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AP Macroeconomics Cause and Effect ‘Chains’

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  1. AP MacroeconomicsCause and Effect ‘Chains’

  2. Changes in Demand • Δ in T.R.I.P.E. .: Δ D .: Δ P & Δ Q • D  .: P ↑ & Q ↑ • D  .: P↓ & Q↓ • Changes in Supply • Δ in N.I.C.E.J.A.G. .: Δ S .: Δ P & Δ Q • S  .: P ↓ & Q ↑ • S  .: P↑ & Q↓

  3. Consumption and Saving • Δ in DI, wealth, debt, expectations, .: Δ C & Δ S • Loanable Funds • Household Borrowing, Investment, Government Budget Deficit, Foreign Borrowing .: Δ Borrowing .: Δ DLF • DLF .: r%↑& QLF↑ • DLF.: r%↓ & QLF↓ • Household Saving, Retained Earnings, Government Budget Surplus, Capital/Financial Account .: Δ Saving .: SLF • SLF .: r%↓ & QLF↑ • SLF.: r% ↑ & QLF↓

  4. Investment • Δ r% .: Δ IG • r% ↑ .: IG ↓ • r% ↓ .: IG ↑ • Net Exports • Δ Relative S.T.r%.π%.N.G. .: S & D for currency .: Δe .: ΔXN • e ↑ .: XN ↓ • e ↓ .: XN ↑ • Aggregate Demand • ΔC, ΔIG, ΔG, and/or ΔXN = Δ AD • AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑ • AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓ • Short Run Aggregate Supply • Δ Input Prices, Δ Productivity, Δ Expected π% and/or Δ Business Taxes / Regulation = Δ SRAS • SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓ • SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑

  5. Self-correcting economy: below full-employment (recession) • Assume recessionary gap with flexible wages (w) u% ↑.: w↓ .: SRAS→.: GDPR↑ & PL↓.: u%↓ & π%↓ = SRPC← • Self-correcting economy: above full-employment (inflation) • Assume inflationary gap with flexible wages (w) u%↓.: w↑ .: SRAS←.: GDPR↓ & PL ↑.: u%↑ & π%↑ = SRPC→ • Expansionary fiscal policy on economy below full-employment (recession) • Assume recessionary gap with sticky wages (note: DI = disposable income) T↓.: DI↑.: C↑.: AD→.: GDPR↑ & PL↑.: u%↓ & π%↑ = move up/left along SRPC OR G↑.: AD→.: GDPR↑ & PL↑.: u%↓ & π%↑ = move up/left along SRPC • Contractionary fiscal policy on economy above full-employment (inflation) • Assume inflationary gap T↑ .: DI↓.: C↓ .: AD← .: GDPR↓ & PL↓ .: u%↑ & π%↓ = move down\right along SRPC OR G↓ .: AD← .: GDPR↓ & PL↓ .: u%↑ & π%↓ = move down\right along SRPC • Expansionary monetary policy on economy below full-employment (recession) • Assume recessionary gap with sticky wages Fed buys bonds, DR↓, and/or RR↓ .: ER↑ .: MS→ .: i%↓ .: IG↑ .: AD→.: GDPR↑ & PL↑.: u%↓ & π%↑ = move up/left along SRPC • Contractionary monetary policy on economy above full-employment (inflation) • Assume inflationary gap Fed sells bonds, DR↑, and/or RR↑ .: ER↓ .: MS ← .: i%↑ .: IG ↓ .: AD← .: GDPR↓ & PL↓ .: u%↑ & π%↓ = move down\right along SRPC

  6. ‘Crowding Out’ of Gross Private Investment (effect of deficit spending) • Assume Expansionary Fiscal Policy (G↑ and/or T↓ .: government budget moves toward deficit) deficit spending .: DLF → or SLF ← .: r%↑ .: IG ↓ (partially or completely offsets intended increase in AD) • ‘Crowding In’ of Gross Private Investment (effect of budget surplus) • Assume Contractionary Fiscal Policy (G↓ and/or T ↑ .: government budget moves toward surplus) budget surplus .: DLF ←or SLF→ .: r% ↓ .: IG↑ (partially or completely offsets intended decrease in AD) • Expansionary Fiscal Policy Net Export Effect (counters policy) • Assume Expansionary Fiscal Policy (G↑ and/or T↓ .: government budget moves toward deficit) deficit spending .: DLF → or SLF ← .: r%↑ .: D$→ .: $↑ .: U.S. goods/services relatively expensive and foreign goods/services are relatively cheap .: X↓ and/or M↑ .: XN ↓ • Contractionary Fiscal Policy Net Export Effect (counters policy) • Assume Contractionary Fiscal Policy (G↓ and/or T ↑ .: government budget moves toward surplus) budget surplus .: DLF ←or SLF→ .: r% ↓ .: S$ → .: $↓ .: U.S. goods/services relatively cheap and foreign goods/services are relatively expensive .: X↑ and/or M↓ .: XN↑ • Expansionary Monetary Policy Net Export Effect (reinforces policy) • Fed buys bonds, DR↓, and/or RR↓ .: ER↑ .: MS → .: i%↓ .: S$ → .: $↓ .: U.S. goods/services relatively cheap and foreign goods/services are relatively expensive .: X↑ and/or M↓ .: XN↑ • Contractionary Monetary Policy Net Export Effect (reinforces policy) • Fed sells bonds, DR↑, and/or RR↑ .: ER↓ .: MS↓ .: i%↑ .: D$→ .: $↑ .: U.S. goods/services relatively expensive and foreign goods/services are relatively cheap .: X↓ and/or M↑ .: XN ↓