An expansionary monetary policy aims to:

Decrease interest rates and increase money supply

A vertical LRAS curve implies that in the long run:

Output is determined by the economy's resources and technology

Macroeconomic Principles Cheat Sheet

This cheat sheet summarizes key concepts in macroeconomics, including monetary policy, aggregate demand and supply, and the quantity theory of money. It covers how economic shocks affect the economy and the role of policy responses.

Core Principles

Monetary policy influences the money supply and interest rates.
Expansionary policy increases money supply; contractionary policy decreases it.
Aggregate Demand (AD) represents total spending; Aggregate Supply (AS) represents total output.
AD-AS model analyzes economic shocks and policy responses.
Quantity Theory of Money: MV = PY, linking money supply, velocity, price level, and output.
Long-Run Aggregate Supply (LRAS) is vertical at the natural rate of output.
Short-Run Aggregate Supply (SRAS) is upward sloping.
Market adjustments and expectations play crucial roles in economic dynamics.

Action Steps

Identify the type of economic shock (demand or supply, positive or negative).
Analyze the impact on AD and/or AS curves.
Determine the short-run and long-run effects on price level and output.
Evaluate appropriate policy responses (fiscal or monetary).
Consider the role of expectations and market self-correction.

Formulas

$M \times V = P \times Y$
$ERR = \frac{Reserves}{Deposits} \times 100$
$EMM = \frac{1}{ERR}$
$Real Wage Index = \frac{Money Wage Index}{Price Level}$

Key Terms

Expansionary Monetary Policy: Actions taken to increase the money supply and lower interest rates, stimulating economic activity.
Contractionary Monetary Policy: Actions taken to decrease the money supply and raise interest rates, curbing inflation.
Aggregate Demand (AD): Total demand for goods and services in an economy at a given price level.
Aggregate Supply (AS): Total supply of goods and services that firms in a national economy plan on selling during a specific time period.
Long-Run Aggregate Supply (LRAS): The total output an economy can produce when all prices, including nominal wages, are fully adjusted.
Short-Run Aggregate Supply (SRAS): The total quantity of output that firms are willing and able to supply at different price levels, assuming nominal wages are fixed.
Quantity Theory of Money: A theory stating that the general price level of goods is directly proportional to the amount of money in circulation.
Long Run Steady State Equilibrium (LRSSE): A state where AD, SRAS, and LRAS intersect, representing full employment and stable prices.
Effective Reserve Ratio (ERR): The actual ratio of reserves to deposits in a bank.
Effective Money Multiplier (EMM): The multiplier that accounts for excess reserves held by banks.

Real World Examples

A negative demand shock (e.g., a sudden drop in consumer confidence during a recession).: AD curve shifts left, leading to lower output and price levels. Expansionary policies may be needed.
A negative supply shock (e.g., a sudden increase in oil prices).: SRAS curve shifts left, leading to higher prices (inflation) and lower output (stagflation).
COVID-19 pandemic's initial phase.: Likely a negative demand shock causing deflationary pressures initially.
COVID-19 pandemic's later phase.: Shifted towards a negative supply shock, contributing to inflationary pressures.

Timeline

Classical Economics: Focus on self-correcting markets and the Quantity Theory of Money (MV=PY).
Keynesian Economics: Introduction of AD-AS model, emphasis on demand shocks and government intervention.
Stagflation (1970s): Period of high inflation and high unemployment, highlighting supply shocks.
Modern Macroeconomics: Integration of AD-AS with expectations, rational behavior, and supply-side factors.
Recent Events (e.g., COVID-19): Demonstrated complex interplay of demand and supply shocks, and policy challenges.

People

Irving Fisher: Developed the Quantity Theory of Money (MV=PY).
John Maynard Keynes: Pioneered the AD-AS model and the concept of demand management.
Milton Friedman: Advocated for monetarism and the importance of money supply in controlling inflation.

Quiz

An expansionary monetary policy aims to:: Decrease interest rates and increase money supply
A vertical LRAS curve implies that in the long run:: Output is determined by the economy's resources and technology
According to the Quantity Theory of Money, if the money supply (M) doubles and velocity (V) and real output (Y) remain constant, the price level (P) will:: Double