Generated by AskSia.ai — graphs, formulas, traps
GDP = C + I + G + NX (expenditure approach)GDP = market value of final goods/services produced within a country in a period. Excludes intermediate goods (avoid double-counting), used goods, and pure financial transfers.
| Measure | Definition | Use |
|---|---|---|
| Nominal GDP | current prices | raw output × current P |
| Real GDP | base-year prices | true output growth |
| GDP deflator | (nom/real)·100 | broad price level |
| GNP | by nationals (anywhere) | ≠ GDP |
Demand-pull inflation: AD shifts right Cost-push inflation: SRAS shifts leftOutput gap: recession when actual GDP < potential. Boom when above (inflationary). Equilibrium where AD intersects both SRAS and LRAS only in long run.
Used cars, stock purchases, transfer payments (welfare, gifts), housework, and underground economy are not in GDP. Used goods were counted when first sold; financial trades just swap claims; transfers are not production.
| Tool | Expansionary | Contractionary |
|---|---|---|
| Govt spending G | ↑ (raise G) | ↓ |
| Taxes T | ↓ (cut taxes) | ↑ |
| Use when… | recessionary gap | inflationary gap |
Spending multiplier = 1 / (1 − MPC) Tax multiplier = −MPC / (1 − MPC)MPC = marginal propensity to consume. Spending multiplier > |tax multiplier| because the first dollar of G is spent in full; the first dollar of tax cut leaks (1 − MPC) into savings.
multiplier = 1/(1−0.8) = 5Total ΔY = $100 · 5 = $500.
tax mult = −0.8/0.2 = −4 (sign with tax direction)$100 cut → ΔY = $100 · 4 = $400.
Crowding out: deficit-financed G raises r → reduces private I and net exports. Long-run, partial offset to fiscal stimulus.
Budget surplus = T − G − Transfers Deficit when negative Debt accumulates deficitsAutomatic stabilizers (progressive tax, unemployment insurance) cushion fluctuations without new legislation. Discretionary policy is the active kind.
Deficit = single-year shortfall. Debt = accumulated deficits over history. Confusing them gives nonsense. 'The deficit fell but the debt rose' is normal — debt grows whenever deficit > 0, even if deficit is shrinking.
| Curve | Market | Slope | Why |
|---|---|---|---|
| IS | goods | downward (r vs Y) | r ↓ → I ↑ → AD ↑ → Y ↑ |
| LM | money | upward (r vs Y) | Y ↑ → money demand ↑ → r ↑ to clear money mkt |
Equilibrium: where IS crosses LM — both goods and money markets clear simultaneouslyFiscal expansion (G↑): IS shifts right → r ↑, Y ↑ (crowding out limits Y ↑)Monetary expansion (M↑): LM shifts right → r ↓, Y ↑Liquidity trap: at very low r, LM becomes flat. Monetary policy ineffective (more M doesn't lower r further); fiscal policy works without crowding out.
Fiscal expansion + monetary expansion can both raise Y, but the effect on r depends on relative shifts. r outcome is ambiguous when both move in the expansionary direction. Always draw the diagram before claiming r rises or falls.
| Tool | To expand | How it works |
|---|---|---|
| Open Market Ops | Buy bonds | injects reserves → r ↓ |
| Discount rate | Lower it | cheap borrowing for banks |
| Reserve req | Lower it | more lending capacity per $ |
Money multiplier = 1 / RR where RR = required reserve ratioBanks loan a fraction (1−RR) of every deposit; that loan becomes a new deposit elsewhere; cycle repeats. Total money created from $1 reserve injection = $1 × multiplier.
M1 = currency + checking deposits + traveler's checksM2 = M1 + savings + small time deposits + retail money market fundsQuantity theory: MV = PY. With V (velocity) stable and Y at potential, ΔM directly causes ΔP — money is neutral in the long run.
The Fed doesn't literally print money in OMO — it creates reserves digitally and buys bonds. Banks then multiply those reserves into broader money supply via lending. Don't say 'Fed prints' on essays.
Quoted as units of foreign per domestic OR domestic per foreign — read carefully. Appreciation = currency stronger (buys more foreign). Depreciation = weaker.
| If $ appreciates… | Effect |
|---|---|
| US exports | more expensive abroad → ↓ |
| US imports | cheaper at home → ↑ |
| NX = X − M | ↓ falls |
| AD | ↓ (NX is part of AD) |
Real exchange rate = nominal × (P_domestic / P_foreign)Balance of payments: current account (trade in goods + services + transfers) + capital account (financial flows) = 0 (with reserve adjustment). Trade deficit ↔ capital surplus identity.
NX = Y − (C + I + G) = S − I (national saving identity)Fixed vs floating: floating regimes let market clear; fixed regimes require central bank intervention to defend the peg. Crisis when reserves run out (1992 GBP, 1997 Asia).
'Strong currency' sounds good, but appreciation hurts exporters and widens trade deficits. Don't conflate political 'strong currency' rhetoric with macro health. Fed often welcomes mild depreciation to support exports.
| Measure | Basket | Uses |
|---|---|---|
| CPI | fixed consumer basket | cost of living, COLAs |
| GDP deflator | all of GDP | broad price level |
| PCE | chained consumer expenditure | Fed's preferred |
| Core (ex-food/energy) | CPI minus volatiles | policy guidance |
Inflation rate = (P_t − P_{t−1}) / P_{t−1} × 100U-rate = unemployed / labor force × 100 LF participation = LF / working-age populationDiscouraged workers (gave up looking) and part-time for economic reasons are not in U-rate. U-6 (broader measure) captures them.
Phillips curve: short-run trade-off between inflation and unemployment. Vertical in long run at NAIRU — only expected-inflation surprises move U temporarily.
Real wages = nominal wages / price level. If nominal wages grow 3% and inflation is 5%, real wages fell 2%. Always adjust for inflation when comparing across years.
Money serves 4 functions: medium of exchange, unit of account, store of value, standard of deferred payment. Anything that performs all four counts as money — historically gold, salt, today fiat currency.
| Type | Example | Backing |
|---|---|---|
| Commodity | gold, silver coins | intrinsic value |
| Fiat | USD, EUR (post-1971) | government decree |
| Cryptocurrency | BTC, stablecoins | cryptography / collateral |
Reserves = required + excess Lending capacity = excess reservesThe Fed (US central bank): 12 regional banks + Board of Governors. Dual mandate: maximum employment + stable prices (target ~2% inflation).
Federal funds rate: rate banks charge each other for overnight reserves — Fed's main policy leverThe Fed doesn't take retail deposits or make consumer loans. It deals with banks and Treasury. Commercial banks (BoA, Chase) deal with you. Confusing the two leads to wrong answers about who creates which kind of money.
| Symptom | Use § from | Tool |
|---|---|---|
| Y < potential, U high | § ⑤ ⑥ | expansionary monetary OR fiscal (or both) |
| P rising fast (demand-pull) | § ⑤ ⑥ | contractionary: ↑r, ↓G, ↑T |
| Cost-push inflation (oil shock) | § ① ⑥ | tradeoff: tighten and accept Y↓, or loosen and accept P↑ |
| Liquidity trap (r near 0) | § ② ⑤ | fiscal works (no crowding); QE / forward guidance |
| Currency too strong, NX falling | § ⑦ | cut r → currency depreciates → NX up |
| Deficit growing, debt concern | § ⑥ | ↑T or ↓G; long run, austerity vs growth tradeoff |
| 'how much does Y rise from $X G' | § ⑥ | spending multiplier 1/(1−MPC) × ΔG |
| 'tax cut effect on Y' | § ⑥ | tax mult −MPC/(1−MPC) × ΔT |
| Fed buys bonds (OMO) | § ⑤ | reserves ↑ → money mult → M ↑ → r ↓ |
| 'money mult given RR' | § ⑤ | 1 / RR (theoretical max) |
| 'IS-LM shift, find new r and Y' | § ② | identify which curve moves, sketch, compare |
| 'real GDP vs nominal GDP' | § ① | deflator = (nominal/real)·100 |
Macro questions get fuzzy fast. Drawing AD-AS or IS-LM with shift arrows is worth 30-50% of the points. Even if your numerical answer is wrong, a correct diagram earns partial credit. Words alone won't do.
Many macro effects vanish in the long run. Monetary expansion: SR Y ↑, LR only P ↑ (money neutral). Fiscal expansion: SR Y ↑, LR partial crowding out. Always specify the time horizon — 'in the short run' or 'in the long run' belongs in nearly every answer.