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Last Minute Macro

1. Economics: Study of how scarce resources are allocated among competing users
2. Economic Questions: What is produced? How is it produced?
Who gets what is produced?
3. Resources
a. Land: Natural resources, earns rent
b. Capital: human and physical, earns interest
c. Labor: human work, earn wage
d. Entrepreneurship: business sense, earns profit
4. PPF/PPC: Production Possibilities
a. Illustrates opportunity cost: what is lost when
producing one good over another
b. Law of Increasing Opportunity Costs: obtaining more of
a good requires a reduction in the production (lost opportunity) of the alternate good; creates
concave PPC
c. Points A, B, C: resources are efficiently allocated
d. Point X: inefficiency, not using all available resources
e. Point Y: not attainable at the moment, must increase resources or technology to reach

5. Business Cycle
a. Alternating periods of economic growth and
contraction, broken into four parts (macroeconomic goal is for smooth
business cycle, directed upward as often as possible)
i. Trough (bottom point)
ii. Recovery/growth (trough to peak)
iii. Peak (top point)
iv. Recession (peak to trough)

6. Supply and Demand

b. Law of Demand: increase in P causes decrease
in QD
i. Demand Shifters: change in taste, price
of related goods (substitutes and
complements), income, increase in
number of buyers; if D, right shift; if
D, left shift
1. All change planned
consumption at all prices
2. When D (right shift) PQ
3. When D (left shift) P Q
ii. Change in QD: caused by own price
change and result in movement along
the curve
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c. Law of Supply: increase in P causes increase in QS

i. Supply Shifters: change in the cost of production, technology, price of other produced
goods, number of planned sellers; if S, right shift; if S, left shift
1. All change planned supply at all prices
ii. Change in QS: caused by own price change and results in movement along the curve
d. Market Equilibrium: when price is established where QD = QS
i. Pe changes whenever supply or demand shifts
ii. When P exceeds Pe = surplus
iii. When P is below Pe = shortage
iv. When P equals Pe = stable
7. Macroeconomic Theories
a. Classical Economics (Adam Smith): Wages and prices are flexible; the economy is self-correcting in
the long run; minimum government intervention required; persistent unemployment requires
supply-side policies (deregulation and tax cuts); Equilibrium is reached when SRAS, LRAS and AD
intersect
b. Keynesian Economics (JM Keynes): wages and prices are sticky (slow to change), economy cannot
rely on private investment and consumption, must use government spending to spark economic
growth; persistent unemployment requires demand-side policies (G and decrease taxes)
8. Maroeconomic Theories and Their Opinions on the Financial Sector
a. Classical: financial market works smoothly; investment and savings will always be equal; interest
rates changes to ensure this equality
b. Keynesian: savings and investments are often unequal with the monetary sector not working
properly; AD does not equal AS; imbalances are typically caused by multiplier effects;
discretionary fiscal policy is needed to implements to change savings
9. Aggregates in the Macroeconomy
e. GDP (Gross Domestic Product): value of production within a countrys boundaries
i. Measured as consumption + investments + government spending + exports imports OR
C + I + G + NX
f. rGDP (real Gross Domestic Product): GDP with adjustment for inflation in price level
g. Measuring Price Level:
i. Price Index: average level of prices relative to the average level in a base period of time;
cost of a fixed basket of goods/services as a percentage of base period cost
ii. GDP Price Index: a measure of changes in the average price of all goods and services
iii. CPI (Consumer Price Index): a measure of changes in the average price of urban consumer
goods and services
iv. Cost of Living Adjustment (COLA): Automatic adjustments of income to the rate of
inflation
h. Measuring Inflation
i. Inflation: continuing increase in the average price level of goods and services over time
ii. Deflation: continuing decrease in the average price level of goods and services over time
(Negative Inflation Rate)
iii. Types of Inflation:
1. Wage-push: wage increase leads to price increase
2. Cost-push: increase in non-labor costs leads to price increase
3. Demand-pull: an increase in the price level initiated by excessive AD
iv. Consequences of Unanticipated Inflation:
1. Uncertainty
2. Incorrect speculation
3. Unproductive investments
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i. Measuring Unemployment
i. Labor Force: employed + unemployed
ii. Employed: working and not looking for work
iii. Unemployed: not working, able to work, and looking for work
iv. Unemployment rate = ( unemployment total / labor force ) * 100
v. Types of Unemployment:
1. Seasonal: unemployed during periods between agricultural seasons, tourist
seasons, school breaks, etc
2. Frictional: unemployment as people move between jobs or into the labor market
3. Structural: workers laid off by declining industry/regions or job made obsolete
4. Cyclical: unemployment due to changes in economic cycle (during recession)
vi. Unemployment Vocab to Know
1. Underemployed: people seeking FT paid employment; working PT when qualified
for FT; or those employed at a level lower than their capability
2. Discouraged Workers: not considered in the labor force because they are not
actively seeking work; likely to re-enter when labor market improves
vii. Consequences to Unemployment
1. Lost output, measured by Okuns Law (for every 1% increase in unemployment,
2.5% loss of total output (GDP))
10. Keynesian Approach to Aggregate Spending
a. Consumption
i. MPC (Marginal Propensity to Consume) = change in C / change in Y = fraction of an extra
dollar of income that is spent
ii. APC (Average Propensity to Consume) = C / Y = fraction of an average dollar that is spent
b. Savings = Income Consumption
i. MPS (Marginal Propensity to Save) = change in S / change in Y = fraction of an extra dollar
that is saved
ii. APC (Average Propensity to Save) = S / Y fraction of an average dollar that is saved
c. MPC + MPS = 1
d. APC + APS = 1
e. Government Expenditures (G) = federal, state and local government spending
i. Two types: direct purchases by the government or transfer payments that redistribute
income from one group to another
f. Foreign Sector (EX IM)
i. Exports: spending by foreigners on domestically produced goods
ii. Imports: spending by domestic residents on goods produced in foreign countries
g. Keynesian Equilibrium
i. Achieved when output (Y)= aggregate expenditures (AE)
ii. Y = AE
iii. Y = C+I+G+NX
11. GDP Gap and the Multiplier
a. Gaps: Differences between spending at equilibrium GDP and full-employment equilibrium
i. Recessionary Gap: amount by which the equilibrium GDP falls short from full-
employment equilibrium
ii. Inflationary Gap: amount by which equilibrium GDP surpasses full-employment
equilibrium
b. How to adjust to gaps?
i. Keynesian Answer: G only way to guarantee an AD
ii. Classical Answer: no government intervention (wait for I and C to AD)
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c. Expenditure Multiplier: the multiple by which an initial change in aggregate spending will alter
total expenditure after an infinite number of spending cycles
i. Multiplier = (1 / (1 MPC)) :::OR::: (1 / MPS)
d. For Example:
Question: How much of an increase in I is required to solve the deflationary gap?
MPC = 0.8
Deflationary Gap = $300 million
Answer: I x multiplier = $300 million
I x (1/MPS) = $300 million
I = $300m x MPS
I = $300m x (1/MPC)
I = $300m x 0.2
I = $60m
12. Fiscal Policy: what the government does to change the level of total spending in the economy with taxes
or government spending (G)
a. Expansionary Fiscal Policy
i. Increases government spending G or decreasing taxes (New Deal policies); bigger
budget deficit
b. Contractionary Fiscal Policy
i. Decreases in government or increasing taxes; smaller budget deficit or possible surplus
c. Keynesian Fiscal Policy
i. Use of fiscal policy to eliminate GDP gaps, discretionary fiscal policy (not automatic fiscal
policy, it can change year to year)
d. Automatic Fiscal Stabilizers
i. Built-in federal spending/tax policies that automatically respond to changes in national
income (ie-taxes are automatically withdrawn from paycheck, so taxes with income)
e. Problems with Fiscal Policy
i. Have to estimate all variables
ii. Government not able to alter G or taxes quickly, typically have to wait for legislation to be
approved
iii. Financing deficits can have offsetting effects, called crowding out, when a government
finances a deficit, the expansionary or contractionary effects are not fully felt in the
economy because it takes away or adds to investments and consumption (ie-if the
government sells bonds to finance expansionary fiscal policy, it takes away funds from
potential private investment, so G is offset by I)
13. Determining PLe and Ye in the aggregate economy
a. AD (aggregate demand): total quantity of output
demanded at any price level
i. Slopes downward because:
1. Real balances effect: price changes
affect the real value of GDP
2. Foreign trade effect: domestic
price increase lowers exports while increasing imports; goods are
more expensive domestically and cheaper overseas; lower exports
and higher imports means lower expenditures on domestic
goods/services
3. Interest-rate effect: increase in
prices causes an increase in money demand (MD); increase in
MD raises interest rates, which lowers investments, lowering total
expenditures
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b. AS (aggregate supply): total quantity of output supplied at any price level

i. SRAS (short run aggregate supply): as price level rises, quantity of output rises as firms
seek higher profits; in the SR, prices of inputs are sticky; as firms expand output (even
with a fixed input price) price level rises due to diminishing returns
ii. LRAS (long run aggregate supply): as price level rises, there is no increase in output the
economy is at full employment of all resources
1. There is NO PAYOFF to changing AD in the LR
14. Money
a. Money: anything that is accepted as a medium of exchange; ideally is in a constant but limited
supply, difficult to counterfeit, small and portable
b. Use of Money:
i. Medium of Exchange
ii. Store of Value
iii. Unit of Account
c. Types of Money
i. Commodity Money: value as a traded good = value as money
ii. Fiat Money: Money declared by government to be valuable
d. Money Supply
i. M1 = currency held by the public outside of banks
ii. M2 = M1 + savings accounts + small time deposits (less than $100,000)
e. Credit Card is not money! Not an asset!
15. Banking
a. Financial Intermediary: go-between for lenders and borrowers, hold deposits and makes loans
b. Bank reserves: vault cash and deposits
i. Required Reserves: % mandated by the Federal Reserve (central bank)
ii. Excess Reserves: anything above required amount; may be loaned to other banks on the
Federal Funds Market (interest rate set just below the Discount Window to encourage
banks to borrow from one another instead of the Fed)
c. Money Creation: How do banks create money?
i. Banks create demand deposits (part of the money supply) when making bank loans
ii. Money Multiplier: the amount of money that the banking system can create from $1 of
excess reserves
iii. Maximum Money Creation: assumes all money gets deposited, banks lend or spend all
excess reserves (only holding required reserve)
1. MM = 1 / rr
16. Federal Reserve (US central bank, the Fed)
a. Twelve regional banks supervised by a Board of Governors in DC, nominated by US Senate for
fixed terms
b. Six explicit functions
i. Conduct monetary policy
ii. Supervise/regulate financial institutions
iii. Serve as lender of resort to financial institutions (Discount Window)
iv. Provide banking services for the US government
v. Issue coin/currency
vi. Provide financial services to commercial banks, savings/loan associations, savings banks
and credit unions
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c. MONETARY POLICY: policy set by the central bank that aims to manipulate the money supply
(MS)
i. OMOs (Open Market Operations): buying/sales of bonds (buy bonds, go big MS; sell
bonds, go small MS)
ii. Change the Reserve Requirement
iii. Change the Discount Rate/Discount Window (interest rate charged to banks by the Fed
for borrowing funds)
d. To decrease MS (Contractionary)
i. Increase RR
ii. Increase DR
iii. Sell bonds
e. To increase MS (Expansionary)
i. Decrease RR
ii. Decrease DR
iii. Buy bonds
f. Demand Money (MD)
i. The quantities of money people are
willing and able to hold across interest rates

17. Maroeconomic Theories and Their Opinions on the Monetary Policy

a. Classical View: monetary policy cannot be used to solve the problems of income, output and
employment; velocity of money is fixed (how quickly money changes hands); any change in MS
will be inflationary in the LR
b. Keynesian View: used to fight inflation and recession, but needs to be used in conjunction with
fiscal policy; liquidity trap: money gets caught when people hold onto it (usually at low interest
rates) instead of putting it into savings/I/C.
i. Contractionary MP will MS, IR, I/C, AD
ii. Expansionary MP will MS, IR, I/C, AD
18. Interest Rates:
a. Nominal interest rate: not adjusted for inflation
b. Real interest rate: nIR inflation
19. Phillips Curve!
a. Inflation and unemployment are
related variables; when
unemployment is low, people have
jobs, people have wages so
purchases can happen, demand
increases, prices increase, leading
to higher inflation rates; when
unemployment is high, people have
no wages to purchase
goods/services, demand is low, so
prices decrease, then inflation
decreases
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b. SRPC (Short Run Phillips Curve): negative relationship between inflation and unemployment rate
c. LRPC (Long Run Phillips Curve): with expectations of inflation met, changes in expectation have
no effect on unemployment; LRPC is when actual inflation = expected inflation
20. Fighting Stagflation (Combination of high/accelerating inflation with high unemployment)
a. Classical: run a recession to squeeze inflationary expectations out of the economy
b. Keynesian: wage and price controls (pressure on individual to hold down wages/prices) to lower
inflation expectations which will shift SRPC to the left without causing a recession; lift regulations
when LRPC is reached
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Last Minute Macro

1. Economics: Study of how ____________________ resources are allocated among competing users
2. Economic Questions: What is produced? How is it produced? Who gets what is produced?
3. Resources
a. L__________________: Natural resources, earns rent
b. C_______________: human and physical, earns interest
c. L_________________: human work, earn wage
d. E____________________: business sense, earns profit
4. PPF/PPC: Production Possibilities
a. Illustrates ____________________cost: what is lost
when producing one good over another
b. Law of Increasing Opportunity Costs: obtaining more of
a good requires a reduction in the production (lost
opportunity) of the alternate good; creates
____________________PPC
c. Points A, B, C: resources are efficiently
____________________
d. Point X: ____________________, not using all available resources
e. Point Y: not attainable at the moment, must increase _________________or technology to reach

5. Business Cycle
j. Alternating periods of economic growth and
contraction, broken into four parts (macroeconomic goal is for
smooth business cycle, directed upward as often as possible)
i. ____________________ (bottom point)
ii. Recovery/growth (trough to peak)
iii. ____________________ (top point)
iv. Recession (peak to trough)
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6. Supply and Demand

k. Law of Demand: increase in P causes decrease
in QD
i. Demand Shifters: change in
____________________, price of
related goods
(____________________and
complements), income, increase in
number of buyers; if D, right shift; if
D, left shift
1. All change planned
consumption at all prices
2. When D (right shift) PQ
3. When D (left shift) P Q
ii. Change in QD: caused by own price change and result in __________________ along the
curve
l. Law of Supply: increase in P causes increase in QS
i. Supply Shifters: change in the cost of ____________________, technology, price of other
produced goods, number of planned sellers; if S, right shift; if S, left shift
1. All change planned supply at all prices
ii. Change in QS: caused by own price change and results in _____________ along the
curve
m. Market Equilibrium: when price is established where QD = QS
i. Pe changes whenever supply or demand shifts
ii. When P exceeds Pe = ____________________
iii. When P is below Pe = ____________________
iv. When P equals Pe = stable
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7. Macroeconomic Theories
a. Classical Economics (____________________): Wages and prices are flexible; the economy is
____________________in the long run; minimum government intervention required; persistent
unemployment requires supply-side policies (deregulation and tax cuts); Equilibrium is reached
when SRAS, LRAS and AD intersect
b. Keynesian Economics (____________________): wages and prices are ____________________
(slow to change), economy cannot rely on private investment and consumption, must use
____________________spending to spark economic growth; persistent unemployment requires
demand-side policies (G and decrease taxes)
8. Maroeconomic Theories and Their Opinions on the Financial Sector
a. Classical: financial market works smoothly; investment and savings will always be equal; interest
rates changes to ensure this equality
b. Keynesian: savings and investments are often unequal with the monetary sector not working
properly; AD does not equal AS; imbalances are typically caused by ___________________
effects; discretionary fiscal policy is needed to implements to change savings
9. Aggregates in the Macroeconomy
n. GDP (Gross Domestic Product): value of production within a countrys boundaries
i. Measured as consumption + investments + government spending + exports imports OR
________________________________________
o. rGDP (real Gross Domestic Product): GDP with adjustment for ____________________
p. Measuring Price Level:
i. Price Index: average level of prices relative to the average level in a base period of time;
cost of a fixed ____________________of goods/services as a percentage of base period
cost
ii. GDP Price Index: a measure of changes in the ____________________price of all goods
and services
iii. CPI (Consumer Price Index): a measure of changes in the average price of urban consumer
goods and services
iv. Cost of Living Adjustment (COLA): Automatic adjustments of income to the rate of
inflation
q. Measuring Inflation
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i. Inflation: continuing ____________________in the average price level of goods and

services over time
ii. Deflation: continuing ____________________in the average price level of goods and
services over time (Negative Inflation Rate)
iii. Types of Inflation:
1. Wage-push: ____________________increase leads to price increase
2. Cost-push: increase in non-labor ____________________leads to price increase
3. Demand-pull: an increase in the price level initiated by excessive ____________
iv. Consequences of Unanticipated Inflation:
1. Uncertainty
2. Incorrect speculation
3. Unproductive investments
r. Measuring Unemployment
i. Labor Force: employed + ____________________
ii. Employed: working and ________________ looking for work
iii. Unemployed: not working, able to work, and ____________________ for work
iv. Unemployment rate = ( unemployment total / labor force ) * 100
v. Types of Unemployment:
1. Seasonal: unemployed during periods between ____________________ seasons,
tourist seasons, school breaks, etc
2. Frictional: unemployment as people move ___________________ jobs or into the
labor market
3. Structural: workers laid off by _______________ industry/regions or job made
obsolete
4. Cyclical: unemployment due to changes in economic cycle (during
_______________)
vi. Unemployment Vocab to Know
1. Underemployed: people seeking FT paid employment; working PT when qualified
for FT; or those employed at a level lower than their capability
2. Discouraged Workers: not considered in the labor force because they are not
____________________ seeking work; likely to re-enter when labor market
improves
vii. Consequences to Unemployment
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1. Lost output, measured by Okuns Law (for every 1% increase in unemployment,

2.5% loss of total output (GDP))

10. Keynesian Approach to Aggregate Spending

a. Consumption
i. MPC (Marginal Propensity to ____________________) = change in C / change in Y =
fraction of an extra dollar of income that is spent
ii. APC (Average Propensity to ____________________) = C / Y = fraction of an average
dollar that is spent
b. Savings = Income Consumption
i. MPS (Marginal Propensity to ____________________) = change in S / change in Y =
fraction of an extra dollar that is saved
ii. APC (Average Propensity to ____________________) = S / Y fraction of an average
dollar that is saved
c. MPC + MPS = 1
d. APC + APS = 1
e. Government Expenditures (G) = federal, state and local government spending
i. Two types: direct purchases by the government or ____________________ payments
that redistribute income from one group to another
f. Foreign Sector (EX IM)
i. Exports: spending by foreigners on ____________________ produced goods
ii. Imports: spending by domestic residents on goods produced in ____________________
countries
g. Keynesian Equilibrium
i. Achieved when output (Y)= aggregate expenditures (AE)
ii. Y = AE
iii. Y = C+I+G+NX
11. GDP Gap and the Multiplier
a. Gaps: Differences between spending at equilibrium GDP and full-employment equilibrium
i. Recessionary Gap: amount by which the equilibrium GDP falls short from
________________________________________ equilibrium
ii. Inflationary Gap: amount by which equilibrium GDP surpasses
________________________________________ equilibrium
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b. How to adjust to gaps?

i. Keynesian Answer: ________ only way to guarantee an AD
ii. Classical Answer: no government intervention (wait for ______ and _______ to AD)
c. Expenditure Multiplier: the multiple by which an initial change in aggregate spending will alter
total expenditure after an infinite number of spending cycles
i. Multiplier = (1 / (1 MPC)) :::OR::: (____________________)
d. For Example:
Question: How much of an increase in I is required to solve the deflationary gap?
MPC = 0.8
Deflationary Gap = $300 million
Answer: I x multiplier = $300 million
I x (1/MPS) = $300 million
I = $300m x MPS
I = $300m x (1/MPC)
I = $300m x 0.2
I = $60m
12. Fiscal Policy: what the government does to change the level of total spending in the economy with taxes
or government spending (G)
a. Expansionary Fiscal Policy
i. Increases government spending G or ____________________ taxes (New Deal policies);
bigger budget deficit
b. Contractionary Fiscal Policy
i. Decreases in government or increasing taxes; smaller budget deficit or possible ________
c. Keynesian Fiscal Policy
i. Use of fiscal policy to eliminate GDP gaps, ____________________ fiscal policy (not
automatic fiscal policy, it can change year to year)
d. Automatic Fiscal Stabilizers
i. Built-in federal spending/tax policies that automatically respond to changes in national
income (ie-taxes are automatically withdrawn from paycheck, so taxes with income)
e. Problems with Fiscal Policy
i. Have to estimate all variables
ii. Government not able to alter G or taxes quickly, typically have to wait for legislation to be
approved
 14

iii. Financing deficits can have offsetting effects, called crowding out, when a government
finances a deficit, the expansionary or contractionary effects are not fully felt in the
economy because it takes away or adds to ____________________ and consumption (ie-
if the government sells bonds to finance expansionary fiscal policy, it takes away funds
from potential private investment, so G is offset by I)
13. Determining PLe and Ye in the aggregate economy
a. AD (aggregate demand): total quantity of output demanded at any price level
i. Slopes downward because:
1. Real balances effect: price changes affect the real value of GDP
2. Foreign trade effect: domestic price increase lowers exports while increasing
imports; goods are more expensive domestically and cheaper overseas; lower
exports and higher imports means lower expenditures on domestic
goods/services
3. Interest-rate effect: increase in prices causes an increase in money demand
(MD); increase in MD raises interest rates, which lowers investments, lowering
total expenditures
b. AS (aggregate supply): total quantity of output
supplied at any price level
i. SRAS (short run aggregate supply): as
price level rises, quantity of output rises
as firms seek higher profits; in the SR,
prices of inputs are
___________________; as firms expand
output (even with a fixed input price)
price level rises due to diminishing
returns
ii. LRAS (long run aggregate supply): as
price level rises, there is no increase in output the economy is at full employment of all
___________________
 15

1. There is NO PAYOFF to changing AD in the LR

14. Money
a. Money: anything that is accepted as a medium of ____________________; ideally is in a constant
but limited supply, difficult to counterfeit, small and portable
b. Use of Money:
i. Medium of Exchange
ii. Store of Value
iii. Unit of Account
c. Types of Money
i. Commodity Money: value as a traded good = value as money
ii. ____________________: Money declared by government to be valuable
d. Money Supply
i. M1 = currency held by the public outside of banks
ii. M2 = M1 + savings accounts + small time deposits (less than $100,000)
e. Credit Card is not ____________________!
15. Banking
a. Financial Intermediary: go-between for lenders and ____________________, hold deposits and
makes loans
b. Bank reserves: vault cash and deposits
i. Required Reserves: % mandated by the Federal Reserve (____________________)
ii. Excess Reserves: anything above ____________________amount; may be loaned to
other banks on the ____________________ Market (interest rate set just below the
Discount Window to encourage banks to borrow from one another instead of the Fed)
c. Money Creation: How do banks create money?
i. Banks create demand deposits (part of the money supply) when making bank loans
ii. Money Multiplier: the amount of money that the banking system can create from $1 of
excess reserves
iii. Maximum Money Creation: assumes all money gets deposited, banks lend or spend all
excess reserves (only holding required reserve)
1. MM = 1 / rr
16. Federal Reserve (US central bank, the Fed)
a. Twelve regional banks supervised by a Board of Governors in DC, nominated by US Senate for
fixed terms
 16

b. Six explicit functions

i. Conduct monetary policy
ii. Supervise/regulate financial institutions
iii. Serve as lender of resort to financial institutions (Discount Window)
iv. Provide banking services for the US government
v. Issue coin/currency
vi. Provide financial services to commercial banks, savings/loan associations, savings banks
and credit unions
c. MONETARY POLICY: policy set by the ____________________that aims to manipulate the money
supply (MS)
i. OMOs (Open Market Operations): buying/sales of ____________________ (buy bonds,
go big MS; sell bonds, go small MS)
ii. Change the Reserve Requirement
iii. Change the Discount Rate/Discount Window (interest rate charged to banks by the Fed
for borrowing funds)
d. To decrease MS (Contractionary)
i. Increase RR
ii. Increase DR
iii. Sell bonds
e. To increase MS (Expansionary)
i. Decrease RR
ii. Decrease DR
iii. Buy bonds
f. Demand Money (MD)
i. The quantities of money people are willing and able to hold across interest rates
17. Maroeconomic Theories and Their Opinions on the Monetary Policy
a. Classical View: monetary policy cannot be used to solve the problems of income, output and
employment; velocity of money is fixed (how quickly money changes hands); any change in MS
will be inflationary in the LR
b. Keynesian View: used to fight inflation and recession, but needs to be used in conjunction with
fiscal policy; liquidity trap: money gets ____________________ when people hold onto it (usually
at low interest rates) instead of putting it into savings/I/C.
i. Contractionary MP will MS, IR, I/C, AD
 17

ii. Expansionary MP will MS, IR, I/C, AD

18. Interest Rates:
a. Nominal interest rate: not adjusted for inflation
b. Real interest rate: ________________________________________

19. Phillips Curve!

a. Inflation and unemployment are related variables; when unemployment is low, people have jobs,
people have ____________________ so purchases can happen, ____________________
increases, prices increase, leading to higher inflation rates; when unemployment is high, people
have no wages to purchase goods/services, demand is low, so prices decrease, then inflation
decreases
b. SRPC (Short Run Phillips Curve): negative relationship between inflation and unemployment rate
c. LRPC (Long Run Phillips Curve):
with expectations of inflation
met, changes in expectation
have no effect on
____________________; LRPC
is when actual inflation =
expected inflation
20. Fighting Stagflation (Combination of
high/accelerating inflation with high
unemployment)
a. Classical: run a
____________________ to
squeeze inflationary
expectations out of the economy
b. Keynesian: wage and price controls (pressure on individual to hold down wages/prices) to lower
inflation expectations which will shift SRPC to the left without causing a recession; lift regulations
when ____________________ is reached