Macroeconomics
By Jacob Reed
2025 Edition
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Macroeconomics Principles. While it is not a substitute for
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understand macroeconomics much better! If you have any
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Table of Contents
Section 1 – Economics Basics
Questions, Key
What is Economics (Also in Micro) ----------------------------------------------------------------------------------------------------------------------------
1, 34
Choice and Opportunity Cost (Also in Micro) --------------------------------------------------------------------------------------------------------------
1, 34
Production Possibilities Curve (Also in Micro) ------------------------------------------------------------------------------------------------------------
2, 34
Comparative Advantage (Also in Micro) ---------------------------------------------------------------------------------------------------------------------
4, 37
Determinants of Supply and Demand (Also in Micro) ---------------------------------------------------------------------------------------------------
5, 38
Market Equilibrium (Also in Micro) ----------------------------------------------------------------------------------------------------------------------------
6, 39
Section 2 – Economic Indicators and the Business Cycle
Circular Flow ----------------------------------------------------------------------------------------------------------------------------------------------------------
8, 41
Gross Domestic Product ------------------------------------------------------------------------------------------------------------------------------------------
8, 41
Unemployment -------------------------------------------------------------------------------------------------------------------------------------------------------
9, 42
GDP Deflator and CPI ----------------------------------------------------------------------------------------------------------------------------------------------
9, 42
Business Cycle ------------------------------------------------------------------------------------------------------------------------------------------------------
11, 44
Section 3 – National Income and Price Determination
Propensities and Multipliers -------------------------------------------------------------------------------------------------------------------------------------
11, 44
AS/AD Model ----------------------------------------------------------------------------------------------------------------------------------------------------------
12, 45
Fiscal Policy -----------------------------------------------------------------------------------------------------------------------------------------------------------
13, 46
Section 4 – Money and Monetary Policy
Money --------------------------------------------------------------------------------------------------------------------------------------------------------------------
14, 47
Fisher Formula -------------------------------------------------------------------------------------------------------------------------------------------------------
14, 47
Bank Balance Sheets -----------------------------------------------------------------------------------------------------------------------------------------------
15, 48
Money Market ---------------------------------------------------------------------------------------------------------------------------------------------------------
16, 49
Monetary Tools -------------------------------------------------------------------------------------------------------------------------------------------------------
17, 50
Loanable Funds ------------------------------------------------------------------------------------------------------------------------------------------------------
18, 51
Section 5 – Long-Run Consequences of Stabilization Policies
Fiscal and Monetary Interaction --------------------------------------------------------------------------------------------------------------------------------
19, 52
Monetary Equation of Exchange -------------------------------------------------------------------------------------------------------------------------------
20, 53
Deficits and Crowding Out ---------------------------------------------------------------------------------------------------------------------------------------
21, 54
Economic Growth ---------------------------------------------------------------------------------------------------------------------------------------------------
21, 54
Phillips Curve --------------------------------------------------------------------------------------------------------------------------------------------------------
22, 55
Section 6 – International Markets
Balance of Payments -----------------------------------------------------------------------------------------------------------------------------------------------
23, 56
Foreign Exchange Markets ---------------------------------------------------------------------------------------------------------------------------------------
23, 56
Multiple Choice Practice Exam ----------------------------------------------------------------------------------------------------------------------------------
25, 58
Cheat Sheets (Graphs and Formulas) ------------------------------------------------------------------------------------------------------------------------
64
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 1
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Macroeconomics Review
Unit 1 – Basic Economic Concepts
What is Economics (Also in Micro): https://www.reviewecon.com/what-is-econ
A. Define the following terms:
1. Scarcity:
2. Land:
B. What is human capital?
C. What are the key qualities for each of the
following economic systems?
1. Command Economy:
3. Labor:
2. Market Economy:
4. Capital:
D. What role do property rights play in a market
economy?
5. Entrepreneurship:
Choice and Opportunity Cost (Also in Micro): https://www.reviewecon.com/opportunity-cost
A. Define the following terms:
1. Explicit Cost:
2. Implicit Cost:
B. If Marco chooses to go to college, which of the
following would be part of his opportunity cost?
Explain.
1. Cost of tuition:
2. Cost of books for classes:
3. Cost of food while in college:
3. Opportunity Cost:
4. Wages lost from not working while in
college:
Practice Calculating Opportunity Cost (Click “Opportunity Cost”):
https://www.reviewecon.com/games-activities/cost-revenue-and-profit
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Production Possibilities Curve (Also in Micro): https://www.reviewecon.com/production-possibilities-curve
A. What does the production possibilities curve
illustrate?
B. On the production possibilities curve on the right:
1. Place an X on the graph where resources
are being used in a productively efficient
manner.
2. Place a Y on the graph where production is
inefficient and resources are not being fully
utilized.
3. Place a Z on the graph at a level of
production that scarce resources make it
impossible to reach.
C. Look at the PPC for donuts and robots.
1. The opportunity cost of the first 20 robots
produced is _____ donuts.
2. The opportunity cost of the second 20 robots
produced is _____ donuts.
3. A concave (bowed out) PPC has
________________ (increasing, decreasing,
or constant) opportunity costs.
4. What causes a PPC to be concave?
D. Look at the PPC for cupcakes and muffins.
1. The opportunity cost of the first 10 muffins
produced is _____ cupcakes.
2. The opportunity cost of the second 10
muffins produced is _____ cupcakes.
3. A straight line (Linear) PPC has
________________ (increasing, decreasing,
or constant) opportunity costs.
4. What causes a PPC to be a straight line?
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E. What two things can cause the PPC to shift
outward?
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F. What two things can cause a PPC to shift
inward?
1. Increase in the quality of ______________.
1. Decrease in the quality of _____________.
2. Increase in the quantity of ______________.
2. Decrease in the quantity of _____________.
G. Show the impact of an increase in the
unemployment rate on this PPC.
H. Show the impact of increased capital investment
(more capital goods) on this PPC.
I.
J. Show the impact of the depletion of nonrenewable natural resources.
Show the impact of an increase in military
spending (guns) on an economy that is already
efficient.
Practice manipulating the PPC: https://www.reviewecon.com/games-activities/production-possibilities
Practice drawing the PPC: https://www.reviewecon.com/games-activities/ppc1
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Comparative Advantage (Also in Micro): https://www.reviewecon.com/comparative-advantage3
A. Define the following terms:
1. Absolute Advantage:
2. Comparative Advantage:
B. For comparative advantage, the formula for opportunity cost when given an output problem is:
1. The opportunity cost of 1 A = ______ B’s
2. The pneumonic for the output formula is _______ over
C. For comparative advantage, the formula for opportunity cost when given an input problem is:
1. The opportunity cost of 1 A = ______ B’s
2. The pneumonic for the input formula is _______ over
D. The chart shows how many hours it takes for
A.J. and Nicole to mow one lawn or type one
memo.
A.J.
Nicole
Lawn
Memo
3 hours 2 hours
2 hours 1 hour
1. Is this an input problem or an output problem?
2. Who has the absolute advantage for mowing lawns?
Explain.
3. What is Nicole’s opportunity cost for mowing one
lawn?
4. Who has the comparative advantage in typing
memos? Explain.
5. If A.J. and Nicole specialize and trade, mutually
beneficial terms of trade would have one mowed
lawn be worth between ______ and _____ typed
memos.
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E. The production possibilities curves show the number of toys Michelle and Martin could assemble in a day
as well as the number of cakes they could bake in a day.
1. Is this an input problem or an output problem?
2. Who has the absolute advantage in the baking of cakes? Explain.
3. What is Michelle’s opportunity cost for assembling one toy?
4. Who has the comparative advantage in the baking of cakes? Explain.
5. If Michelle and Martin specialize and trade, mutually beneficial terms of trade would have one
assembled toy be worth between ______ and _____ baked cakes.
Comparative Advantage practice: https://www.reviewecon.com/games-activities/comparative-advantage
Determinants of Supply and Demand (Also in Micro): https://www.reviewecon.com/determinants
A. The law of demand states as price goes
C. What are the 5 non-price determinants of
demand?
1.
________, quantity demanded goes ________.
B. Demand vs Quantity demanded:
2.
1. A change in quantity demanded comes from
3.
a change in _________.
4.
2. ________ does not change demand.
5.
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D. Complementary goods:
1. What are complementary goods?
2. If x and y are complements, an increase in
the price of x will cause the demand for y to
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E. Substitute goods:
1. What are substitute goods?
2. If x and y are substitutes, an increase in the
price of x will cause the demand for y to
____________.
3. If x and y are complements, a decrease in
the price of x will cause the demand for y to
____________.
3. If x and y are substitutes, a decrease in the
price of x will cause the demand for y to
____________.
F. Normal goods
1. What are normal goods in regards to
changes in income?
2. If consumers’ incomes increase, demand for
____________.
G. Inferior goods
1. What are inferior goods?
2. If consumers’ incomes increase, demand
normal goods will ____________.
H. The law of supply states that as price goes
________, quantity supplied goes ________.
I.
Supply vs Quantity supplied:
1. A change in quantity supplied comes from a
for inferior goods will ____________.
J. What are the 6 non-price determinants of
supply?
1.
2.
3.
change in ________.
4.
2. ________ does not change supply.
5.
Practice Shifting Supply and Demand: https://www.reviewecon.com/games-activities/changes-in-supply-demand
sc
Market Equilibrium (Also in Micro): https://www.reviewecon.com/market-equilibrium
A. Draw a market at equilibrium
B. Draw a market with a surplus
1. When there is a surplus, price will eventually:
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C. Draw a market with a shortage
1. When there is a shortage, price will eventually:
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D. Draw a market with an increase in demand
1. Equilibrium price will __________ and equilibrium
quantity will __________.
E. Draw a market with a decrease in demand.
1. Equilibrium price will __________ and equilibrium
F. Draw a market with an increase in supply.
1. Equilibrium price will __________ and equilibrium
quantity will __________.
quantity will __________.
G. Draw a market with a decrease in supply.
H. Draw a market with a decrease in demand and a
decrease in supply.
1. Equilibrium price will __________ and equilibrium
1. Equilibrium price will __________ and equilibrium
quantity will __________.
quantity will __________.
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I.
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When there are double shifts, what is the key to determining the impact on Qe and Pe?
Practice Shifting Markets: https://www.reviewecon.com/games-activities/shifting-markets
Section 2 – Economic Indicators and the Business Cycle
Circular Flow: https://www.reviewecon.com/circular-flow-model1
A. Draw a circular flow diagram for a pure market economy. Label the economic actors (2 of them), the flows
(4 of them), and the Markets (2 of them).
B. In a capitalist economy, what is the 3rd economic actor? How are they involved?
Practice Circular Flow: https://www.reviewecon.com/games-activities/circular-flow-model
Gross Domestic Product: https://www.reviewecon.com/gross-domestic-product1
A. What is gross domestic product?
C. What transactions are not counted in GDP?
1.
B. In order for a good or service to be counted in
GDP it must be:
1.
2.
3.
2.
3.
D. What is the output expenditure formula for
GDP?
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Page 9
E. What goes into each component of GDP?
1. Consumer Spending:
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F. What are 4 reasons why gross domestic product
is an imperfect measure of a country’s standard
of living?
1.
2. Gross Investment:
2.
3. Government Purchases:
3.
4. Net Exports:
4.
G. An unexpected increase in business inventories
is an indicator of what?
Practice GDP: https://www.reviewecon.com/games-activities/gross-domestic-product
Unemployment: https://www.reviewecon.com/unemployment
A. What is the formula for the unemployment rate?
B. What is the formula for the labor force?
C. Define the following:
1. Discouraged Worker:
3. Frictional Unemployment:
4. Structural Unemployment:
2. Underemployed
5. Cyclical Unemployment:
D. What is the formula for the natural rate of unemployment?
GDP Deflator and CPI: https://www.reviewecon.com/deflator-and-cpi
A. What is the difference between the CPI and the
GDP deflator?
B. Define:
1. Nominal:
2. Real:
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C. The table below shows the output and prices for a country. Answer the questions using 2000 as the base year.
2000
2000
2019
2019
Quantities Prices Quantities Prices
TV’s
100
$200
160
$250
Sofas
20
$500
25
$600
1. Calculate the nominal GDP for 2000.
5. Calculate the GDP Deflator for the year
2000.
2. Calculate the real GDP for 2000.
6. Calculate the GDP Deflator for the year
2019.
3. Calculate the nominal GDP for 2019.
7. Calculate the amount of inflation there was
between the year 2000 and the year 2019.
4. Calculate the real GDP for 2019.
D. Use the market basket table below to answer each of the questions using 2010 as the base year.
Market 2010 2018
Basket Prices Prices
Tacos
5
$1
$2
Burritos
20
$4
$6
Quesadillas
10
$3
$4
1. Calculate the CPI for the year 2010.
2. Calculate the CPI for the year 2018.
3. Calculate the amount of inflation there was between the year 2010 and the year 2018.
Practice Deflator and CPI: https://www.reviewecon.com/games-activities/delfatorcpi-calculations
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Business Cycle: https://www.reviewecon.com/business-cycle
A. What economic problem results from the
following?
1. Inflationary Gap:
B. What are the 3 macroeconomic goals?
1.
2.
2. Recessionary Gap:
3.
Practice Business Cycle: https://www.reviewecon.com/games-activities/business-cycle1
Unit 3 – National Income and Price Determination
Propensities and Multipliers: https://www.reviewecon.com/propensities-and-multipliers
A. Define:
1. Marginal Propensity to Save:
1. What is the formula for the spending multiplier?
2. What is the formula for the tax multiplier?
2. Marginal Propensity to Consume:
3. Why is the tax multiplier less than the spending
multiplier?
B. Calculate answers to the following questions
assuming an MPC of .80:
1. What is the MPS?
3. If the government increases spending by
$10 million, what is the maximum change to
GDP?
2. If the government increases taxes by $5
million, what is the maximum change to
GDP?
4. If the government wants to increase GDP by
$100 million, what is the minimum decrease
in taxes needed?
Practice Propensities and Multipliers: https://www.reviewecon.com/games-activities/propensities-multipliers
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AS/AD Model: https://www.reviewecon.com/asad-model1
A. Why is aggregate demand downward sloping?
B. What are the components (shifters) of aggregate
demand?
1.
1.
2.
2.
3.
3.
4.
C. What are the aggregate supply shifters?
D. Why is long run aggregate supply vertical at the
full employment real GDP?
1.
2.
E. What things shift the LRAS?
3.
1. _____________ of resources.
4.
2. _____________ of resources.
5.
3.
4.
F. Draw an AS/AD Model for an economy at long run
equilibrium.
1. What is the unemployment rate when the
economy is in long-run equilibrium?
2. Show what would happen to the price level
and real output if there was an increase in
consumer spending.
G. Draw an AS/AD Model for an economy at long run
equilibrium.
1. Show what would happen to the price level and
real output if there was an increase in the price of
raw materials.
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Page 13
H. Draw an AS/AD Model for an economy with an
inflationary gap.
1. Show and explain what will happen in the long
run if no government action is taken.
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I.
Draw an AS/AD Model for an economy with a
recessionary gap.
1. Show and explain what will happen in the long
run if no government action is taken.
AS/AD Practice https://www.reviewecon.com/games-activities/asad-model
Practice Drawing AS/AD: https://www.reviewecon.com/games-activities/asad-graph
Fiscal Policy: https://www.reviewecon.com/fiscal-tools
A. Expansionary fiscal policy includes:
B. Contractionary fiscal policy includes:
1. Tax ________
1. Tax ________
2. Government Spending ________
2. Government Spending ________
3. Budget Deficit ________
3. Budget Deficit ________
C. What happens to these automatic stabilizers in
an economic expansion?
D. What happens to these automatic stabilizers in
an economic contraction?
1. Taxes ________
1. Taxes ________
2. Transfer Payments ________
2. Transfer Payments ________
3. Deficit ________
3. Deficit ________
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E. Draw an AS/AD model in long run equilibrium
and show the impact of expansionary fiscal
policy on output and the price level in the short
run.
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F. Draw an AS/AD model in long run equilibrium
and show the impact of contractionary fiscal
policy on output and the price level in the short
run.
Practice sorting fiscal policy: https://www.reviewecon.com/games-activities/monetary-fiscal-sort1
Section 4 – Money and Monetary Policy
Money: https://www.reviewecon.com/money
A. What are the functions of money?
1.
C. What comprises the 3 measures of the money
supply?
1. M0 (not all money):
2.
3.
2. M1 (money):
B. Identify the relationship between interest rates
and bond prices:
1. Interest Rates Up → Bond Prices ________
3. M2 (money + near money):
2. Interest Rates Down → Bond Prices ________
Fisher Formula: https://www.reviewecon.com/fisher-formula
A. What is the Fisher formula?
C. How does higher than expected inflation impact?
Explain.
1. Borrowers:
B. What does each variable in the formula
represent?
1.
2.
3.
2. Lenders:
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D. Calculate the Following (Show your work):
1. If the nominal interest rate is 5% and the expected inflation rate is 3%, what is the real interest rate?
2. If real wages increase by 2% when the inflation rate was 8%, by how much did nominal wages change?
3. If nominal GDP increases by 2% but real GDP decreased by 1%, what was the inflation rate?
Practice the Fisher Formula: https://www.reviewecon.com/games-activities/fisher
Bank Balance Sheets: https://www.reviewecon.com/bank-balance-sheets
A. Define each of the following:
1. Required Reserves:
3. Total Reserves:
4. Checkable Deposits:
2. Excess Reserves:
5. Other Deposits:
B. Answer the following questions based on this bank balance sheet assuming a 5% reserve requirement:
Assets
Liabilities
Total Reserves:
Loans:
Securities:
Physical Assets:
$8,000
$11,000
$5,000
$2,000
Checkable Deposits:
Other Deposits:
Other Liabilities:
Owner Equity:
Total:
$26,000 Total
$10,000
$12,000
$1,000
$3,000
$26,000
1. What is the value of this bank’s required reserves?
2. How much money can this bank currently loan out?
3. If a customer deposits $2000 into their checking, what will required reserves and excess reserves be?
A. What is the formula for the money multiplier?
3. Maximum value of loans the banking system
can create from this deposit:
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B. If the reserve requirement is 20% and a
customer deposits $1000 into their checking
account, what are the values for each of the
following:
1. The money multiplier:
4. Maximum value of deposits the banking
system can create from this deposit:
5. Maximum value of new money the banking
system can create from this deposit:
2. The amount of money this bank can initially
loan out:
Practice with bank balance sheets: https://www.reviewecon.com/games-activities/bank-balance-sheet
Practice the money multiplier: https://www.reviewecon.com/games-activities/money-multiplier
Money Market: https://www.reviewecon.com/money-market2
A. What type of interest rate is used on the Y axis
for the money market?
B. Define the two components of the demand for
money?
1. Asset Demand:
2. Transaction Demand:
C. Show the short run impact of expansionary monetary policy with limited reserves on the money market and
the AS/AS model.
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D. Show the short run impact of contractionary monetary policy with limited reserves on the money market
and the AS/AD model.
Practice with money market: https://www.reviewecon.com/games-activities/money-market
Practice drawing money market graph: https://www.reviewecon.com/games-activities/money-market1
Monetary Tools: https://www.reviewecon.com/monetary-tools
A. Define each of the following:
1. Open Market Operations:
4. Federal Funds Rate/Policy Rate:
2. Reserve Requirement:
5. Interest on Reserves:
3. Discount Rate:
B. If there are limited reserves and the central bank
wants to fight unemployment, it can:
1. Policy Name:
D. If there are limited reserves and the central bank
wants to fight inflation, it can:
1. Policy Name:
2. Open Market Operations:
2. Open Market Operations:
3. Discount Rate:
3. Discount Rate:
4. Reserve Requirement:
4. Reserve Requirement:
C. What is the Impact on the money supply for the
above action (from B)?
E. What is the impact on the money supply for the
above action (from D)?
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F. Does the US Federal Reserve operate with
ample or limited reserves?
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G. If there are ample reserves, how will the central
bank change the administered rates (Discount
and IOR) to fight each of the following:
1. Unemployment:
2. Inflation:
H. Draw a reserve market for a banking system
with ample reserves and show the impact of an
increase in administered rates.
I.
Draw a reserve market for a banking system
with ample reserves and show the impact of an
open market purchase of bonds by the central
bank.
J. What impact does expansionary monetary policy
have on each of the following?
1. Interest rates:
K. What impact does contractionary monetary
policy have on each of the following?
1. Interest rates:
2. Gross investment:
2. Gross investment:
3. Aggregate Demand:
3. Aggregate Demand:
4. Real GDP:
4. Real GDP:
5. The Price Level:
5. The Price Level:
Loanable Funds: https://www.reviewecon.com/loanable-funds1
A. What is a real interest rate?
C. What shifts the loanable funds supply curve?
1.
B. What shifts the loanable funds demand curve?
1.
2.
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D. Draw a loanable funds market at equilibrium.
Show the impact of an increase in business
confidence on the equilibrium interest rate and
quantity of loanable funds.
E. Draw a loanable funds market at equilibrium.
Show the impact of an increase in disposable
income on the equilibrium interest rate and
quantity of loanable funds.
F. How do interest rates impact economic growth?
G. Which loanable funds curve will YOU shift and
which direction when there is an increase in the
budget deficit?
Practice Loanable Funds: https://www.reviewecon.com/games-activities/loanable-funds
Practice Drawing Loanable Funds: https://www.reviewecon.com/games-activities/loanable-funds-market
Unit 5: Long-Run Consequences of Stabilization Policies
Fiscal and Monetary Interaction: https://www.reviewecon.com/fiscal-monetary-policy-interactions
A. How does expansionary fiscal and monetary
policy impact each of the following in the short
run?
B. How does contractionary fiscal and monetary
policy impact each of the following in the short
run?
1. Aggregated Demand
1. Aggregated Demand
2. Price Level
2. Price Level
3. Output
3. Output
4. Unemployment
4. Unemployment
5. Interest Rates
5. Interest Rates
6. Economic Growth
6. Economic Growth
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C. How does expansionary fiscal and
contractionary monetary policy impact each of
the following in the short run?
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E. How does contractionary fiscal and
expansionary monetary policy impact each of
the following in the short run?
1. Aggregated Demand
1. Aggregated Demand
2. Price Level
2. Price Level
3. Output
3. Output
4. Unemployment
4. Unemployment
5. Interest Rates
6. Economic Growth
5. Interest Rates
6. Economic Growth
Practice Fiscal & Monetary Policy Interaction: https://www.reviewecon.com/games-activities/monetary-fiscal-sort1
Monetary Equation of Exchange: https://www.reviewecon.com/the-quantity-theory-of-money
A. What is the Monetary Equation of Exchange?
C. What are both side of the equation equal to?
B. What does each variable represent?
1. M
D. If the money supply increases by 10% while the
price level and velocity of money do not change,
what will happen to real output?
2. V
3. P
4. Y (or Q)
Practice with MV=PY: https://www.reviewecon.com/MV-PQ
E. What is the impact of expansionary monetary
policy on the price level and real output?
1. Short Run:
2. Long Run:
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Deficits and Crowding Out: https://www.reviewecon.com/deficit-debt-and-crowding-out
A. Define each of the following
1. Deficit:
C. Explain how an increase in taxes and/or
decrease in spending will lead to higher
economic growth.
2. Surplus:
3. National Debt:
B. Explain how a decrease in taxes and/or increase
in spending will lead to lower economic growth.
D. Draw a loanable funds graph and show the
impact of expansionary fiscal policy on the real
interest rate.
Economic Growth: https://www.reviewecon.com/4-things-to-know-about-economic-growth
A. What is economic growth?
C. Show the impact of an increase in productivity
on the PPC below.
B. What are the components needed cause
economic growth?
D. Show the impact of an increase in the labor
force participation rate on the long-run
aggregated supply curve.
E. What are supply side policies and how do they
work?
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 22
F. What is the production Function?
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G. What can cause the production function to shift
upward?
1.
2.
3.
Phillips Curve: https://www.reviewecon.com/phillips-curve4
A. What is the relationship between the inflation
rate and the unemployment rate in the short
run?
B. What is the relationship between the inflation
rate and the unemployment rate in the long run?
C. What causes the short run Phillips curve to
shift?
D. What causes the long run Phillips curve to shift?
1.
1.
2.
2.
E. How are the following shifts in the AS/AD Model illustrated in the Phillips curve model?
1. Shifts of the SRAS Curve:
2.
Shifts of the AD Curve:
F. Draw a long run and short run Phillips curve for
an economy experiencing an inflationary gap.
Then show the impact of contractionary fiscal
policy.
G. Draw a long run and short run Phillips curve for
an economy in long run equilibrium. Then show
the impact of a decrease in inflation
expectations.
Practice the Phillips curve: https://www.reviewecon.com/games-activities/phillips-curve1
Practice drawing the Phillips curve: https://www.reviewecon.com/games-activities/phillips-curve
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 23
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Unit 6: Open Economy International Trade and Finance
Balance of Payments: https://www.reviewecon.com/balance-of-payments1
A. What types of transactions are included in the
current account?
1.
B. How do national income and price levels impact
the current account?
1. Price Level ↑ = Current Account ____
2. National Income ↑ = Current Account ____
2.
C. Define the following:
1. Trade Deficit:
3.
2. Trade Surplus:
4.
D. What transactions are included in the
financial/capital account?
F. How are transactions counted in the balance of
payments?
1. Money in:
2. Money out:
E. Current Account + Financial account = _______
Practice with the Balance of Payments: https://www.reviewecon.com/games-activities/balance-of-payments
Foreign Exchange Markets: https://www.reviewecon.com/foreign-exchange
A. What are the foreign exchange demand
shifters?
1.
B. What are the foreign exchange supply shifters?
1.
2.
2.
3.
3.
C. Draw a foreign exchange market for the Dollar
compared to Euros. Show the impact of an
increase in US exports to Europe.
D. Draw a foreign exchange market for the Dollar
compared to Euros. Show the impact of an
increase in interest rates in Europe.
Copyright 2024: Jacob Reed, ReviewEcon.com
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E. How do exchange rates impact net exports?
1. When the currency appreciates, Exports ________ and Imports ________.
2. When the currency depreciates, Exports ________ and Imports ________.
Practice with foreign exchange markets: https://www.reviewecon.com/games-activities/foreign-exchange1
Practice drawing foreign exchange markets: https://www.reviewecon.com/games-activities/foreign-exchange2
You have reached the end of the Macroeconomics Review!!
Now put it all together by playing the 30 question MC Test Game:
https://www.reviewecon.com/games-activities/macro-mc-exam
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 25
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Macroeconomics Practice Exam
To take this exam as an online game, go to https://www.reviewecon.com/premium-macro-full-exam
1. When the economy contracts, which of the following
5. Which of the following groups would be most likely
is most likely to increase?
to benefit from higher than expected inflation?
a. The inflation rate
a. Banks
b. National income
b. Citizens on fixed incomes
c. Cyclical unemployment
c. Citizens on flexible incomes that adjust with
d. Nominal interest rates
the price level
e. Gross investment
d. Savers
e. Debtors
2. Which of the following is most likely to cause
economic growth?
6. Which of the following is true about the federal
a. Increased consumer spending
funds rate?
b. An increase in transfer payments
a. The federal funds rate is the interest rate the
c. A decrease in exports
Federal Reserve charges banks.
d. A decrease in government funded
b. The federal funds rate changes when interest
infrastructure
on reserves changes.
e. An increase in capital formation
c. The federal reserve controls the federal
funds rate directly.
3. If the expected inflation rate is 6% and the nominal
d. The federal funds rate is set by congress as
interest rate is 8%, what is the expected real interest
part of fiscal policy.
rate?
e. The federal funds rate is fixed at 2%.
a. 0.75%
b. 1.33%
7. A large increase in the price of energy is likely to
c. -2%
cause which of the following?
d. 2%
a. An increase in real output
e. 14%
b. A decrease in the price level
c. An increase in employment
4. If the government engages in expansionary fiscal
d. A leftward shift of short run aggregate supply
policy, which of the following will happen to the
e. A decrease in the nominal interest rate
price level and real output in the short run?
a. The price level will increase and real output
8. If the economy has an inflationary gap and limited
will increase
reserves, which of the following monetary and fiscal
b. The price level will decrease and real output
policy combinations would be most likely to bring the
will decrease
economy back to long run equilibrium?
c. The price level will decrease and real output
a. Sell bonds and decrease taxes
will increase
b. Buy bonds and decrease the government
d. The price level will increase and real output
spending
will decrease
c. Sell bonds and increase government
e. The price level will increase and real output
spending
will not change
d. Buy Bonds and increase taxes
e. Sell bonds and increase taxes
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Page 26
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9. Which of the following would be most likely to
decrease China’s trade surplus with the United
States?
a. A decrease in Chinese demand for United
States goods
b. An increase in China’s national income
c. A decrease in China’s price level
d. An increase in United States tourism to China
e. A decrease in value of Chinese currency
13. When the economy is in long-run equilibrium, which
of the following is at zero?
a. Cyclical unemployment
b. Structural unemployment
c. Seasonal unemployment
d. Frictional unemployment
e. Total unemployment
10. If there is an increase in household purchases of
durable goods, which of the following is true?
a. This is an increase in gross investment that
will cause a rightward shift of aggregate
demand
b. This is an increase in consumption that will
cause a rightward shift of aggregate demand
c. This is an increase in exports that will cause a
leftward shift of aggregate supply
d. This is an increase in inventories that will
cause a rightward shift of aggregate supply
e. This is an increase in household production
that will cause a leftward shift of aggregate
demand
11. Suppose nominal GDP increases from $2000 in 2010
to $3000 in 2019 and the GDP deflator increases
from 100 in 2010 to 150 in 2019. Based on this
information, which of the following is true?
a. Real GDP more than doubled between 2010
and 2019
b. Real GDP did not change between 2010 and
2019
c. Price levels did not change between 2010
and 2019
d. Nominal GDP increased more than the
inflation rate between 2010 and 2019
e. Nominal GDP between 2010 and 2019
increased less than the inflation rate
12. Which of the following actions by the central bank
would increase the money supply when there are
limited reserves?
a. Decrease taxes
b. Increase government spending
c. Purchase government securities
d. Increase the discount rate
e. Increase the reserve requirement
14. Which of the following would be most likely to cause
the United States dollar to depreciate in foreign
exchange markets?
a. An increase in the United States money
supply
b. A decrease in the United States price level
c. A decrease in United States national income
d. An increase in United States interest rates
e. Increased demand for United States exports
15. In an economy with scarce reserves, expansionary
monetary policy will cause which of the following in
the short run?
a. A decrease in the money supply
b. An increase in the nominal interest rate
c. A leftward shift of the aggregate supply
curve
d. A rightward shift of aggregate demand
e. A decrease in bank reserves
16. If there is both an increase in the demand and supply
of cookies, which of the following changes in the
equilibrium quantity and equilibrium price will occur?
a. Price will increase and quantity will increase
b. Price will be indeterminate and quantity will
decrease
c. Price will be indeterminate and quantity will
increase
d. Price will increase and quantity will be
indeterminate
e. Price will decrease and quantity will be
indeterminate
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 27
17. If the government reduces the budget deficit, what is
the most likely impact on the real interest rate and
economic growth?
a. The real interest rate will decrease and
economic growth decrease
b. The real interest rate will increase and
economic growth will increase
c. The real interest rate will not change and
economic growth will decrease
d. The real interest rate will decrease and
economic growth will increase
e. The real interest rate will increase and
economic growth will decrease
18. Which of the following would be most likely to cause
the United States dollar to appreciate relative to the
Japanese yen?
a. An increase in US national income
b. A decrease in Japan’s real interest rate
c. A decrease in Japanese imports from the US
d. Expansionary monetary policy in the US
e. An increase in household savings in the US
19. If the current unemployment rate is well below the
natural rate of unemployment, which of the
following is true if the economy has ample reserves?
a. The economy is experiencing a recessionary
gap and tax increases can close the gap
b. The economy is experiencing an inflationary
gap and a decrease of interest on reserves
can close the gap
c. The economy is experiencing a stagflation
gap and a decrease of interest on reserves
can close the gap
d. The economy is experiencing an inflationary
gap and a decrease in government spending
can close the gap
e. The economy is experiencing a recessionary
gap and a decrease of administered rates can
close the gap
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2010
2019
Quantity Price Quantity Price
Phones
10
$400
12
$500
Dishwashers
20
$520
10
$900
20. The chart shows all of the prices and production for
2010 and 2019 for a country that produces just two
goods; phones and dishwashers. Using 2010 as the
base year, what is the GDP deflator for 2019?
a. 67
b. 100
c. 120
d. 150
e. 400
21. Which of the following is NOT likely to increase
economic growth in the long run?
a. Lower interest rates
b. Training programs to improve human capital
c. More technological research
d. Investment tax credits for businesses
e. An increase in government spending
22. When Julie looks online to see which websites offer
the best deals, she is using money as which of the
following?
a. A store of value
b. A medium of exchange
c. A standard of value
d. A barter system
e. As liquid currency
23. Which of the following people would be counted as
unemployed?
a. An electrician with a part time job looking for
a full-time job
b. A fast food worker with a job looking for a
job that pays better
c. A newly graduated college student looking
for their first job
d. A discouraged worker
e. A person who is self employed
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Page 28
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24. Suppose the government engages in expansionary
fiscal policy and, at the same time there is a positive
supply shock to the economy. If the aggregate supply
curve is upward sloping which of the following will
necessarily occur?
a. The price level will rise
b. Real GDP will rise
c. The price level will fall
d. Real GDP will decrease
e. Employment will fall
28. If the Federal Reserve wishes to increase and
economy’s gross investment, which of the following
monetary policy actions would be most likely to
work?
a. Increasing transfer payments
b. Decreasing administered interest rates
c. Decreasing taxes
d. Increasing the discount rate
e. Increasing the reserve requirement
25. Suppose the marginal propensity to save is .25. If
there was a $1000 increase in consumption and a
$300 decrease in business investment, the maximum
change in national income would be which of the
following?
a. A decrease of $200
b. An increase of $700
c. A decrease of $1200
d. An increase of $2800
e. An increase of $4000
26. Which of the following would be most likely to cause
cost-push inflation?
a. An increase in interest rates
b. An increase of government expenditures
c. Higher resource prices
d. Wage decreases
e. An increase in the velocity of money
27. Suppose the price level in the United States
increases. How will that impact the foreign exchange
market for the United States Dollar and the Canadian
Dollar if the United States and Canada are trade
partners?
a. The demand for US dollars will decrease and
the demand for Canadian dollars will
increase
b. The demand for US dollars will increase and
the supply of Canadian dollars will increase
c. The supply of US dollars will decrease and
the demand for Canadian dollars will
decrease
d. The demand of US dollars will increase and
the supply of US dollars will decrease
e. The demand for Canadian dollars will
decrease and the supply of Canadian dollars
will increase
29. In an economy with scarce reserves, which of the
following combinations of fiscal and monetary policy
would be most likely to increase employment in the
short run?
a. Higher taxes and an open market purchase of
bonds
b. Higher government spending and an open
market sale of bonds
c. Lower taxes and an open market purchase of
bonds
d. Lower government spending and an open
market sale of bonds
e. Higher government spending and an open
market purchase of bonds
30. In the circular flow model of the U.S. Economy which
of the following is true?
a. Total income is greater than total spending
which increases economic growth
b. Households sell resources for wages,
interest, and rent in the factor market
c. Businesses purchase goods and services in
the product market and sell resources in the
product market
d. Households purchase resources in the factor
market and goods and services in the
product market
e. Businesses are paid rent, wages, interest by
households in the factor market
31. An increase in aggregate demand will cause which of
the following in the short run?
a. Disinflation
b. Deflation
c. Greater real output
d. Higher unemployment
e. Lower national income
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 29
32. Suppose Josh and Marty spend their days washing
windows and cleaning rain gutters. Marty is able to
clean 4 gutters or wash 5 windows in an hour. Josh is
able to clean 6 gutters or wash 7 windows in an hour.
Which of the following is true about Marty and Josh?
a. They will be able to wash more windows and
clean more gutters if Marty didn’t work
b. They will be able to wash the most windows
and clean the most gutters if Josh washes
windows and Marty cleans gutters
c. They will maximize their productivity if Marty
washes all windows and Josh cleans all
gutters
d. Marty has an absolute advantage for
cleaning windows and a comparative
advantage for cleaning gutters
e. Josh has an absolute advantage for cleaning
gutters and a comparative advantage for
cleaning windows
33. If a large number of people without jobs stop looking
for work, which of the following will occur?
a. The natural rate of unemployment will fall
b. The unemployment rate will not change
c. The number of part time workers will
increase
d. The quantity of discouraged workers will
increase
e. The size of the labor force will increase
34. When a bank loans money to a consumer, which of
the following occurs?
a. The bank’s required reserves decrease
b. Money is created
c. The consumer pays the discount rate
d. The bank’s excess reserves increase
e. The number of deposits in the bank
decreases
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35. What is the long run impact of a money supply
increase on the price level and real output?
a. The price level increases and real output
does not change
b. The price level decreases and real output
decreases
c. The price level increases and real output
increases
d. The price level does not change and real
output increases
e. The price level increases and real output
decreases
36. Which of the following will occur if there is an
increase in government deficit spending?
a. The supply of loanable funds will increase
b. The demand of loanable funds will decrease
c. The real interest rate will decrease
d. The long run aggregate supply curve will shift
right
e. Gross investment will decrease
37. If the British pound appreciates relative to the
Canadian Dollar, which of the following is most likely
to occur?
a. The price level in Canada will fall
b. Real output in Great Britain will rise
c. Great Britain will buy more Canadian exports
d. British goods will become cheaper for
Canadian consumers
e. Real interest rates in Great Britain will rise
38. Which of the following would be most likely to
decrease the demand for money?
a. An increase in the price level
b. A decrease in the nominal interest rate
c. An increase in real GDP
d. A decrease in nominal GDP
e. A decrease in the money supply
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39. In an economy with scarce reserves, which of the
following would most likely happen if there is an
increase in business investment?
a. A rightward shift of the short run Phillips
curve
b. A leftward shift of the aggregate demand
curve
c. A rightward shift of the long run aggregate
supply curve
d. A leftwards shift of the demand for loanable
funds
e. A rightward shift of the money supply
43. Which of the following best explains why the
demand for money is downward sloping?
a. When interest rates decrease, more money
is demanded for transactions
b. The central bank determines the shape of
the money demand curve
c. When interest rates rise, the opportunity
cost for holding money increases
d. At lower interest rates, banks will loan out
less money
e. The demand for money is inversely related to
the price level
40. Suppose a general contractor purchases a new work
truck in 2015 for $30,000 then sells it in 2019 for
$14,000. How will these transactions impact 2019’s
GDP?
a. $14,000 will be added to 2019’s GDP
b. $16,000 will be subtracted from 2019’s GDP
c. The transactions will not change 2019’s GDP
d. $44,000 will be added to 2019’s GDP
e. $30,000 will be subtracted from 2019’s GDP
44. Which of the following is a fiscal policy that could
reduce inflation in an economy with scarce reserves?
a. An open market sale of government bonds
b. An increase in the reserve requirement
c. An increase in the discount rate
d. An increase in taxes
e. An increase in government spending
41. If the government decreases taxes and increases
government expenditures, which of the following is
most likely to occur in the short run?
a. Unemployment will rise and the price level
will rise
b. Unemployment will rise and the price level
will fall
c. Unemployment will not change and the price
level will fall
d. Unemployment will fall and the price level
will fall
e. Unemployment will fall and the price level
will rise
42. The long run aggregate supply curve would shift right
from which of the following?
a. An increase in government transfer
payments
b. A decrease in household taxes
c. Lower birth rate
d. More research and development
e. Capital outflows
45. The short run aggregate supply curve is upward
sloping because of which of the following?
a. Wages are sticky in the short run
b. Prices and wages increase at the same rate
c. Resource prices are flexible
d. Menu costs are zero
e. When price levels rise, exports increase
Category
Working Age Civilian
Population
Full time Employed
Part Time Employed
Looking for work
Discouraged Workers
Quantity
1000
200
300
100
50
46. Using the information in the table, calculate the
labor force participation rate.
a. 5%
b. 10%
c. 50%
d. 60%
e. 65%
Copyright 2024: Jacob Reed, ReviewEcon.com
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47. Which of the following fiscal policy actions would be
most likely to increase the budget deficit and
increase the national debt?
a. Increase tax rates
b. Increase government expenditures
c. Decrease transfer payments
d. Open market sale of government bonds
e. Decrease tax incentives
48. The production possibilities curve is for a country
that produces just good X and good Y. Based on the
information in the graph, which of the following
must be true?
a. The opportunity cost of producing good X is
higher at point C than point A
b. This country is productively efficient while
producing at point D
c. This country is allocatively efficient while
producing at point E
d. The opportunity cost for producing good X is
constant for this country
e. The resources used to produce good Y are
easily adapted to the production of good x
49. Which of the following would be most likely to cause
the US dollar to appreciate?
a. Foreign tariffs on United States exports to
other countries
b. A negative aggregate supply shock in the
United States
c. A decrease in United States interest rates
d. A recession in the united states
e. A combination of contractionary monetary
policy and expansionary fiscal policy
50. The Short run and long run Phillips curves (SRPC and
LRPC) show an economy in long run equilibrium with
an inflation rate and unemployment rate found at
point A. If this economy has a decrease in inflation
expectations, which of the following will most likely
occur in the short run?
a. The inflation rate and unemployment rate
will shift from point A to point B
b. The inflation rate and unemployment rate
will shift from point A to point C
c. The long run Phillips curve will shift right
d. The short run Phillips curve will shift left
e. The short run Phillips curve will shift right
51. Which of the following would not be included in the
Gross Domestic Product calculation for a country?
a. The income earned by the owner of a
landscaping business
b. The unsold inventory produced by a shoe
factory
c. The purchase of a corporate bond
d. The services of a taxi driver
e. The construction of a highway funded by the
government
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Page 32
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52. Suppose United States Interest rates increase while
they decrease in Mexico. Which of the following
would most likely happen to the supply of loanable
funds and the flow of financial capital between the
two countries?
a. Mexico will have an inflow of financial capital
and a decrease in the supply of loanable
funds
b. The United States will have an outflow of
financial capital and an increase in the supply
of loanable funds
c. Mexico will have an outflow of financial
capital and an increase in the supply of
loanable funds
d. The United states will have an inflow of
financial capital and an increase in the supply
of loanable funds
e. The United States will have an inflow of
financial capital and a decrease in the supply
of loanable funds
55. Which of the following is most likely to increase the
budget deficit?
a. When exports are less than imports
b. When the money supply increases
c. When there is a financial capital inflow
greater than financial capital outflow
d. When tax receipts are less than government
expenditures
e. When nominal GDP increases faster than real
GDP
53. Suppose the Bank of Elk Grove currently has $10,000
in demand deposits and $4,000 in total reserves
while the reserve requirement is 10%. If Charissa
deposits $2,000 into her checking account, how
much will the Bank of Elk Grove be able to loan out
after the deposit?
a. $600
b. $1200
c. $1800
d. $4800
e. $6000
54. Which of the following is true for a short run Phillips
curve but NOT true for a long run Phillips curve?
a. It shows the inverse (negative) relationship
between the unemployment rate and the
inflation rate
b. It shows that the economy will have the
natural rate of unemployment at any
inflation rate
c. It shows the direct (positive) relationship
between the unemployment rate and the
inflation rate
d. It will shift when there is a change in cyclical
unemployment
e. It shows that the economy will have 2-3%
inflation at any unemployment rate
56. Suppose an economy is currently producing at Y1
with a price level of PL1. If there is no monetary or
fiscal policy action taken, which of the following will
happen in the long run?
a. Wages will not change and the economy will
remain at Y1 and P1
b. Wages will decrease and aggregate demand
will shift left
c. Wages will increase and short run aggregate
supply will shift left
d. Wages will increase and aggregate demand
will shift right
e. Wages will decrease and short run aggregate
supply will shift right
57. When expected inflation rises, which of the following
is most likely true?
a. Real interest rates increase
b. The money supply increases
c. Lenders benefit from the higher inflation
d. Nominal interest rates increase
e. Savers benefit from the higher inflation
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Page 33
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58. Suppose Koby wins tickets to a concert. If he doesn’t
go to the concert, he will sell the tickets for $100 and
work a 4-hour shift earning $15 an hour. What Koby’s
opportunity cost if he chooses to go to the concert?
a. $60
b. $85
c. $100
d. $115
e. $160
60. If a country has a surplus in the financial and capital
account, which of the following must be true?
a. The country has a trade deficit
b. The country has a trade surplus
c. The country has a current account deficit
d. The country has a current account surplus
e. The country has a government budget deficit
59. An increase in which of the following would be most
likely to increase an economy’s long run economic
growth?
a. Human capital
b. Business inventories
c. Consumer purchases of durable goods
d. National debt
e. Imports
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 34
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Macroeconomics Review
Section 1 – Economics Basics
What is Economics (Also in Micro): https://www.reviewecon.com/what-is-econ
A. Define the following terms:
1. Scarcity:
When people want more of something than there is of it.
Items that are scarce, tend to have a positive price.
2. Land:
Any resource or raw material that comes from nature.
Oil, lumber, leather, etc.
3. Labor:
The human resource of mental and physical work.
4. Capital:
Also called physical capital. These are the machines
and tools used to produce goods and services.
5. Entrepreneurship:
A business person who takes the other 3 resources
(land, labor, & capital), takes a risk, and produces a
good or service while seeking a profit.
B. What is human capital?
The skills and knowledge of labor. More knowledgeable
workers are more productive workers.
C. What are the key qualities for each of the
following economic systems?
1. Command Economy:
Government officials answer the 3 basic questions. This
system may achieve social goals but is often inefficient
as supply and demand rarely meet.
2. Market Economy:
Individuals answer the 3 basic questions. This system
emphasizes efficiency and the enforcement of property
rights.
D. What role do property rights play in a market
economy?
They create more efficient outcomes and expand
overall wealth.
Choice and Opportunity Cost (Also in Micro): https://www.reviewecon.com/opportunity-cost
A. Define the following terms:
1. Explicit Cost:
Money paid out of one’s pocket to pay for a choice like
money spent on a movie ticket when choosing to go to
the movies.
B. If Marco chooses to go to college, which of the
following would be part of his opportunity cost?
Explain.
1. Cost of tuition:
Yes. This is an explicit cost that he would not have to
pay if he chose not to attend college.
2. Implicit Cost:
Money not earned as a result of a choice; like income
lost from taking the night off from work to go to the
movies.
2. Cost of books for classes:
Yes. This is an explicit cost that he would not pay if he
chose not to attend college.
3. Opportunity Cost:
The value of the best alternative not chosen. It includes
both explicit and implicit costs.
3. Cost of food while in college:
No. This is a cost which Marco must pay whether he
goes to college or not. It is not part of the cost of his
choice.
4. Wages lost from not working while in
college:
Yes. Lost earnings are the implicit cost of going to
college.
Practice Calculating Opportunity Cost (Click “Opportunity Cost”):
https://www.reviewecon.com/games-activities/cost-revenue-and-profit
Production Possibilities Curve (Also in Micro): https://www.reviewecon.com/production-possibilities-curve
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 35
A. What does the production possibilities curve
illustrate?
All combinations of two different goods (or categories of
goods) that can be produced with fixed resources.
B. On the production possibilities curve on the
right:
1. Place an X on the graph where resources
are being used in a productively efficient
manner.
2. Place a Y on the graph where production is
inefficient and resources are not being fully
utilized.
3. Place a Z on the graph at a level of
production that scarce resources make it
impossible to reach.
C. Look at the PPC for donuts and robots.
1. The opportunity cost of the first 20 robots
produced is _10__ donuts. (From Point A to
B)
2. The opportunity cost of the second 20 robots
produced is _40__ donuts. (From Point B to
C)
3. A concave (bowed out) PPC has
_increasing______ (increasing, decreasing,
or constant) opportunity costs.
4. What causes a PPC to be concave?
When resources used to produce one of the
goods are not perfectly adaptable to
producing the other good.
D. Look at the PPC for cupcakes and muffins.
1. The opportunity cost of the first 10 muffins
produced is _20__ cupcakes. (From Point A
to B)
2. The opportunity cost of the second 10
muffins produced is _20____ cupcakes.
(From Point B to C)
3. A straight line (Linear) PPC has
___constant______ (increasing, decreasing,
or constant) opportunity costs.
4. What causes a PPC to be a straight line?
When resources used to produce one of the
goods are perfectly adaptable to producing
the other good.
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E. What two things can cause the PPC to shift
outward?
1. Increase in the quality of _resources_.
F. What two things can cause a PPC to shift
inward?
1. Decrease in the quality of _resources_.
2. Increase in the quantity of _resources_.
2. Decrease in the quantity of _resources_.
G. Show the impact of an increase in the
unemployment rate on this PPC.
H. Show the impact of increased capital investment
(more capital goods) on this PPC.
I.
J. Show the impact of the depletion of nonrenewable natural resources.
Show the impact of an increase in military
spending (guns) on an economy that is already
efficient.
Practice manipulating the PPC: https://www.reviewecon.com/games-activities/production-possibilities
Practice drawing the PPC: https://www.reviewecon.com/games-activities/ppc1
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Comparative Advantage (Also in Micro): https://www.reviewecon.com/comparative-advantage3
A. Define the following terms:
1. Absolute Advantage:
The ability to produce an item in greater quantities or using fewer resources than some other person,
country, or economy.
2. Comparative Advantage:
The ability to produce an item with a lower opportunity cost than some other person, country, or
economy.
B. For comparative advantage, the formula for opportunity cost when given an output problem is:
1. The opportunity cost of 1 A = _B/A_ B’s
2. The pneumonic for the output formula is _other_ over
C. For comparative advantage, the formula for opportunity cost when given an input problem is:
2. The opportunity cost of 1 A = _A/B_ B’s
3. The pneumonic for the input formula is ___it__ over
D. The chart shows how many minutes it takes for
A.J. and Nicole to mow one lawn or type one
memo.
A.J.
Nicole
Lawn
Memo
3 hours 2 hours
2 hours 1 hour
1. Is this an input problem or an output problem?
Input
(Since the variable numbers are hours that go into
the production of mowed lawns or memos, this is an
input problem)
2. Who has the absolute advantage for mowing lawns?
Explain.
Nicole because she can mow a lawn with fewer
hours.
3. What is Nicole’s opportunity cost for mowing one
lawn? (Use the it over formula here)
O.C of 1 Lawn = 2/1 = 2 Memos
4. Who has the comparative advantage in the typing
memos? Explain.
Nicole, because she has a lower opportunity cost for
typing a memo (½ a lawn) than A.J. (2/3 of a lawn).
5. If A.J. and Nicole specialize and trade, mutually
beneficial terms of trade would have one mowed
lawn be worth between _1 1/2_ and _2__ typed
memos.
The full opportunity cost table:
Nicole: 1 Lawn = 2 Memos
1 Memo = ½ Lawn
A.J.: 1 Lawn = 1 ½ Memos
1 Memo = 2/3 Lawn
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F. The production possibilities curves show the number of toys Michelle and Martin could assemble in a day
as well as the number of cakes they could bake in a day.
The full opportunity cost table:
Martin: 1 Toy = 1/3 Cake
1 Cake = 3 Toys
Michelle: 1 Toy = ¼ Cake
1 Cake = 4 toys
1. Is this an input problem or an output problem?
Output (The variable numbers are completed products)
2. Who has the absolute advantage in the baking of cakes? Explain.
Michelle because she can produce more cakes than Martin can.
3. What is Michelle’s opportunity cost for assembling one toy?
(Use the other over formula here) OC of 1 Toy = 25/100 = ¼ a cake
4. Who has the comparative advantage in the baking of cakes? Explain
Martin because his opportunity cost for a cake is lower (3 toys) than Michelle’s (4 toys)
.
5. If Michelle and Martin specialize and trade, mutually beneficial terms on trade would have one
assembled toy be worth between __1/4____ and __1/3__ baked cakes.
Comparative Advantage practice: https://www.reviewecon.com/games-activities/comparative-advantage
Determinants of Supply and Demand (Also in Micro): https://www.reviewecon.com/determinants
A. The law of demand states as price goes
(these answers can be reversed as well)
_up__, quantity demanded goes __down__.
B. Demand vs Quantity demanded:
1. A change in quantity demanded comes from
a change in __price___.
2. _Price__ does not change demand.
C. What are the 5 non-price determinants of
demand?
1. Consumer tastes and preferences
2. Market size (number of buyers)
3. Prices of related goods (substitutes have
direct relationship and complements have an inverse)
4. Changes in income (normal goods have a
direct relationship and inferior goods have an inverse)
5. Expectations for the future
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D. Complementary goods:
1. What are complementary goods?
A pair of goods where one is often needed to
enjoy another; like cookies and milk.
2. If x and y are complements, an increase in
the price of x will cause the demand for y to
E. Substitute goods:
1. What are substitute goods?
A pair of goods where one can be used in
place of the other; like ice cream and frozen
yogurt.
2. If x and y are substitutes, an increase in the
price of x will cause the demand for y to
___decrease__ (or shift left).
3. If x and y are complements, a decrease in
the price of x will cause the demand for y to
___increase___ (or shift right).
3. If x and y are substitutes, a decrease in the
price of x will cause the demand for y to
___increase__ (or shift right).
F. Normal goods
1. What are normal goods in regards to
changes in income?
These are goods that people buy more of
when they have larger incomes; like shoes.
2. If consumers’ incomes increase, demand for
___decrease_ (or shift left).
G. Inferior goods
1. What are inferior goods?
These are goods that people buy less of
when they have more income; like generic
brands.
2. If consumers’ incomes increase, demand
normal goods will _increase_ (shift right).
H. The law of supply states that as price goes
(these answers can be reversed as well)
_up___, quantity supplied goes __up__.
I.
Supply vs Quantity supplied:
1. A change in quantity supplied comes from a
change in _price_.
2. _Price__ does not change supply.
for inferior goods will __decrease_ (shift left).
J. What are the 6 non-price determinants of
supply?
1. Prices of resources or inputs
2.
Government tools (taxes decrease supply,
subsidies increase supply, & regulations
generally decrease supply).
3. Competition (number of sellers)
4. Technology
5. Prices of other goods
Practice Determinants sorting: https://www.reviewecon.com/games-activities/determinants-sorting1
Market Equilibrium (Also in Micro): https://www.reviewecon.com/market-equilibrium
A. Draw a market at equilibrium
B. Draw a market with a surplus
1. When there is a surplus, price will eventually:
Decrease until it reaches equilibrium.
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C. Draw a market with a shortage
1. When there is a shortage, price will eventually:
Increase until it reaches equilibrium.
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D. Draw a market with an increase in demand.
1. Equilibrium price will _increase__ and equilibrium
quantity will _increase___.
E. Draw a market with a decrease in demand.
F. Draw a market with an increase in supply.
1. Equilibrium price will __decrease__ and equilibrium
1. Equilibrium price will __decrease__ and equilibrium
quantity will __decrease__.
quantity will __increase__.
G. Draw a market with a decrease in supply.
H. Draw a market with a decrease in demand and a
decrease in supply.
1. Equilibrium price will __increase_ and equilibrium
quantity will __decrease__.
1. Equilibrium price will _be indeterminate_ and
equilibrium quantity will _decrease_.
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I. When there are double shifts, what is the key to determining the impact on Qe and Pe?
Graph out both shifts. If the price or quantity increase and decrease, that axis is indeterminate. If both shifts move
the price or quantity the same direction, that axis can be determined.
Practice Shifting Markets: https://www.reviewecon.com/games-activities/shifting-markets
Section 2 – Economic Indicators and the Business cycle
Circular Flow: https://www.reviewecon.com/circular-flow-model1
A. Draw a circular flow diagram for a pure market economy. Label the economic actors (2 of them), the flows
(4 of them), and the Markets (2 of them).
B. In a capitalist economy, what is the 3rd economic actor? How are they involved?
The government. They buy resources in the factor market and goods and services in the product market.
They provide public goods and charge taxes as well.
Practice Circular Flow: https://www.reviewecon.com/games-activities/circular-flow-model
Gross Domestic Product: https://www.reviewecon.com/gross-domestic-product1
A. What is gross domestic product?
The value of all new goods and services
produced within a country in a calendar year.
C. What transactions are not counted in GDP?
B. In order for a good or service to be counted
in GDP it must be:
2. Intermediate goods. (These are goods that
are consumed during production or put into
the final product. Only the final product is
counted)
3. Financial transactions. (Shifting money
around is not counted because no goods or
services are produced in the transactions)
D. What is the output expenditure formula for
GDP?
C+Ig+G+Xn
1. A final good
2. New
3. Made within the country’s borders
1. Second hand items (they were already
counted once when they were brand new)
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E. What goes into each component of GDP?
F. What are 4 reasons why gross domestic
product is an imperfect measure of a
country’s standard of living?
1. Underground economy (not counted
because sales aren’t reported)
1. Consumer Spending:
Goods and services purchased by
consumers
2. Gross Investment:
Capital goods (including private buildings),
and changes in inventories
2. Home production (not counted because no
money is exchanged for these goods and
services)
3. “Bads counted as goods” (that means the
clean-up of pollution or natural disasters are
counted as a positive in GDP)
4. The distribution of wealth (not accounted for
in GDP)
G. An unexpected increase in business
inventories is an indicator of what?
It is a leading indicator for an economic
contraction or recession in the business cycle.
3. Government Purchases:
Purchases of goods and services by the
government (transfer payments are not
counted)
4. Net Exports:
Exports minus imports. (This is also called
the trade deficit or trade surplus)
Practice GDP: https://www.reviewecon.com/games-activities/gross-domestic-product
Unemployment: https://www.reviewecon.com/unemployment
A. What is the formula for the unemployment rate?
Unemployed / Labor Force x 100 = Unemployment Rate
B. What is the formula for the labor force?
Labor Force = Those working + Those looking for work
C. Define the following:
1. Discouraged Worker:
People available to work and want to work but gave up
looking for work (Not counted as unemployed)
3. Frictional Unemployment:
Unemployed worker who is in between jobs
or looking for their first job.
2. Underemployed
People who are working part time but want full time
work (Counted as employed)
4. Structural Unemployment:
Unemployed because of a skills mismatch.
Training is needed to get a new job.
5. Cyclical Unemployment:
Unemployment caused by a decrease in
overall spending in the economy
D. What is the formula for the natural rate of unemployment?
Frictional Unemployment + Structural Unemployment OR Unemployment Rate – Cyclical Unemployment
(When cyclical unemployment is zero, the economy is at the natural rate of unemployment)
GDP Deflator and CPI: https://www.reviewecon.com/deflator-and-cpi
A. What is the difference between the CPI and the
GDP deflator?
The CPI measures price changes in a market basket
of goods while the GDP Deflator measures price
changes in all goods.
B. Define:
1. Nominal: Values expressed in current year
prices. Not adjusted for inflation.
2. Real: Values are in base year prices.
Inflation has been deleted out.
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C. The table below shows the output and prices for a country. Answer the questions using 2000 as the base year.
2000
2000
2019
2019
Quantities Prices Quantities Prices
TV’s
100
$200
160
$250
Sofas
20
$500
25
$600
1. Calculate the nominal GDP for 2000.
5. Calculate the GDP Deflator for the year
100 x $200 = $20,000, 20 x $500 = $10,000
2000.
$20,000 + $10,000 = $30,000 Nominal GDP
($30,000/$30,000) x 100 = 100
(Current quantities and current prices)
(Nominal / Real) x 100 = Deflator
2. Calculate the real GDP for 2000.
(Deflator/CPI in the base year is always 100)
Same as #1 because the base year and the
6. Calculate the GDP Deflator for the year
current year are the same so nominal = real
2019.
for the year 2000.
($55,000/$44,500) x 100 = 123.596
3. Calculate the nominal GDP for 2019.
(Nominal / Real) x 100 = Deflator
160 x $250 = $40,000, 25 x $600 = $15,000
$40,000 + $15,000 = $55,000 Nominal GDP
7. Calculate the amount of inflation there was
(Current quantities and current prices)
between the year 2000 and the year 2019.
4. Calculate the real GDP for 2019.
[(123.596-100) / 100] x 100 = 23.596%
160 x $200 = $32,000, 25 x $500 = $12,500
[(New – Old) / Old] x 100 = Inflation
$32,000 + $12,500 = $44,500 Real GDP
(Current quantities and base year prices)
D. Use the market basket table below to answer each of the questions using 2010 as the base year.
Market 2010 2018
Basket Prices Prices
Tacos
5
$1
$2
Burritos
20
$4
$6
Quesadillas
10
$3
$4
1. Calculate the CPI for the year 2010.
Market basket value base year prices = (5 x $1) + (20 x $4) + (10 x $3) = $115 Real
Market basket value current year prices = (5 x $1) + (20 x $4) + (10 x $3) = $115 Nominal
($115/$115) x 100 = 100 (Nominal/Real)x 100 = CPI, Base year always has a CPI & Deflator of 100
2. Calculate the CPI for the year 2018.
Market basket value base year prices = (5 x $1) + (20 x $4) + (10 x $3) = $115 Real
Market basket value current year prices = (5 x $2) + (20 x $6) + (10 x $4) = $170 Nominal
($170/$115) x 100 = 147.83 (Nominal/Real) x 100 = CPI
3. Calculate the amount of inflation there was between the year 2010 and the year 2018.
[(147.83-100)/100] x 100 = 47.83%
[(New – Old) / Old] x 100 = Inflation
Practice Deflator and CPI: https://www.reviewecon.com/games-activities/delfatorcpi-calculations
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Business Cycle: https://www.reviewecon.com/business-cycle
A. What economic problem results from the
following?
1. Inflationary Gap:
Inflation. When output exceeds potential,
prices rise.
2. Recessionary Gap:
Unemployment. When output is less than
potential, workers get laid off and have
trouble finding jobs.
B. What are the 3 macroeconomic goals?
1. Economic Growth. Potential GDP should
increase over time. This requires increases
in the quality and/or quantity of resources or
increased productivity.
2. Full Employment. That means the
unemployment rate is at the natural rate
(Frictional + Structural, or zero Cyclical
unemployment).
3. Stable Prices: Which means low inflation.
Practice Business Cycle: https://www.reviewecon.com/games-activities/business-cycle1
Unit 3 – National Income and Price Determination
Propensities and Multipliers: https://www.reviewecon.com/propensities-and-multipliers
A. Define:
1. Marginal Propensity to Save:
The percentage (expressed as a decimal) of
new income consumers save.
Δ Savings / Δ Income
2. Marginal Propensity to Consume:
The percentage (expressed as a decimal) of
new income consumers spend.
Δ Consumption / Δ Income
B. Calculate answers to the following questions
assuming an MPC of .8:
1. What is the MPS?
1 – .8 = .2
1 – MPC = MPS
2. If the government increases taxes by $5
million, what is the maximum change to
GDP?
Tax multiplier = .8/.2 = 4
$5 million x 4 = $20 million Decrease
(Tax increases decrease GDP and Tax decreases
increase GDP)
1. What is the formula for the spending multiplier?
1/MPS or 1/(1-MPC)
2. What is the formula for the tax multiplier?
MPC/MPS or Spending Multiplier – 1
3. Why is the tax multiplier less than the spending
multiplier?
When citizens receive a tax cut, they will save
some of that money.
3. If the government increases spending by
$10 million, what is the maximum change to
GDP?
Spending multiplier = 1/.2 = 5
$10 million x 5 = $50 million
4. If the government wants to increase GDP by
$100 million, what is the minimum decrease
in taxes needed?
Tax multiplier = .8/.2 = 4
$100 million / 4 = $25 million
Practice Propensities and Multipliers: https://www.reviewecon.com/games-activities/propensities-multipliers
Copyright 2024: Jacob Reed, ReviewEcon.com
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AS/AD Model: https://www.reviewecon.com/asad-model1
A. Why is aggregate demand downward sloping?
1. Wealth Effect: At lower price levels, assets
buy more goods and services.
2. Interest Rate Effect: At lower price levels,
nominal interest rates decrease causing
more gross investment.
3. Net Export Effect: Lower price levels make
exports cheaper to foreign consumers.
C. What are the aggregate supply shifters?
1. Prices of resources (especially wages)
2. Productivity and technology
B. What are the components (shifters) of aggregate
demand?
1. Consumer Spending
2. Gross Investment
3. Government Purchases
4. Net Exports
D. Why is long run aggregate supply vertical at the
full employment real GDP?
In the long run, wages adjust to price levels so output
doesn’t change with price levels.
E. What things shift the LRAS?
3. Inflation expectations
5. __Quantity____ of resources.
4. Business taxes or subsidies
(Note taxes generally are an AD shifter
because they change Consumption)
5. Business regulations
6. __Quality_____ of resources.
F. Draw an AS/AD Model for an economy at long run
equilibrium.
1. What is the unemployment rate when the
economy is in long-run equilibrium?
Full employment or the Natural rate of unemployment
(Structural + Frictional, or zero Cyclical)
2. Show what would happen to the price level
and real output if there was an increase in
consumer spending.
7.
Productivity
8.
Technology
G. Draw an AS/AD Model for an economy at long run
equilibrium.
1. Show what would happen to the price level and
real output if there was an increase in the price of
raw materials.
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H. Draw an AS/AD Model for an economy with an
inflationary gap.
I.
Draw an AS/AD Model for an economy with a
recessionary gap.
1. Show and explain what will happen in the long
run if no government action is taken.
In the long run, wages will rise (as well as the prices of
other resources). That means higher input costs for
businesses; causing a leftward shift of the SRAS curve.
1. Show and explain what will happen in the long
run if no government action is taken.
In the long run, wages will fall (as well as the prices of
other resources). That means lower input costs for
businesses; causing a rightward shift the of SRAS
curve.
AS/AD Practice https://www.reviewecon.com/games-activities/asad-model
Practice Drawing AS/AD: https://www.reviewecon.com/games-activities/asad-graph
Fiscal Policy: https://www.reviewecon.com/fiscal-tools
A. Expansionary fiscal policy includes:
B. Contractionary fiscal policy includes:
1. Tax _Decrease_
1. Tax _Increase_
2. Government Spending _ Increase_
2. Government Spending _Decrease_
3. Budget Deficit _Increase_
3. Budget Deficit _Decrease_
C. What happens to these automatic stabilizers in
an economic expansion?
D. What happens to these automatic stabilizers in
an economic contraction?
1. Taxes _Increase_
1. Taxes _Decrease_
2. Transfer Payments _Decrease_
2. Transfer Payments _ Increase_
3. Deficit _Decrease_
3. Deficit _Increase_
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E. Draw an AS/AD model in long run equilibrium
and show the impact of expansionary fiscal
policy on output and the price level in the short
run.
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F. Draw an AS/AD model in long run equilibrium
and show the impact of contractionary fiscal
policy on output and the price level in the short
run.
Practice sorting fiscal policy: https://www.reviewecon.com/games-activities/monetary-fiscal-sort1
Section 4 – Money and Monetary Policy
Money: https://www.reviewecon.com/money
A.What are the functions of money?
1. Medium of Exchange (Can be used to purchase
goods, services, or resources)
2. Unit of Account (able to measure or compare
value – AKA standard of value)
3. Store of value (needs a stable value)
B. What comprises the two measures of the money
supply?
B. Identify the relationship between interest rates and
bond prices:
2. M1 (money): Currency (coins and paper
money), checkable deposits, and savings
deposits
1. M0 (not all money): Currency (paper and
coin money), and bank reserves (both
excess and required). AKA Monetary Base
1. Interest Rates Up → Bond Prices ___Down___
3. M2 (money + near money): All of M1 plus
small time deposits (up to $200k CDs)
2. Interest Rates Down → Bond Prices ___Up___
Fisher Formula: https://www.reviewecon.com/fisher-formula
A. What is the Fisher formula?
i≈r+π
B. What does each variable in the formula
represent?
1. “i” is the nominal interest rate or nominal rate
of change.
2. “r” is the real interest rate or the real rate of
change.
C. How does higher than expected inflation impact
these people? Explain.
1. Borrowers: Benefit.
When the inflation rate is higher than expect,
borrowers benefit because they pay back
loans with fewer real dollars (less valuable
money than they borrowed)
2. Lenders: Hurt.
When the inflation rate is higher than
expected, lenders are hurt because they are
paid back fewer real dollars (less valuable
money than they loaned out)
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3. “π” is the inflation rate.
D. Calculate the Following (Show your work):
1. If the nominal interest rate is 5% and the expected inflation rate is 3%, what is the real interest rate?
5% - 3% = 2%
i–π=r
2. If real wages increase by 2% when the inflation rate was 8%, by how much did nominal wages change?
2% + 8% = 10%
r+π=i
3. If nominal GDP increases by 2% but real GDP decreased by 1%, what was the inflation rate?
2% – -1% = 3%
i–r=π
Practice the Fisher Formula: https://www.reviewecon.com/games-activities/fisher
Bank Balance Sheets: https://www.reviewecon.com/bank-balance-sheets
A. Define each of the following:
1. Required Reserves:
A percentage of checkable deposits (set by the federal
reserve) the bank has but cannot be loaned out.
2. Excess Reserves:
Funds the bank has available to be loaned out.
3. Total Reserves:
All the funds the bank has in its possession. It includes
required and excess reserves. AKA Reserves.
4. Checkable Deposits:
These are easily spent deposits. The reserve
requirement applies only to these deposits. AKA
demand deposits.
5. Other Deposits:
Savings accounts, CD’s, money markets, etc. These
deposits do not have a reserve requirement.
B. Answer the following questions based on this bank balance sheet assuming a 5% reserve requirement:
Assets
Liabilities
Total Reserves:
Loans:
Securities:
Physical Assets:
$8,000
$11,000
$5,000
$2,000
Checkable Deposits:
Other Deposits:
Other Liabilities:
Owner Equity:
Total:
$26,000 Total
$10,000
$12,000
$1,000
$3,000
$26,000
1. What is the value of this bank’s required reserves?
$500 (5% of $10,000 is $500)
2. How much money can this bank currently loan out?
$7500 (total reserves – required reserves = excess reserves)
3. If a customer deposits $2000 into their checking, what will required reserves and excess reserves be?
Checkable deposits becomes $12,000, Total reserves are now $10,000. Required reserves would
now be $600 (5 % of $12,000) and excess reserves would be what is left; $9,400.
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C. What is the formula for the money multiplier?
1/RR (1 divided by the reserve requirement)
2. Maximum value of loans the banking system
can create from this deposit:
5 x $800 = $4,000 (original amount was not
a loan)
3. Maximum value of deposits the banking
system can create from this deposit:
5 x $800 + $1000 = $5000 (original amount
was a deposit)
4. Maximum value of new money the banking
system can create from this deposit:
5 x $800 = $4,000 (original amount was
already M1 money)
D. If the reserve requirement is 20%, and a
customer deposits $1000 into their checking
account, what are the values for each of the
following:
1. The money multiplier:
1/20% = 5
The amount of money this bank can initially loan out:
$1000 – 20% = $800 (this is the excess reserves)
Practice with bank balance sheets: https://www.reviewecon.com/games-activities/bank-balance-sheet
Practice the money multiplier: https://www.reviewecon.com/games-activities/money-multiplier
Money Market: https://www.reviewecon.com/money-market2
A. What type of interest rate is used on the Y axis
for the money market?
Nominal interest rate (This interest rate has not been
adjusted for inflation)
B. Define the two components of the demand for
money?
1. Asset Demand:
Based on the desire to hold wealth as money. The
interest rate is the opportunity cost for holding money.
2. Transaction Demand:
Based on the need to hold currency to purchase goods,
services, or resources. (Determined by price level and
real GDP)
C. Show the short run impact of expansionary monetary policy (with limited reserves) on the money market
and the AS/AS model.
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 50
Please do not post this on the internet! It wouldn’t be cool.
D. Show the short run impact of contractionary monetary policy (with limited reserves) on the money market and
the AS/AD model.
Practice with money market: https://www.reviewecon.com/games-activities/money-market
Practice drawing money market graph: https://www.reviewecon.com/games-activities/money-market1
Monetary Tools: https://www.reviewecon.com/monetary-tools
A. Define each of the following:
1. Open Market Operations:
Buying and selling bonds (or securities) by
the Federal Reserve’s Federal Open Market
Committee
2. Reserve Requirement:
A percentage of checkable deposits that the
bank cannot loan out
4. Federal Funds Rate/Policy Rate:
It is the interest rate banks charge each
other for overnight loans. Central banks use
monetary policy to target their policy rates.
The US policy rate is the Federal Funds
Rate.
5. Interest on Reserves:
Interest paid to banks by the central bank
for reserves.
3. Discount Rate:
The interest rate banks are charged when
they borrow from the Fed
B. If there are limited reserves and the central bank
wants to fight unemployment, it can:
1. Policy Name: Expansionary
D. If there are limited reserves and the central
bank wants to fight inflation, it can:
1. Policy Name: Contractionary
2. Open Market Operations: Buy Bonds
2. Open Market Operations: Sell Bonds
3. Discount Rate: Decrease
3. Discount Rate: Increase
4. Reserve Requirement: Decrease
4. Reserve Requirement: Increase
C. What is the impact on the money supply for the
above action (from B)?
Increase
E. What is the impact on the money supply for the
above action (from D)?
Decrease
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 51
F. Does the US Federal Reserve operate with
ample or limited reserves?
Ample Reserves
Please do not post this on the internet! It wouldn’t be cool.
G. If there are ample reserves, how will the central
bank change the administered rates (Discount
and IOR) to fight each of the following:
1. Unemployment: Decrease
2. Inflation: Increase
H. Draw a reserves market for a banking system
with ample reserves and show the impact of an
increase in administered rates (discount rates
and IOR)
I.
Draw a reserve market for a banking system
with ample reserves and show the impact of an
open market purchase of bonds by the central
bank.
J. What impact does expansionary monetary policy
have on each of the following?
1. Interest rates: Decrease
K. What impact does contractionary monetary
policy have on each of the following?
1. Interest Rates: Increase
2. Gross Investment: Increase
2. Gross Investment: Decrease
3. Aggregate Demand: Increase
3. Aggregate Demand: Decrease
4. Real GDP: Increase
4. Real GDP: Decrease
5. Price Level: Increase
5. Price Level: Decrease
Loanable Funds: https://www.reviewecon.com/loanable-funds1
A. What is a real interest rate?
An interest rate that has been adjusted for
inflation. (Real = Nominal – Inflation)
B. What shifts the loanable funds demand curve?
1. Expected rate of return on new investments
(anything that makes businesses think there
is more profit for new investments).
C. What shifts the loanable funds supply curve?
1. Consumer savings (impacted by disposable
income)
2. Foreign investment (foreign investors saving
money in domestic banks)
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 52
D. Draw a loanable funds market at equilibrium.
Show the impact of an increase in business
confidence on the equilibrium interest rate and
quantity of loanable funds.
Please do not post this on the internet! It wouldn’t be cool.
E. Draw a loanable funds market at equilibrium.
Show the impact of an increase in disposable
income on the equilibrium interest rate and
quantity of loanable funds.
F. How do interest rates impact economic growth?
G. Which loanable funds curve will YOU shift and
Lower interest rates mean higher economic growth.
which direction when there is an increase in the
That is because businesses invest more which
budget deficit?
increases capital formation. Higher real interest rates
You can shift supply left or demand right. Do
mean lower economic growth.
what your teacher/professor prefers.
Practice Loanable Funds: https://www.reviewecon.com/games-activities/loanable-funds
Practice Drawing Loanable Funds: https://www.reviewecon.com/games-activities/loanable-funds-market
Unit 5: Long-Run Consequences of Stabilization Policies
Fiscal and Monetary Interaction: https://www.reviewecon.com/fiscal-monetary-policy-interactions
A. How does expansionary fiscal and monetary
policy impact each of the following in the short
run?
B. How does contractionary fiscal and monetary
policy impact each of the following in the short
run?
1. Aggregated Demand
Rightward shift
1. Aggregated Demand
Decrease
2. Price Level
Increase
2. Price Level
Decrease
3. Output
Increase
3. Output
Decrease
4. Unemployment
Decrease
4. Unemployment
Increase
5. Interest Rates
Indeterminate
5. Interest Rates
Indeterminate
6. Economic Growth
Indeterminate
6. Economic Growth
Indeterminate
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 53
C. How does expansionary fiscal and
contractionary monetary policy impact each of
the following in the short run?
Please do not post this on the internet! It wouldn’t be cool.
G. How does contractionary fiscal and
expansionary monetary policy impact each of
the following in the short run?
1. Aggregated Demand
Indeterminate
1. Aggregated Demand
Indeterminate
2. Price Level
Indeterminate
2. Price Level
Indeterminate
3. Output
Indeterminate
3. Output
Indeterminate
4. Unemployment
Indeterminate
4. Unemployment
Indeterminate
5. Interest Rates
Increase
5. Interest Rates
Decrease
6. Economic Growth
Decrease
6. Economic Growth
Increase
Practice Fiscal & Monetary Policy Interaction: https://www.reviewecon.com/games-activities/monetary-fiscal-sort1
Monetary Equation of Exchange: https://www.reviewecon.com/the-quantity-theory-of-money
A. What is the Monetary Equation of Exchange?
MV=PQ
OR
MV=PY
B. What does each variable represent?
1. M = Money supply (M1 or M2)
2. V = Velocity of Money (How many times
each dollar is spent on average)
3. P = Price Level (as measured by the CPI or
GDP Deflator)
4. Y (or Q) = Real GDP (AKA Real output or
national income)
Practice with MV=PY: https://www.reviewecon.com/MV-PQ
C. What are both side of the equation equal to?
Nominal GDP
D. If the money supply increases by 10% while the
price level and velocity of money do not change,
what will happen to real output?
Real Output increase by 10%
E. What is the impact of expansionary monetary
policy on the price level and real output?
1. Short Run:
Price level increases and real output
increases. (AD shifts right)
2. Long Run:
Price level increases and real output does
not change. (AD shifts right, inflation
expectations cause SRAS to shift left)
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 54
Please do not post this on the internet! It wouldn’t be cool.
Deficits and Crowding Out: https://www.reviewecon.com/deficit-debt-and-crowding-out
A. Define each of the following
1. Deficit:
When tax revenue is less than government
spending.
2. Surplus:
When tax revenue is greater than government
spending.
3. National Debt:
The sum of all previous deficits and surpluses.
It is the total amount of money currently owed
by the federal government.
C. Explain how an increase in taxes and/or
decrease in spending will lead to higher
economic growth.
Government must borrow less. That decreases the
demand for loanable funds (or increases the supply),
causing a decrease in the interest rate, increasing
investment and capital formation.
D. Draw a loanable funds graph and show the
impact of expansionary fiscal policy on the real
interest rate.
B. Explain how a decrease in taxes and/or increase
in spending will lead to lower economic growth.
Government must borrow more. That increases the
demand for loanable funds (or decreases the supply),
causing an increase in the interest rate, decreasing
investment and capital formation.
Shifting either curve is acceptable. Interest rates rise,
investment decreases, and growth decreases.
Economic Growth: https://www.reviewecon.com/4-things-to-know-about-economic-growth
A. What is economic growth?
An increase in POTENTIAL GDP
C. Show the impact of an increase in productivity
on the PPC below.
B. What are the components needed cause
economic growth?
Greater Quality or Quantity of Resources, Technology,
or Productivity increases.
D. Show the impact of an increase in the labor
force participation rate on the long-run
aggregated supply curve.
E. What are supply side policies and how do they
work?
Supply side policies are government actions that focus
on reducing business taxes and regulations as well as
encouraging investment and work. The goal is the shift
the LRAS right.
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 55
F. What is the production Function?
A graph that shows the relationship between the use of
a resource and real GDP
Please do not post this on the internet! It wouldn’t be cool.
G. What can cause the production function to shift
upward?
1. Increases in Human Capital
2. Increases in Technology
3. Increases in the quantity of other resources
Phillips Curve: https://www.reviewecon.com/phillips-curve4
A. What is the relationship between the inflation
rate and the unemployment rate in the short
run?
There is an inverse relationship between inflation rates
and the unemployment rate.
C. What causes the short run Phillips curve to
shift?
1. Supply shocks (SRAS shifters)
B. What is the relationship between the inflation
rate and the unemployment rate in the long run?
There is no relationship between unemployment and
inflation in the long run. In the long run, the
unemployment rate will be the natural rate at any
inflation rate.
D. What causes the long run Phillips curve to shift?
1. Changes in structural unemployment
2.
2. Inflation expectations (higher expected
inflation shifts SRPC upward)
Changes in frictional unemployment
(Changes in the NRU are what shift the LRPC)
E. How are the following shifts in the AS/AD Model illustrated in the Phillips curve model?
1. Shifts of the SRAS Curve: There is a shift of the SRPC in the opposite direction. Leftward shift of SRAS
causes rightward shift of SRPC. Rightward shift of SRAS causes leftward shift of SRPC.
2.
Shifts of the AD Curve: There is movement along the SRPC. Rightward shift of AD causes movement
to the left along the SRPC. Leftward shift of AD causes movement rightward along SRPC.
F. Draw a long run and short run Phillips curve for
an economy experiencing an inflationary gap.
Then show the impact of contractionary fiscal
policy.
G. Draw a long run and short run Phillips curve for
an economy in long run equilibrium. Then show
the impact of a decrease in inflation
expectations.
Practice the Phillips curve: https://www.reviewecon.com/games-activities/phillips-curve1
Practice drawing the Phillips curve: https://www.reviewecon.com/games-activities/phillips-curve
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 56
Please do not post this on the internet! It wouldn’t be cool.
Section 6: International Markets
Balance of Payments: https://www.reviewecon.com/balance-of-payments1
A. What types of transactions are included in the
current account?
1. Payments for goods
B. How do national income and price levels impact
the current account?
1. Price Level ↑ = Current Account _↓__
2. National Income ↑ = Current Account _↓__
2. Payments for services
3. Investment Income
C. Define the following:
1. Trade Deficit:
When Imports > Exports
4. Transfers of money
2. Trade Surplus:
When Exports > Imports
D. What transactions are included in the
financial/capital account?
Purchases of assets (like businesses, stocks,
bonds, etc.)
F. How are transactions counted in the balance of
payments?
1. Money in: Credit (positive)
2. Money out: Debit (negative)
E. Current Account + Financial account = ___0___
Practice with the Balance of Payments: https://www.reviewecon.com/games-activities/balance-of-payments
Foreign Exchange Markets: https://www.reviewecon.com/foreign-exchange
A. What are the foreign exchange demand
shifters?
1. Demand for exports (direct relationship)
(Includes price level & foreign national income)
2. Interest rates (direct relationship)
3. Expected exchange rate (direct relationship)
C. Draw a foreign exchange market for the Dollar
compared to Euros. Show the impact of an
increase in US exports to Europe.
Europeans will demand more dollars to purchase more
US exports.
B. What are the foreign exchange supply shifters?
1. Demand for imports (direct relationship)
(Includes price level & domestic national income)
2. Interest rates (inverse relationship)
3. Expected exchange rate (inverse
relationship)
D. Draw a foreign exchange market for the Dollar
compared to Euros. Show the impact of an
increase in interest rates in Europe.
Investors put money in European banks. They supply
more dollars (and demand more euros). They also
demand fewer dollars.
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 57
Please do not post this on the internet! It wouldn’t be cool.
E. How do exchange rates impact net exports?
1. When the currency appreciates, Exports ___↓____ and Imports ___↑____.
2. When the currency depreciates, Exports ___↑____ and Imports ___↓____.
Practice with foreign exchange markets: https://www.reviewecon.com/games-activities/foreign-exchange1
Practice drawing foreign exchange markets: https://www.reviewecon.com/games-activities/foreign-exchange2
You have reached the end of the Macroeconomics Review!!
Now put it all together by playing the 30 question MC Test Game:
https://www.reviewecon.com/games-activities/macro-mc-exam
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 58
Please do not post this on the internet! It wouldn’t be cool.
Macroeconomics Practice Exam – Key
To take this exam as an online game, go to https://www.reviewecon.com/premium-macro-full-exam
1. c. Cyclical unemployment is unemployment caused
by the business cycle. It increases when there is a
contraction (recession) and decreases when there
is an expansion (recovery).
2. e. Economic growth is an increase in POTENTIAL
GDP not just an increase in GDP. Growth occurs
when there is an increase in the quality or quantity
of resources or new technologies.
3. d. The fisher formula is r ≈ i - ∏. “r” is the real
interest rate, “i” is the nominal interest rate and
“∏” is the inflation rate. That means the real
interest rate is 8%-6%, or 2%.
4. a. Expansionary fiscal policy is an increase in
government spending and/or a decrease in taxes.
Expansionary fiscal policy will cause a rightward
shift of the aggregate demand curve in the AS/AD
model That will cause an increase in the price level
and an increase in real output (real GDP).
5. e. When the inflation rate is higher than expected.
The real interest rate paid by the borrower is lower
than expected. That is because of the fisher
formula; r ≈ i - ∏. “r” is the real interest rate, “i” is
the nominal interest rate and “∏” is the inflation
rate. Higher inflation after the loan has been made
(since the interest rate is fixed) means a lower real
interest rate.
6. b. The federal funds rate is the interest rate banks
charge one another for overnight loans. In the US,
the Federal Reserve targets this rate by changing
interest on reserves and other administered rates.
7. d. An increase in energy prices is a negative supply
shock to the economy. It will cause a leftward shift
of the short run aggregate supply curve and will
increase price levels and decrease real output. The
increase in prices here is cost push inflation and
since there is lower output (higher unemployment)
along with higher prices, this is also called
stagflation.
8. e. When there is an inflationary gap,
contractionary monetary and fiscal policy can shift
the aggregate demand curve to the left returning
the economy to long run equilibrium.
Contractionary monetary policy includes selling
bonds on the open market, raising the discount
rate, or raising the reserve requirement.
Contractionary fiscal policy includes increasing
taxes or cutting government spending.
9. b. A trade surplus exists when a country exports
more than it imports. In order to reduce the trade
surplus, China will need to purchase more United
States goods or the US will need to buy fewer
Chinese goods. If there is an increase in China’s
national income, Chinese consumers will purchase
more goods and services; some of which will be
from the United States.
10. b. These household purchases are counted as
consumption in the output expenditure model of
GDP. Durable goods are goods which are
purchased in one year, but they continue to be
useful for future years. Cars, refrigerators,
lawnmowers, etc. are durable goods. When there
is an increase in consumption, there will be an
increase in aggregate demand (rightward shift).
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 59
Please do not post this on the internet! It wouldn’t be cool.
11. b. Since the GDP deflator for 2010 is 100, that
means the base year is the year 2010 and real and
nominal are the same for 2010 ($2000). In 2019,
real GDP can be found by taking nominal GDP
($3000), dividing by the GDP deflator (150), then
multiplying by 100. $3000/150 x 100 = $2000. So
real GDP for the year 2010 and 2019 are both
$2000.
17. d. If there is a decrease in the budget deficit, the
government will not have to borrow as much
money. That will decrease the demand for loanable
funds (or increase the supply), leading to a
decrease in the equilibrium real interest rate. The
lower real interest rate will mean more investment
and with that, more capital formation. More
capital increases potential GDP.
12. c. An increase in the money supply can be achieved
through expansionary monetary policy. A decrease
in the discount rate, decrease in the reserve
requirement or buying government securities will
all increase the money supply. Note: this will
decrease nominal interest rates, increase
investment, and increase aggregate demand.
18. b. If the real interest rate decreases in Japan,
money will flow out of Japan and into the United
states. Foreign investors will sell (supply) Japanese
Yen and buy (demand) United States dollars. The
increase in the demand for US dollars (there would
be a decrease in supply of US dollars as well),
would cause the US dollar to appreciate.
13. a. In the long run, the economy will always have
the natural rate of unemployment (NRU). The NRU
is structural unemployment plus frictional
unemployment, or the rate of unemployment
when cyclical unemployment is zero.
19. d. In the long run, the economy will have the
natural rate of unemployment (structural plus
frictional). If the economy expands faster than its
long run potential, unemployment will fall below
the natural rate. That is called an inflationary gap
without government intervention, workers will
seek higher wages and prices will rise (from a
leftward shift of SRAS). If the government
decreases spending and/or increases taxes, the gap
can be closed faster.
14. a. If there is an increase in the supply of money in
the united states, interest rates will fall. That will
cause foreign investors to pull money out of US
banks (there will be a capital outflow). Foreign
investors will supply US dollars and demand
foreign currencies (the demand for US dollars will
also decrease). The increased supply and
decreased demand for US dollars will cause the
value of the US dollar to depreciate.
15. d. Expansionary monetary policy (buying bonds,
lowering the discount rate, and/or decreasing the
reserve requirement) will cause an increase in the
supply of money. That will lower the interest rate
causing an increase in gross investment and
interest rate sensitive consumer spending. That
causes the aggregate demand curve to shift right.
16. c. The increase in the demand for cookies will
increase price and quantity. The increase in the
supply of cookies will decrease price and increase
quantity. Since one shift increases price and the
other decreases price, the net effect on price will
be indeterminate. Since both shifts increase
quantity, quantity will surely increase.
20. d. To find a GDP deflator you must calculate
nominal GDP and real GDP for the year in question
(2019). Nominal GDP uses the current year
quantities and the current year prices; (12 x $500)
+ (10 x $900) = $15,000. Real GDP uses the current
year quantities and the base year prices (10 x $520)
+ (12 x $400) = $10,000. The formula for the
Deflator is nominal / real x 100. $15,000/10,000 x
100 = 150.
21. e. Growth doesn’t just mean more GDP, it means
more potential GDP. An increase in government
spending will actually crowd out private
investment leading to a decrease in economic
growth.
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 60
22. c. When a person uses money to measure the
relative value of different goods, they are using
money as a standard of value (also called unit of
account). Saving is using money as a store of value
and buying goods and services or resources is using
money as a medium of exchange.
23. c. The official measure of unemployment does not
count discouraged workers. It only counts people
without a job who are actively looking for work.
Discouraged workers are not part of the labor force
while the self-employed, part time employed and
those with jobs looking for better jobs are all
counted as employed.
24. b. Expansionary fiscal policy (increase in
government spending and/or decrease in taxes)
will cause a rightward shift of the aggregated
demand curve and increase the price level and real
output. The positive supply shock is a rightward
shift of the short run aggregate supply curve
(usually caused by a decrease in resource prices)
that will cause a decrease in the price level and
increase in real output. Since one shift increases
prices and the other decreases prices, the price
level will be indeterminate. Since both shifts
increase real output, real GDP, national income
and employment must increase.
25. d. If the marginal propensity to save is .25, then the
simple spending multiplier is 4 (1/.25). The increase
in consumption will increase national income (Real
GDP) by a maximum of $4000 (4 x $1000), while
the decrease in business investment will decrease
national income $1200 (4 x $300). $4000-$1200 =
$3800
26. c. Cost push inflation (and stagflation) results from
a leftward shift of the short run aggregate supply
curve. Higher resources prices will cause the short
run aggregate supply curve to shift left.
Please do not post this on the internet! It wouldn’t be cool.
27. a. When the price level increases in the United
States, US goods get relatively more expensive and
Canadian goods get relatively cheaper. As a result,
there will be less demand for US goods and more
demand for Canadian goods. The demand for US
dollars will decrease (and the supply of Canadian
dollars will decrease) since Canadians will buy
fewer US goods. The demand for Canadian dollars
will increase (and the supply of US dollars will
increase) since Americans will buy more Canadian
goods.
28. b. The primary factor influencing the quantity of
investment (aside from business confidence) is the
interest rate. If the Federal Reserve lowers
administered interest rates (interest on reserves
and the discount rate) that will decrease other
interest rates. The lower interest rates will increase
the quantity of investment and increase economic
growth.
29. e. An increase in employment can best be achieved
through expansionary monetary and fiscal policy.
Expansionary fiscal policy includes more
government spending and/or a decrease in taxes.
Expansionary monetary policy includes open
market purchases of government bonds, a
decrease in the reserve requirement, and/or a
decrease in the discount rate.
30. b. In the circular flow diagram, households sell
resources in the factor market and are paid wages,
interest, rents, and profit. In the product market,
households buy goods and services from
businesses. Those payments are called sales.
31. c. If there is an increase in aggregate demand, the
price level will increase (causing inflation) and real
output will increase. More output means
unemployment will fall.
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 61
32. c. Since the numbers here are completed sets of
windows and gutters, this is an output question.
The formula for output opportunity costs is “other
over.” The opportunity cost of A = B/A. Marty’s
opportunity cost for 1 window is 4/5 of a gutter
and his opportunity cost for 1 gutter is 1 1/4
windows. Josh’s opportunity cost for 1 window 6/7
of a gutter and his opportunity cost for 1 gutter is 1
1/6 windows. Marty has a lower opportunity cost
(comparative advantage) for windows and Josh has
a lower opportunity (comparative advantage) cost
for gutters. As a result, they would maximize their
productivity by having Josh clean gutters and have
Marty wash windows.
33. d. Civilians over the age of 16 who do not have jobs
but have recently stopped looking for work are
called discouraged workers. They are not counted
as unemployed. This would increase the number of
discouraged workers and actually decrease the
unemployment rate since those not looking for
work are not part of the labor force.
34. b. Every time a loan is made, money is created.
Every time a loan is paid back, money is destroyed.
35. a. In the long run (think no short run aggregate
supply curve or a vertical aggregate supply only)
wages and other resource prices will adjust to the
price level. Expansionary monetary policy causes a
rightward shift of the aggregated demand curve
(because it increases the money supply which
decreases interest rates, leading to increased
investment). That causes the price level and real
output to increase in the short run, but when
wages and other resource prices increase to the
new higher price level, the economy will return to
the prior output with even higher prices.
36. e. When government spending is greater than
taxes, the government is deficit spending. The
government must borrow the shortfall which
increases demand (or decreases supply) in the
loanable funds market. That increases interest
rates which causes a decrease in the quantity of
gross investment.
Please do not post this on the internet! It wouldn’t be cool.
37. c. When a country’s currency appreciates, foreign
goods get relatively cheaper and that country’s
goods get relatively more expensive. So, if the
British pound appreciates, British consumers will
buy more Canadian goods (exports) and Canadians
will buy fewer British goods.
38. d. The demand for money is comprised of two
things. The asset demand for money and the
transaction demand for money. This question is
about the transaction demand for money. It will
increase if any component of the output
expenditure formula for GDP increases
(C+Ig+G+Xn) or if the price level increases. A higher
price level means more money is needed to
purchase the same number of goods.
39. c. If there is an increase in business investment,
much of that investment will be purchases of
physical capital. An increase in the capital stock will
cause a rightward shift of the long run aggregate
supply curve because the long run potential output
for the economy will be higher.
40. c. Gross Domestic Product is the value of all final
goods and services produced within a country in a
calendar year. The sale of the work truck would be
counted as investment in 2015, but would not
change GDP for 2019.
41. e. An increase in government expenditures
(spending) and a decrease in taxes are
expansionary fiscal policies that cause an increase
in aggregate demand. The increase in aggregate
demand cause the price level to rise and real
output to increase. More output means less
unemployment (more employment).
42. d. The long run aggregate supply curve is vertical at
the long run potential output. Research and
development will cause an increase in new
technologies. Those new technologies will increase
productivity increasing potential GDP and shifting
LRAS right.
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 62
43. c. This question is about the asset demand for
money; it is the reason for the downward sloping
money demand curve. The interest rate is the
opportunity cost for holding your assets as money
(M1 as opposed to M2). If money is put into a
savings account, it earns interest. But transferring
it to checking or holding it as cash means you lose
the interest you could have earned. So, when the
interest rate is high, people demand (hold) less
money and when the interest rate is low, people
demand (hold) more money.
44. d. Inflation can be reduced through contractionary
fiscal policy that will cause a leftward shift of the
aggregate demand curve. Increasing taxes or
decreasing government spending are both
contractionary fiscal policies.
45. a. The difference between the vertical long run
aggregate supply curve and the upward sloping
short run aggregate supply curve is caused by
wages and resource prices being slow to adjust to
new price levels. In the short run, when prices rise
firms earn more profit with more output, so they
produce more. But eventually, wages rise causing
output to return to the long run potential.
46. d. The labor force participation rate is the
percentage of the working age civilian population
that is working or looking for work. Workers part
time employed and full time employed are both
working and discouraged workers are not looking
for work. The labor force is 200 + 300 + 100 = 600.
The working age civilian population is 1000. That
means the labor force participation rate is
600/1000 x 100 = 60%.
47. b. The budget deficit is government spending taxes. The deficit is how much money the
government must borrow, adding to the national
debt, each year. An increase in government
expenditures without an increase in taxes will
cause an increase in the budget deficit.
Please do not post this on the internet! It wouldn’t be cool.
48. a. When there is a concave (bowed out) production
possibilities curve, the opportunity cost of
producing more of one good will continually
increase. This is called the law of increasing cost.
So, the opportunity cost of producing more of good
X will be highest where the PPC hits the good X axis
and lowest where the PPC hits the good Y axis.
49. e. Contractionary monetary policy will increase
interest rates and that will cause an inflow of
financial capital into the United States which
increase the demand (and decreases the supply) of
US dollars, causing the US dollar to appreciate.
50. d. Inflation expectations are a short run Phillips
curve shifter. A decrease in inflation expectations
shift the SRPC left (down) and shift the short run
aggregate supply right (down). An increase in
inflation expectations would shift the SRPC left(up)
and shift the short run aggregates supply right (up).
51. c. Gross Domestic Product includes the production
of all final goods and services produced in a
country in a calendar year. Bonds are just loans
which means this is a financial transaction and no
good or service is being purchased.
52. d. When interest rates increase in the United
States and decrease in Mexico, foreign investors
will seek the higher interest rate. They will pull
their money out of Mexican banks and put it into
US banks. That will be an outflow of financial
capital from Mexico and an inflow of financial
capital to the United Sates. The outflow decreases
the supply of loanable funds in Mexico and the
inflow increases the supply of loanable funds in the
United States.
Copyright 2024: Jacob Reed, ReviewEcon.com
Page 63
53. d. The reserve requirement is a percentage of
demand deposits that cannot be loaned out
(required reserves). Before Charissa’s deposit, the
bank has $1000 in required reserves (10% of
$10,000) and $3000 in excess reserves (the rest of
the total reserves can be loaned out). After the
deposit, total reserves increase to $6000 and
demand deposits are now $12,000. Required
reserves are 10% of $12,000, or $1200 and excess
reserves are total reserves minus excess reserves
or $6000 - $1200 = $4800. It is the excess reserves
of $4800 that can be loaned out by the bank.
54. a. The short run Phillips curve is downward sloping
and shows the short run relationship between the
unemployment rate and the inflation rate. It is an
inverse relationship because in the short run, as
unemployment falls the inflation rate rises, and as
unemployment rises the inflation rate falls. The
long run Phillips curve is vertical at the natural rate
of unemployment because in the long run, the
economy will be at the natural rate of
unemployment (frictional plus structural) at any
inflation rate.
55. d. This is a definition question. A budget deficit
occurs when taxes are less than government
spending. If taxes are greater than government
spending, it is called a budget surplus.
Please do not post this on the internet! It wouldn’t be cool.
57. d. The fisher formula is i ≈ r + ∏. “r” is the real
interest rate, “i” is the nominal interest rate and
“∏” is the inflation rate. If expected inflation (∏)
increases, the real interest rate banks desire won’t
change, but the nominal interest rate banks charge
will increase.
58. e. Opportunity cost is the value of the next best
alternative not chosen. It is the cost of a choice.
When Koby chooses to go to the concert, he loses
the opportunity to sell the tickets ($100) and he
loses the opportunity to go to work ($15 x 4 hours
= $60). So, his total opportunity cost is $160.
59. a. Economic growth is an increase in POTENTIAL
GDP not just an increase in GDP. Human capital is
the skills and knowledge of workers. An increase in
human capital will mean workers are smarter and
have more skills. Smarter and more skilled workers
have higher productivity so human capital will
increase potential GDP.
60. c. The current account plus the financial and capital
account always equal zero. If there is a surplus in
one account, there must be a deficit in the other
account. A trade deficit may be the reason but it is
not necessarily the case because the trade balance
is only one component of the current account. It
also includes money transfers and profits from
foreign investments.
56. c. The graph shows an economy with an
inflationary gap. The economy is producing more
than its long run potential. Eventually workers will
seek and get higher wages. Those higher wages
mean greater input costs for businesses which
cause a leftward shift of the short run aggregate
supply curve.
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Macro Formulas Cheat Sheet
GDP Formulas
Expenditures Approach
GDP=C+Ig+G+(X-M) = Consumption + Gross Investment + Government Spending+ (Exports – Imports)
Income Approach (You don’t actually need to memorize this one)
GDP = Wages + Rents + Interest + Profits (with some adjustments)
Growth Formulas
Productivity
Real GDP / Hours Worked
This is how much output can be produced for every hour worked
Net Investment
Gross Investment – Depreciation
Positive net investment causes growth and shifts PPC outward and LRAS right
Negative Net investment shifts PPC inward and LRAS left
Inflation Formulas
Comparative Advantage Formulas
Inflation = Nominal % change - Real % change
Absolute Advantage: The entity that can produce more units with the
Real % Change = Nominal % change – Inflation
same amount of inputs or produce the same amount with fewer
New Market Basket Value x 100
inputs has an absolute advantage.
CPI= ------------------------------------------Base Market Basket Value
Comparative advantage: The entity that can produce a good or service
at a lower opportunity cost.
Nominal GDP x 100
Deflator = ------------------------Outputs (bikes, corn, etc): Other Over
Real GDP
Opportunity cost of A is B/A units of B
New Index – Base Index
-Inputs (hours, machines, land): It Over
Inflation rate = ----------------------------------- x 100
Base Index
Opportunity cost of A is A/B units of B
Nominal Value
Real value= ----------------------------- x 100
Deflator or Index
GDP Multiplier Formulas
MPC = 1- MPS
Change in Consumption
MPC = -----------------------------------------Change in Income
MPS = 1-MPC
Interest Rate Formulas
Real interest rate=Nominal interest rate-Inflation rate
Nominal interest rate=Real interest rate+Inflation rate
Inflation rate=Nominal interest rate – Real interest rate
Wage Change
Change in Real Wage=Change in nominal wage-Inflation
Change in Nominal wage=Change in real wage+Inflation
Change in Savings
MPS= ---------------------------------Change in Income
Spending Multiplier = ------- = ----------MPC = --------MPC
Tax Multiplier = -----------1-MPC
MPS
(also 1 less than the spending multiplier)
Balanced Budget Multiplier = 1
Banking Formulas
1
Money Multiplier = ------------------------------------Reserve Requirement
Labor Force Formulas
Labor Force: Unemployed + Employed
(Must be actively looking for work to be unemployed)
Labor Force Participation Rate:
(Labor Force/Civilian Population) x 100
Unemployment Rate: (Unemployed/Labor Force) x 100
Natural Rate of Unemployment: The rate of unemployment when cyclical
unemployment is zero.
Frictional Unemployment + Structural Unemployment
Maximum Checkable Deposit Creation = Excess Reserves x Money Multiplier
Quantity of Money Theory: Nominal GDP=M x V = P x Y
Foreign Exchange Formulas
Balance of Payments: Current Account + Financial and Capital Account = 0
Current Account = Balance on trade + Foreign Factor Income (Profits from Foreign Investments) + Foreign Transfers
Financial and Capital Account = Purchases of Foreign Assets (including bonds, businesses, land, loans, currency)
Trade Deficit = When Exports < Imports
Production Possibilities Frontier/Curve
1. Inefficient use of resources, but
it is possible to produce at this
point.
2. Scarcity prevents this level of
production without new
resources. (trade may also
make this point possible).
3 to 4 Increasing opportunity costs
if PPC is concave. This is due to
resources not being equally
adaptable both products. For
constant costs the PPC will be a
straight line.
• Increases in the quality or
quantity of resources as well as
technological improvements
will shift the PPC outward.
• Decreases in the quality or
quantity of resources will shift
the PPC inward.
Business Cycle
• Natural fluctuations in economic activity
• Expansion is also called recovery
• Peaks coincide with an inflationary gap and
over time
may bring high inflation.
• Potential Output > Actual Output is a
• Contraction that last more than 6 months
recessionary gap (negative output gap)
• Potential Output < Actual Output is an
are generally referred to as recessions.
inflationary gap (positive output gap)
• Troughs coincide with a recessionary gap
and bring high unemployment and possibly
deflation.
Potential Output
Actual Output
AS/AD Graph – Inflationary Gap
• In the short run the economy
can have an inflationary gap
(current output of Ye is greater
than the full employment
output of Yf)
• Contractionary fiscal policy
(increase taxes and/or
decrease spending) can shift
AD left and restore long-run
equilibrium.
• The central bank can use
Contractionary Monetary
Policy to fight inflation (which
increases interest rates,
decreasing gross investment)
and shift AD left and restore
long-run equilibrium.
• With no intervention, in the
long-run wages and other
inputs will rise, shifting SRAS to
the left until long-run
equilibrium is restored.
Circular Flow
•
•
•
In the product market, Businesses sell goods and services and Households buy
them
In the factor market, Households sell resources (land, labor, capital, and
entrepreneurship) and receive income (rent, wages interest, and profit).
The government (not in this simplified diagram) also buys resources and
products in both markets. It also provides public goods to businesses and
households and charges them taxes.
• PL is the Price Level
• RGDP is Real GDP, Real
AS/AD Graph – Long-run
Output, or Real National
Income.
• AD is equal to GDP and
C+Ig+G+Xn
• Any change to a component of
GDP will shift AD right with an
increase or left with a
decrease.
• SRAS can shift because of
changes in productivity, costs
of inputs, or supply shocks.
• LRAS is vertical at full
employment level of output at
any price level
• In the long run the economy
will always return to the full
employment level of output.
• The LRAS can shift based on
anything that would move the
production possibilities curve.
LRAS is equal to long-run
potential output.
AS/AD Graph – Recessionary Gap
• In the short run the economy
can have a recessionary gap
(current output of Ye is less
than the full employment
output of Yf)
• Expansionary fiscal policy
(decrease taxes and/or
increase spending) can shift AD
right and restore long-run
equilibrium.
• The central bank can use
Expansionary Monetary Policy
to fight inflation (which
decreases interest rates,
increasing gross investment)
and shift AD right and restore
long-run equilibrium.
• With no intervention, in the
long-run wages and other
inputs will fall, shifting SRAS to
the right until long-run
equilibrium is restored.
Long Run
Equilibrium
• MS is the amount of money in
the economy as calculated by
M1 or M2
• The Central Bank regulates
the money supply through
open market operations
(buying and selling bonds or
securities), discount rate,
reserve requirement
• Expansionary monetary policy
shifts the MS right (in limited
reserves)
• Contractionary monetary
policy shifts the MS left (in
limited reserves)
• The MD can move because of
a change in the number of
transactions in an economy
(C+Ig+G+Xn) or a change in the
desire to hold cash as an asset
Money Market (Scarce Reserves System)
Reserves Market (Ample Reserves System)
• This is the market for bank reserves. This is the model • The intersection between supply and demand for
used by the US Federal Reserve and other central banks
with an ample reserves system.
• The demand for reserves has an upper flat end at the
discount rate.
• The demand for reserves has a lower flat end just
below the interest on reserves rate (IOR)
• Both the discount rate and interest on reserves are
“administered rates” set by the central bank in an ample
reserves system.
Loanable Funds
• The supply for loanable funds is
determined by how much money is
being saved in the economy
• The demand for loanable funds is
determined by the amount of
investment businesses would like to
make
• If the government increases spending it
causes a decrease in the supply of
loanable funds (the government has
taken them to deficit spend) that creates
a higher interest rate. AKA Crowding out
(an increase in the demand of loanable funds
instead of a decrease in supply is
also acceptable)
• If the government decreases spending
it causes an increase in the supply of
loanable funds that creates a lower
interest rate. (a decrease in the demand
of loanable funds instead of an increase
in supply is also acceptable)
• The interest rate affects the quantity of
investment in an economy (part of GDP)
so a change in the interest rate will
cause a shift in the AD curve
• The foreign exchange markets can also
affect loanable funds. i.e. If financial
capital is flowing into a country (capital
account) there will be an increase in the
supply of loanable funds
Aggregate Production Function
• This graph shows the
relationship between
employment and Real GDP.
On both curves, an increase
in employment will increase
Real GDP.
• This graph can also be
made with capital per
worker on the X axis instead
of employment.
• The curve will shift up with
increases in productivity.
That can be cause by new
technology, jobs training
programs, increases in
human capital, etc.
• The SRPC shows the inverse
Phillips Curve
relationship between the inflation
rate and the unemployment rate
• The LRPC lies at the Natural Rate
of Unemployment (full
employment)
• The intersection between the
SRPC and the LRPC is the expected
rate of inflation
• When an economy is in long-run
equilibrium will equal the expected
Expected
inflation rate and the
IR
unemployment rate will be the NRU
• When there is an inflationary gap,
inflation is higher than expected
and unemployment < NRU
• When there is a recessionary gap,
inflation is lower than expected and
unemployment > NRU
• Changes in AD will cause
movement along the SRPC.
• Changes in AS will shift the SRPC
left or right
• Changes in inflation expectations
will cause SRPC to shift left or right
reserves is the policy rate (a range for the FED) and
Federal Funds Rate (the rate banks charge each other)
• Changes in administered rates shift the demand for
reserves up or down.
• The supply of reserves is controlled by central bank
Open Market Operations. Buying shifts right selling
shifts left.
• If the intersection falls in the downward sloping range,
the banking system has limited reserves.
Foreign Exchange Market
• Supply and demand determine the
exchange rates for world currencies.
• The demand for a currency will shift
because of a:
• Change in the interest rate for this
country or other countries
• Change in the expected future exchange
rate
• Change in anything that would make
foreigners want to have more of this
countries currency
• The supply for a currency will shift
because of a:
• Changes in the interest rate for this
country or other countries
• Change in the expected future exchange
rate
• Change in anything that would make
foreigners want to have more of this
countries currency
• Anytime there is an increase in the
demand for a currency, there is
simultaneously a decrease in the supply
of the same currency. And there will be
a decrease in the demand for the other
currency and a increase in supply of the
other currency
***Remember this is all foreign supply
and demand for these currencies