GDP at market prices
C+I+G+X-Z
GDP at factor cost
GDPMP-indirect taxes+subsidies
GNP at market prices
GDPMP+NPIA
GNP at factor cost
GDPFC+NPIA
National income
GNPFC-depreciation
Disposable income
GDPFC-direct taxes+transfer payments
Multiplier Accelerator model
Small positive shock raises investment
Multiplier amplifies this into higher output
Rising output triggers acceleration
Investment increases
Creates a self reinforcing expansion
How small shocks generate persistent fluctuations
Initial shock
Multiplier effect
Accelerator effect
Overshooting
Downturn reinforced
Unemployment effects for govt
Economic costs
Social costs
Political costs
Solow model
Explains LR growth through capital accumulation, population growth, and exogenous tech progress
Romer model
Explains growth as endogenous, driven by investment, knowledge, human capital and spillovers
Saving in Solow vs Romer models
Solow - saving has temporary growth effects
Romer - saving has permanent growth effects
How do banks create money?
Through fractional reserve banking, where every loan creates a deposit, leading to multiple credit expansion
Keynesian consumption function
C = a + bY, where a is autonomous consumption and b is the MPC
Capital deepening
Investment that increases capital per worker, raising labour productivity and per-capita GDP
Capital widening
Investment that equips new workers with capital, keeping capital per worker constant
Malthusian trap
A situation where very low incomes prevent saving and capital accumulation, trapping economies in poverty
Core idea of the Romer model
There are constant returns to capital at the economy-wide level due to knowledge spillovers
Effects of fiscal policy
IS curve shifts right
AD and Y increase and economy moves closer to potential output
Interest rates rise as greater demand for goods means greater demand for money
Composition of AD shifts towards G which causes crowding out effect
Unemployment falls
Budget deficit worsens due to greater G or lower T
Trade balance worsens as import demand increases
Effects of monetary policy
LM curve shifts right
Increased MS lowers r
Y rises closer to potential
Composition of AD shifts from G to I
Unemployment falls as economy closer to potential output
Budget improves as Y is increasing and T=tY
Lower demand for imports improves trade balance
Keynesian IS Curve
Steep so C depends on income not interest rates
Investment depends on animal spirits
Monetarist IS curve
Flat so C and I respond strongly to changes in interest rates
Keynesian LM curve
Flat so high interest sensitivity of money demand
Monetarist LM curve
Steep as money demand is more sensitive to income than interest rates
