Principles of Macroeconomics for AP® Courses 2e
Principles of Macroeconomics for AP® Courses 2eKey Concepts and Summary
5 The Macroeconomic Perspective
Introduction to the Macroeconomic Perspective
5.1 Measuring the Size of the Economy: Gross Domestic Product
5.2 Adjusting Nominal Values to Real Values
5.3 Tracking Real GDP over Time
5.4 Comparing GDP among Countries
5.5 How Well GDP Measures the Well-Being of Society
6 Economic Growth
Introduction to Economic Growth
6.1 The Relatively Recent Arrival of Economic Growth
6.2 Labor Productivity and Economic Growth
6.3 Components of Economic Growth
6.4 Economic Convergence
7 Unemployment
Introduction to Unemployment
7.1 How Economists Define and Compute Unemployment Rate
7.2 Patterns of Unemployment
7.3 What Causes Changes in Unemployment over the Short Run
7.4 What Causes Changes in Unemployment over the Long Run
Introduction to Inflation
8.1 Tracking Inflation
8.2 How to Measure Changes in the Cost of Living
8.3 How the U.S. and Other Countries Experience Inflation
8.4 The Confusion Over Inflation
8.5 Indexing and Its Limitations
9 The International Trade and Capital Flows
Introduction to the International Trade and Capital Flows
9.1 Measuring Trade Balances
9.2 Trade Balances in Historical and International Context
9.3 Trade Balances and Flows of Financial Capital
9.4 The National Saving and Investment Identity
9.5 The Pros and Cons of Trade Deficits and Surpluses
9.6 The Difference between Level of Trade and the Trade Balance
10 The Aggregate Demand/Aggregate Supply Model
Introduction to the Aggregate Supply–Aggregate Demand Model
10.1 Macroeconomic Perspectives on Demand and Supply
10.2 Building a Model of Aggregate Demand and Aggregate Supply
10.3 Shifts in Aggregate Supply
10.4 Shifts in Aggregate Demand
10.5 How the AD/AS Model Incorporates Growth, Unemployment, and Inflation
10.6 Keynes' Law and Say's Law in the AD/AS Model
11 The Keynesian Perspective
Introduction to the Keynesian Perspective
11.1 Aggregate Demand in Keynesian Analysis
11.2 The Building Blocks of Keynesian Analysis
11.3 The Expenditure-Output (or Keynesian Cross) Model
11.4 The Phillips Curve
11.5 The Keynesian Perspective on Market Forces
12 The Neoclassical Perspective
Introduction to the Neoclassical Perspective
12.1 The Building Blocks of Neoclassical Analysis
12.2 The Policy Implications of the Neoclassical Perspective
12.3 Balancing Keynesian and Neoclassical Models
13 Money and Banking
Introduction to Money and Banking
13.1 Defining Money by Its Functions
13.2 Measuring Money: Currency, M1, and M2
13.3 The Role of Banks
13.4 How Banks Create Money
14 Monetary Policy and Bank Regulation
Introduction to Monetary Policy and Bank Regulation
14.1 The Federal Reserve Banking System and Central Banks
14.2 Bank Regulation
14.3 How a Central Bank Executes Monetary Policy
14.4 Monetary Policy and Economic Outcomes
14.5 Pitfalls for Monetary Policy
15 Exchange Rates and International Capital Flows
Introduction to Exchange Rates and International Capital Flows
15.1 How the Foreign Exchange Market Works
15.2 Demand and Supply Shifts in Foreign Exchange Markets
15.3 Macroeconomic Effects of Exchange Rates
15.4 Exchange Rate Policies
16 Government Budgets and Fiscal Policy
Introduction to Government Budgets and Fiscal Policy
16.1 Government Spending
16.2 Taxation
16.3 Federal Deficits and the National Debt
16.4 Using Fiscal Policy to Fight Recession, Unemployment, and Inflation
16.5 Automatic Stabilizers
16.6 Practical Problems with Discretionary Fiscal Policy
16.7 The Question of a Balanced Budget
17 The Impacts of Government Borrowing
Introduction to the Impacts of Government Borrowing
17.1 How Government Borrowing Affects Investment and the Trade Balance
17.2 Fiscal Policy, Investment, and Economic Growth
17.3 How Government Borrowing Affects Private Saving
17.4 Fiscal Policy and the Trade Balance
18 Macroeconomic Policy Around the World
Introduction to Macroeconomic Policy around the World
18.1 The Diversity of Countries and Economies across the World
18.2 Improving Countries' Standards of Living
18.3 Causes of Unemployment around the World
18.4 Causes of Inflation in Various Countries and Regions
18.5 Balance of Trade Concerns
Money is what people in a society regularly use when purchasing or selling goods and services. If money were not available, people would need to barter with each other, meaning that each person would need to identify others with whom they have a double coincidence of wants—that is, each party has a specific good or service that the other desires. Money serves several functions: a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. There are two types of money: commodity money, which is an item used as money, but which also has value from its use as something other than money; and fiat money, which has no intrinsic value, but is declared by a government to be the country's legal tender.
We measure money with several definitions: M1 includes currency and money in checking accounts (demand deposits). Traveler's checks are also a component of M1, but are declining in use. M2 includes all of M1, plus savings deposits, time deposits like certificates of deposit, and money market funds.
Banks facilitate using money for transactions in the economy because people and firms can use bank accounts when selling or buying goods and services, when paying a worker or receiving payment, and when saving money or receiving a loan. In the financial capital market, banks are financial intermediaries; that is, they operate between savers who supply financial capital and borrowers who demand loans. A balance sheet (sometimes called a T-account) is an accounting tool which lists assets in one column and liabilities in another. The bank's liabilities are its deposits. The bank's assets include its loans, its ownership of bonds, and its reserves (which it does not loan out). We calculate a bank's net worth by subtracting its liabilities from its assets. Banks run a risk of negative net worth if the value of their assets declines. The value of assets can decline because of an unexpectedly high number of defaults on loans, or if interest rates rise and the bank suffers an asset-liability time mismatch in which the bank is receiving a low interest rate on its long-term loans but must pay the currently higher market interest rate to attract depositors. Banks can protect themselves against these risks by choosing to diversify their loans or to hold a greater proportion of their assets in bonds and reserves. If banks hold only a fraction of their deposits as reserves, then the process of banks' lending money, re-depositing those loans in banks, and the banks making additional loans will create money in the economy.
We define the money multiplier as the quantity of money that the banking system can generate from each $1 of bank reserves. The formula for calculating the multiplier is 1/reserve ratio, where the reserve ratio is the fraction of deposits that the bank wishes to hold as reserves. The quantity of money in an economy and the quantity of credit for loans are inextricably intertwined. The network of banks making loans, people making deposits, and banks making more loans creates much of the money in an economy.
Given the macroeconomic dangers of a malfunctioning banking system, Monetary Policy and Bank Regulation will discuss government policies for controlling the money supply and for keeping the banking system safe.
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Book title: Principles of Macroeconomics for AP® Courses 2e
Book URL: https://openstax.org/books/principles-macroeconomics-ap-courses-2e/pages/1-introduction
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