# AP Macroeconomics: MPS/MPC/Policies

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marginal propensity to consume

with a given amount of money, what proportion will you consume? MPC=1-MPS
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marginal propensity to save

with a given amount of money, what proportion will you save? MPS= 1-MPC MPS= 1/Spending multiplier
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Spending Multiplier

1/MPS Change in Real GDP/ Change in spending
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Calculate change in Real GDP

change in spending x spending multiplier change in taxes x tax multiplier
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Tax multiplier

1- spending multiplier
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Change in Taxes

Change in real GDP/ tax multiplier
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What is a balanced budget?

When change in government spending and change in taxes are the same.
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Loanable funds market graph

shows the amount of money available at different interest rates; real interest rates (y axis) and money (x axis), supply up and demand down borrowers want low interest rates and vice versa
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crowding out

when government increases its borrowing in order to raise interest rates and push out private investors
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functions of money

-medium of exchange -let’s us be able to speak relatively -as a store of value
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liquidity

ability to transfer assets into cash
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M_1 money supply

most liquid money we have– cash, checkable deposits
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M_2 money supply

includes M_1; savings accounts, money market account, small time deposits
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functions of federal reserve bank

print and destroy currency, investigate counterfeiters, process checks, create monetary policy, manipulate money supply
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money supply market

interest rates on y axis money on x axis vertical money supply curve downward sloping demand or investment
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tools of federal government to manipulate money supply

1. change discount rate 2. change required reserve ratio 3. buy and sell bonds
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prime rate

rate at which consumers borrow from banks
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federal funds rate

overnight rate that banks charge each other
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discount rate

rate at which banks can borrow from federal reserve bank
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required reserve ratio

how much of the money we can spend or use; ex: i put \$1000 in the bank and R.R.R. is 20% – that means there’s \$200 in my required reserves and \$800 in my excess reserves (loanable funds) RRR x money multiplier= 1
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money creation

excess reserves x money multiplier
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what are some reasons why the actual money created may be less than expected?

1. borrowers hold on to some of the money as cash and don’t put it back into the bank 2. banks do not lend out all excess reserves
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money multiplier

1/ required reserve ratio
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expansionary fiscal policy

taxes decreases, government spending increases, better for recession
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contractionary fiscal policy

taxes increase, government spending decrease, better for combatting inflation
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expansionary monetary policy

government buys bonds, decrease discount rate, and decrease required reserve ratio; better for combatting recession
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contractionary monetary policy