Macro math practice

Every skill in this set

Spending and tax multipliersNational Income & Price Determination

spending = 1/MPS · tax = −MPC/MPS

The tax multiplier is negative and always smaller in magnitude, because the first round of a tax cut is partly saved. Applying the spending multiplier to a tax change is the classic lost point.

Money multiplierFinancial Sector

money multiplier = 1 / reserve ratio

The multiplier applies to EXCESS reserves, not to the whole deposit. Multiplying the deposit itself overstates money creation by the required-reserve share.

Real GDP and the deflatorEconomic Indicators & Business Cycle

real GDP = (nominal / price index) × 100

Nominal GDP rises with prices as well as output, so only real GDP measures growth. The index is on a base of 100, which is why the ×100 belongs there.

Unemployment and participation ratesEconomic Indicators & Business Cycle

unemployment = unemployed / labor force × 100

The denominator is the labor force, not the population. Discouraged workers leave the labor force entirely, which lowers the measured rate without anyone finding a job.

Tax multiplierNational Income & Price Determination

tax multiplier = −MPC / (1 − MPC)

Negative, and always one smaller in magnitude than the spending multiplier. A tax cut goes to households who save a fraction of it, so the first round injects less than a government purchase does.

Price index and inflation rateEconomic Indicators & Business Cycle

CPI = basket now / basket in base year × 100 · inflation = (new − old)/old × 100

The inflation rate divides by the OLD index, not by 100. Index points and percent coincide only in the base year, which is exactly why exam questions use other years.

Real interest rate (Fisher)Financial Sector

real ≈ nominal − inflation

The real rate measures the true cost of borrowing in purchasing power. When inflation exceeds expectations the realized real rate falls, transferring wealth from lenders to borrowers.

Quantity theory of moneyLong-Run Consequences of Policy

%ΔM + %ΔV ≈ %ΔP + %ΔY

With velocity stable and output set by real factors, sustained money growth in excess of real growth shows up entirely as inflation. Use the growth-rate form, not the levels form.

Output gap and cyclical unemploymentEconomic Indicators & Business Cycle

gap = (actual − potential)/potential × 100 · cyclical = actual rate − natural rate

Negative is recessionary, positive inflationary. Full employment means cyclical unemployment is zero and the rate equals the natural rate — not that unemployment is zero.

Labor force participation rateEconomic Indicators & Business Cycle

LFPR = labor force / adult population × 100

A different denominator from the unemployment rate — the whole adult population, not the labor force. Read it alongside the unemployment rate, because a falling rate with falling participation is a discouragement story.

GDP deflator from nominal and realEconomic Indicators & Business Cycle

deflator = nominal / real × 100

The same relationship as deflating GDP, rearranged. Given any two of nominal, real and the deflator you can find the third — and in the base year all three collapse, since nominal equals real and the index is 100.

Debt-to-GDP ratioLong-Run Consequences of Policy

debt-to-GDP = debt / nominal GDP · debt_new = debt_old + deficit

A deficit is a flow and the debt is a stock, so a shrinking deficit still adds to the debt. The ratio can fall while deficits continue, provided nominal GDP grows faster than the debt.

Required and excess reservesFinancial Sector

required = ratio × deposits · excess = total − required · max system expansion = excess × 1/ratio

The multiplier applies to EXCESS reserves, not total reserves and not the deposit. A single bank lends its excess reserves; the system multiplies them.

Common questions