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PSY-0013 (8)

Final Cheat Sheet.doc

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Sam Sommers

Total income = sum of wages, interest, rent, and profit = total expenditure Total value of production equals total value of income because all expenditure on goods/services must appear as someone’s income. Aggregate Expenditure & GDP If… Inventories... GDP & Employment 45° Line Firm Actions AE = GDP Are unchanged Macroeconomic Intersects 45° line None. equilibrium .AE < GDP Rise GDP and employment Below 45° line Cut back production, reducing decrease employment. Cut back purchases. AE > GDP Fall GDP and employment Above 45° line Increase production, increasing increase employment. Increase purchases. Net Exports – If inflation in US lower, then prices of US products increase slower than other countries – When incomes in US rise more slowly than in other countries, net exports rise – As value of US dollar rises, foreign currency price of US products rise, and dollar price of foreign products sold in US falls (if US dollar value high, then more imports) Multiplier Effect – ↑MPC , ↑multiplier – Effect smaller when tax rates higher or marginal propensity to import (MPI) higher – An increase in autonomous expenditure leads to a larger increase in real GDP Aggregate Expenditure: Increases when prices fall and decreases when prices rise (effects equilibrium between AE & GDP) Aggregate Demand – Change in price = move along curve – Shifts right: ↑ government purchases, ↑ household’s expectations of future incomes – Shifts left: ↑ firm’s expectations of future profitability of investment, ↑ interest rates, ↑ personal income or business taxes (causes ↓ consumption spending and ↓ investment), ↑ growth rate of domestic GDP vs. foreign (↓ net exports), ↑ exchange rate (↓ net exports) If Price Falls… ↑consumption & investment, ↓ interest rates, ↓ imports because domestic products more competitive, ↑ net exports because more competitive in foreign markets and reduced ex
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