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
Inflation = Nominal % change - Real % change Comparative Advantage Formulas
Real % Change = Nominal % change – Inflation Absolute Advantage: The entity that can produce more units with the
same amount of inputs or produce the same amount with fewer
New Market Basket Value x 100
CPI= ------------------------------------------- inputs has an absolute advantage.
Base Market Basket Value Comparative advantage: The entity that can produce a good or service
Nominal GDP x 100 at a lower opportunity cost.
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 Interest Rate Formulas

Real value= ----------------------------- x 100
Deflator or Index Real interest rate=Nominal interest rate-Inflation rate
GDP Multiplier Formulas Nominal interest rate=Real interest rate+Inflation rate
MPC = 1- MPS Inflation rate=Nominal interest rate – Real interest rate
Change in Consumption
MPC = ------------------------------------------ Wage Change
Change in Income
Change in Real Wage=Change in nominal wage-Inflation
MPS = 1-MPC Change in Nominal wage=Change in real wage+Inflation
Change in Savings
MPS= ----------------------------------
Change in Income
Spending Multiplier = ------- = ----------- Labor Force Formulas
Labor Force: Unemployed + Employed
MPC = ---------
Tax Multiplier = ------------ MPC (Must be actively looking for work to be unemployed)
1-MPC MPS Labor Force Participation Rate:
(also 1 less than the spending multiplier) (Labor Force/Civilian Population) x 100
Unemployment Rate: (Unemployed/Labor Force) x 100
Balanced Budget Multiplier = 1 Natural Rate of Unemployment: The rate of unemployment when cyclical
Banking Formulas unemployment is zero.
1
Money Multiplier = -------------------------------------
Reserve Requirement 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
 Circular Flow
Production Possibilities Frontier/Curve • In the product market, Businesses sell goods and services and Households buy
them
1. Inefficient use of resources, but
it is possible to produce at this • In the factor market, Households sell resources (land, labor, capital, and
point. entrepreneurship) and receive income (rent, wages interest, and profit).
2. Scarcity prevents this level of • The government (not in this simplified diagram) also buys resources and
production without new products in both markets. It also provides public goods to businesses and
resources. (trade may also households and charges them taxes.
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 • PL is the Price Level AS/AD Graph – Long-run

• Natural fluctuations in economic activity • Expansion is also called recovery • RGDP is Real GDP, Real
over time • Peaks coincide with an inflationary gap and Output, or Real National
Income.
• Potential Output > Actual Output is a may bring high inflation.
• AD is equal to GDP and
recessionary gap (negative output gap) • Contraction that last more than 6 months C+Ig+G+Xn
• Potential Output < Actual Output is an are generally referred to as recessions.
• Any change to a component of
inflationary gap (positive output gap) • Troughs coincide with a recessionary gap GDP will shift AD right with an
and bring high unemployment and possibly increase or left with a
deflation. decrease.
• SRAS can shift because of
Potential Output changes in productivity, costs
of inputs, or supply shocks.
• LRAS is vertical at full
Actual Output 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 Long Run
production possibilities curve.
LRAS is equal to long-run Equilibrium
potential output.

AS/AD Graph – Inflationary Gap AS/AD Graph – Recessionary Gap

• In the short run the economy • In the short run the economy
can have an inflationary gap can have a recessionary gap
(current output of Ye is greater (current output of Ye is less
than the full employment than the full employment
output of Yf) output of Yf)
• Contractionary fiscal policy • Expansionary fiscal policy
(increase taxes and/or (decrease taxes and/or
decrease spending) can shift increase spending) can shift AD
AD left and restore long-run right and restore long-run
equilibrium. equilibrium.
• The central bank can use • The central bank can use
Contractionary Monetary Expansionary Monetary Policy
Policy to fight inflation (which to fight inflation (which
increases interest rates, decreases interest rates,
decreasing gross investment) increasing gross investment)
and shift AD left and restore and shift AD right and restore
long-run equilibrium. long-run equilibrium.
• With no intervention, in the • With no intervention, in the
long-run wages and other long-run wages and other
inputs will rise, shifting SRAS to inputs will fall, shifting SRAS to
the left until long-run the right until long-run
equilibrium is restored. equilibrium is restored.
• MS is the amount of money in Reserves Market (Ample Reserves System)
the economy as calculated by Money Market (Scarce Reserves System) • This is the market for bank reserves. This is the model • The intersection between supply and demand for
M1 or M2 used by the US Federal Reserve and other central banks reserves is the policy rate (a range for the FED) and
with an ample reserves system. Federal Funds Rate (the rate banks charge each other)
• The Central Bank regulates • The demand for reserves has an upper flat end at the • Changes in administered rates shift the demand for
the money supply through discount rate. reserves up or down.
open market operations • The demand for reserves has a lower flat end just • The supply of reserves is controlled by central bank
below the interest on reserves rate (IOR) Open Market Operations. Buying shifts right selling
(buying and selling bonds or • Both the discount rate and interest on reserves are shifts left.
securities), discount rate, “administered rates” set by the central bank in an ample • If the intersection falls in the downward sloping range,
reserves system. the banking system has limited reserves.
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

Loanable Funds Aggregate Production Function

• The supply for loanable funds is
determined by how much money is
being saved in the economy • This graph shows the
• The demand for loanable funds is
determined by the amount of relationship between
investment businesses would like to employment and Real GDP.
make
• If the government increases spending it On both curves, an increase
causes a decrease in the supply of
loanable funds (the government has in employment will increase
taken them to deficit spend) that creates Real GDP.
a higher interest rate. AKA Crowding out
(an increase in the demand of loanable funds • This graph can also be
instead of a decrease in supply is
also acceptable) made with capital per
• If the government decreases spending
it causes an increase in the supply of worker on the X axis instead
loanable funds that creates a lower of employment.
interest rate. (a decrease in the demand
of loanable funds instead of an increase • The curve will shift up with
in supply is also acceptable)
• The interest rate affects the quantity of increases in productivity.
investment in an economy (part of GDP) That can be cause by new
so a change in the interest rate will
cause a shift in the AD curve technology, jobs training
• The foreign exchange markets can also
affect loanable funds. i.e. If financial programs, increases in
capital is flowing into a country (capital human capital, etc.
account) there will be an increase in the
supply of loanable funds

• The SRPC shows the inverse

relationship between the inflation Phillips Curve Foreign Exchange Market
rate and the unemployment rate • Supply and demand determine the
• The LRPC lies at the Natural Rate exchange rates for world currencies.
of Unemployment (full • The demand for a currency will shift
employment) because of a:
• Change in the interest rate for this
• The intersection between the country or other countries
SRPC and the LRPC is the expected • Change in the expected future exchange
rate of inflation rate
• Change in anything that would make
• When an economy is in long-run foreigners want to have more of this
equilibrium will equal the expected countries currency
inflation rate and the Expected • The supply for a currency will shift
unemployment rate will be the NRU IR because of a:
• When there is an inflationary gap, • Changes in the interest rate for this
country or other countries
inflation is higher than expected • Change in the expected future exchange
and unemployment < NRU rate
• When there is a recessionary gap, • Change in anything that would make
foreigners want to have more of this
inflation is lower than expected and countries currency
unemployment > NRU • Anytime there is an increase in the
• Changes in AD will cause demand for a currency, there is
movement along the SRPC. simultaneously a decrease in the supply
of the same currency. And there will be
• Changes in AS will shift the SRPC a decrease in the demand for the other
left or right currency and a increase in supply of the
• Changes in inflation expectations other currency
will cause SRPC to shift left or right ***Remember this is all foreign supply
and demand for these currencies