Consumption + Investment + Government spending + (eXports − iMports). This is the expenditure approach. Net exports can be negative if a country imports more than it exports.
C
Consumption — household spending on goods/services
I
Investment — business spending on capital
G
Government Spending — federal, state, local purchases
X
Exports — goods sold abroad
M
Imports — goods bought from abroad (subtracted)
📊 Macroeconomics
Phillips Curve: inflation ↑ = unemployment ↓
Phillips Curve Tradeoff
The Phillips Curve — inflation and unemployment move opposite
In the short run, lower unemployment tends to cause higher inflation. Policymakers face this tradeoff constantly. In the long run, the curve is vertical (no tradeoff).
📊 Macroeconomics
Fed raises rates → borrowing costs up → spending down → inflation down
Monetary Policy Transmission
How the Fed fights inflation — the full chain
Federal Reserve raises the federal funds rate → banks raise interest rates → borrowing costs rise → consumers and businesses spend less → demand falls → inflation cools.
📊 Macroeconomics
MV = PQ
Quantity Theory of Money
The equation of exchange — money supply and prices
Money Supply × Velocity = Price Level × Real Output. If M increases faster than Q, P must rise — inflation. This underpins monetarist theory.
📊 Macroeconomics
Recession = 2 consecutive quarters of negative GDP growth
Recession Definition
The technical definition of a recession — one sentence
Two consecutive quarters (6 months) of declining real GDP. This is the textbook definition. NBER may define it differently, but the 2-quarter rule is what you need for exams.
Fiscal Policy
Fiscal policy: government spending and taxes. Expansionary = spend more/tax less. Contractionary = spend less/tax more.
Fiscal Policy
How the government uses spending and taxes to manage the economy
Expansionary fiscal policy: increase government spending OR cut taxes → stimulates demand → used in recessions. Contractionary: decrease spending OR raise taxes → cools overheating economy → used to fight inflation. Congress controls fiscal policy.
Monetary Policy
Monetary policy: central bank controls money supply and interest rates. Fed raises rates to fight inflation.
Monetary Policy
How the Federal Reserve manages the economy through interest rates
The Federal Reserve (the Fed) uses monetary policy. Expansionary: lower interest rates + buy bonds → more money in circulation → stimulates economy. Contractionary: raise rates + sell bonds → less money → slows inflation. Fed is independent of Congress.
Business Cycle
Business cycle: Expansion → Peak → Contraction → Trough → Expansion again
Business Cycle
The recurring pattern of economic growth and decline
Expansion: GDP growing, unemployment falling, consumer spending up. Peak: maximum output, inflation risk rises. Contraction (recession): GDP shrinking, unemployment rising. Trough: bottom of the cycle. Recovery begins again. Average US expansion lasts ~5 years, recession ~11 months.
Expansion
GDP grows, unemployment falls
Peak
Maximum output, inflation risk
Contraction
GDP shrinks, unemployment rises
Trough
Bottom — recovery begins
Types of Inflation
Inflation types: demand-pull (too much money chasing goods) vs cost-push (production costs rise)
Types of Inflation
Two different causes of rising prices — require different policy responses
Demand-pull: economy overheating, consumers spending more than supply can handle → prices rise. Cost-push: production costs (wages, oil) rise → businesses pass costs to consumers → prices rise. Stagflation: cost-push inflation + high unemployment (1970s oil crisis).
Fiscal Multiplier
Multiplier effect: government spending of $1 billion can increase GDP by more than $1 billion
Fiscal Multiplier
How government spending ripples through the economy
Government spends $1B on roads → construction workers get paid → they spend at restaurants → restaurant workers get paid → they spend → each dollar cycles through the economy. Multiplier = 1/(1-MPC) where MPC = marginal propensity to consume.
Deficit vs National Debt
National debt vs deficit: deficit = annual shortfall. Debt = cumulative deficits over all years.
Deficit vs National Debt
Two terms that are constantly confused — they measure different things
Budget deficit: government spends more than it collects in ONE year. National debt: total accumulated borrowing over all years. Running a deficit adds to the national debt. A surplus reduces the debt. US runs a deficit almost every year, so the national debt keeps growing.
How heavy government borrowing can slow private sector growth
When government borrows heavily, it competes with private borrowers for available funds → interest rates rise → businesses and consumers borrow less and invest less. Argument against excessive deficit spending: it may partially offset itself by reducing private investment.