Core college macroeconomics concepts and formulas beyond the AP level.
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- How does real GDP differ from nominal GDP?
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Real GDP adjusts for price changes using a base year, while nominal GDP uses current prices.- What is the GDP deflator?
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A price index that measures the ratio of nominal GDP to real GDP, showing the overall price level change.- Name the four components of GDP.
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Consumption (C), Investment (I), Government spending (G), and Net exports (X-M).- Distinguish GNP from GDP.
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GDP measures output within a country's borders; GNP measures output produced by a country's nationals regardless of location.- What is aggregate demand (AD)?
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The total quantity of goods and services demanded across the entire economy at different price levels.- Why does the aggregate demand curve slope downward?
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Higher price levels reduce purchasing power, decrease net exports, and increase interest rates, all reducing quantity demanded.- What is aggregate supply (AS)?
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The total quantity of goods and services that firms are willing to produce and supply at different price levels.- Define the Phillips curve.
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An inverse relationship between the rate of inflation and the rate of unemployment, showing a trade-off between the two.- What is the natural rate of unemployment (NRU)?
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The unemployment rate at which inflation is stable, consisting of frictional and structural unemployment.- Explain the multiplier effect.
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An initial increase in spending leads to a greater final increase in output, because spending by one group becomes income for another.- How does monetary policy transmission work?
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Central bank changes the money supply, which affects interest rates, which influences investment and consumption, changing output and prices.- What is the loanable funds market?
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A market where savers supply funds and borrowers demand funds, with the interest rate serving as the price.- Describe the Taylor rule.
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A formula suggesting the target nominal interest rate should be set based on deviations of inflation from its target and output from potential, plus a neutral rate.- What is the IS-LM model?
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A macroeconomic model showing the relationship between interest rates and output, combining goods market equilibrium (IS) with money market equilibrium (LM).- What is the fiscal multiplier?
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The ratio of the change in output to the initial change in government spending, reflecting how much AD increases relative to the initial spending change.
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