic value vs. no intrinsic value
  • Functions of Money: Medium of exchange, unit of account, store of value

Money Supply

  • M1 Money Supply: Includes checking accounts (demand deposits)
  • Fractional Reserve Banking: Banks hold a portion of reserves, loan out the rest

Bank Balance Sheets

  • Determine required/excess reserves

Money Multiplier

  • Formula: 1 / Reserve Requirement
  • Impact on total change in money supply

Money Market Graph

  • Demand for money (transaction and asset), supply determined by Fed
  • Monetary Policy: Expansionary vs. Contractionary
  • Shifters: Reserve requirement, discount rate, open market operations

Loanable Funds Market

  • Supply and demand for loans, real interest rates
  • Government borrowing and crowding out effect

Unit 5: International Trade and Foreign Exchange

Balance of Payments

  • Current Account: Exports/imports, investment income, net transfers
  • Financial Account: Financial assets inflow and outflow

Foreign Exchange Market

  • Appreciation vs. Depreciation: Impact on net exports
  • Supply and demand graph for currencies
  • Four shifters: Tastes, income, inflation, interest rates

Exchange Rates

  • Floating vs. Fixed Exchange Rates: Market-determined vs. government-controlled

Conclusion

  • Review Strategies: Watch for key concepts, practice calculations
  • Final Encouragement: Stay confident, you got this!