Gretel's AP Macroeconomics Blog

MONEY THE FUNCTIONS OF MONEY: Medium of Exchange      S erves to trade one product for another    Store of Value      Money hold its value over a period of time Unit of Account       Establishes economic worth TYPES OF MONEY: Commodity Money   Get its value from the type of material that its made with    ex: gold and silver Representative Money   Paper that its backed by something tangible, that gives it value Fiat Money   "Money because the government says so" CHARACTERISTICS OF MONEY:      Durability       Portability  Divisibility  Uniformity     Scarcity  Acceptability   Limited Supply MONEY SUPPLY:      M1 MONEY:    It consists of currency in circulation    Ex: cash and coins   "Liquidity" is easy to convert to cash    Checkable Deposits    Checking accounts demand deposits    Traveler's checks  M2 MONEY:   Consists of M1 money + savin

FISCAL POLICY Fiscal policy   - is the changes in the expenditures or tax revenues of the federal government - it is carried out to promote our nation's economic goals: full employment, price stability, and economic growth.  There are two parts of fiscal policy : t axes --government can increase or decrease taxes spending --government can increase or decrease spending Deficits, surpluses, and debt : Balanced budget Revenues = Expenditures Budget deficit Revenues < Expenditures Budget surplus Revenues > Expenditures Government debt Sum of all deficits - Sum of all surpluses  The government borrows from: Individuals Corporations Financial institutions Foreign entities or foreign governments The two options for fiscal policy are : Discretionary fiscal policy (action) Expansionary fiscal policy -- think deficit Contractionary fiscal policy -- think su

CONSUMPTION AND SAVING Disposable income (DI) is income after taxes or net income. With disposable income, households have two choices, they can...: consume  save  Consumption (C) is household spending. Households consume if DI = 0 through autonomous consumption and dissaving. The ability to consume is forced by: the amount of DI the propensity to save Saving (S) is when the household is NOT spending. Households do NOT save if DI = 0. The ability to save is constrained by: The amount of DI The propensity to consume Here are some formulas and information about average propensity to consume (APC) and average propensity to save (APS) : APC + APS = 1 1 - APC = APS 1 - APS = APC APC > 1 (dissaving) -APS (dissaving) M arginal propensity to consume (MPC) is the percentage of every extra dollar earned that is spent. It is also the fraction of any change in DI that is consumed. Its equations are...: MPC = (change

 INTEREST RATES AND INVESTMENT DEMAND Investment is money spent or expenditures on...: new plants (factories) capital equipment (machinery) technology (hardware and software) new homes inventories (goods sold by producers) Businesses make investment decisions using cost/benefit analysis . Businesses figure out these benefits using expected rates of return . They count the costs using interest costs . Businesses determine the amount of investment they should undertake by comparing the expected rate of return to the interest cost . If the expected return is greater than the interest cost, then they should invest . If the expected rate of return is less than the interest cost, then they shouldn't invest . The nominal interest rate (i%) is the observable rate of interest. Real interest rate (r%) subtracts out the inflation rate ( π%)  and is only known ex post facto. The real interest rate determines the cost of an investment decision.   The

THE AS/AD MODEL The AS/AD model shows that the equilibrium of AS and AD determines the current output (real GDP) and the price level. Full employment equilibrium exists where AD intersects SRAS and LRAS at the same point. A recessionary gap exists when equilibrium occurs below full-employment output An inflationary gap exists when equilibrium occurs beyond full employment output. The three ranges of SRAS:  - keynesian or horizontal range - intermediate range - classical or vertical range keynesian or horizontal range happens when there recession or depression, when resources are not being fully used, or when we're below full employment intermediate-range happens when resources are getting closer to full employment levels, which creates upward pressure on wages and prices classical or vertical range happens when real GDP is at a level below the full employment level and any increase in dema