Macroeconomics cheat sheet

Formulas:
1. 𝑌 = 𝐴 𝐹(𝐾, 𝑁)
𝑥 1−𝑥
𝑌 = 𝐴 𝐹(𝐾, 𝑁) = 𝐴𝐾 𝑁
𝑑𝑌 𝑥−1 1−𝑥 ∆𝑌
2. 𝑀𝑃𝐾 = 𝑑𝐾
= 𝐴𝑥 × 𝐾 𝑁 = ∆𝐾
𝑑𝑌 𝑥 𝑥 ∆𝑌
3. 𝑀𝑃𝑁 = 𝑑𝑁
= 𝐴(1 − 𝑥) × 𝐾 𝑁 = ∆𝑁
4. 𝑀𝑃𝑅𝑁 = 𝑀𝑃𝑁 × 𝑃
5. 𝑀𝑃𝑁 = 𝑤 (profit maximizing condition)
6. 𝑁 𝑑 = 𝑁 𝑠 (in equilibrium condition)
Ȳ−𝑌
7. Ȳ
= 2(𝑢 − ū)
∆𝑌
𝑌
= 3 − 2∆𝑢
8. 𝑌 = 𝐼 + 𝐶 + 𝐺 (in a closed economy)
𝑑 𝑑
𝑆 =𝑌−𝐶 −𝐺
9. 𝐿𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒 = 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 + 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
10. 𝑈𝑅 = 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
11. 𝐿𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒 𝑝𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒/ 𝑡𝑜𝑡𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
12. 𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑/ 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑎𝑔𝑒 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
13. ū = 𝑠𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑎𝑙 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 + 𝑓𝑟𝑖𝑐𝑡𝑖𝑜𝑛𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡
14. 𝐶 = 𝑎 + 𝑏𝑌
15. 𝑐(𝑟 + 1) + 𝑐 𝑓 = (𝑦 + 𝑎)(1 + 𝑟) + 𝑦𝑓
𝑐= consumption, 𝑐 𝑓= future consumption, 𝑦= current income, 𝑎= wealth, 𝑟= real interest
rates, 𝑦𝑓= future income
𝑑𝑐𝑓
𝑑𝑐
=− 𝑟 − 1
𝑒
16. 𝑟 = (1 − 𝑡)𝑖 − π
𝑎−𝑡
𝑒
𝑖= nominal interest rate, 𝑡= rate at which interest income is taxed, π = expected interest
rate, 𝑟 𝑎−𝑡
= expected after tax real interest rate.
Productivity function: 𝑌 = 𝐴 𝐹(𝐾, 𝑁)
- Y is the real GDP
- A is external factors affecting output/ productivity
- K is the capital employed
- N is the number of workers employed in a period of time
- F is the function relating Y to K and N
- When Y is graphed in relation to K or N:
- The graph is positive sloped from left to right
- The graph becomes flatter from left to right

Marginal product of capital: increase in output per unit increase in capital

Marginal product of labor: increase in output per unit increase in labor

Supply shocks: An event that positively or negatively affects the total factor productivity

Assumptions in the labor market:

- All workers are alike in skills and ambition
- Wages are set by firms in a competitive market and not set by firms
- Firms are profit maximizing

Change in wage causes a movement along the curves.

Supply shocks cause a shift in labor supply curves.

Aggregate demand for labor: the sum of demand for each individual firm
Aggregate supply of labor: the sum of all the labor being supplied by everyone in the economy

Income leisure trade off:

- Nominal wage rate is hourly wage after tax
- Assuming you can work for as long as you want and earn the same wage, there is a
trade off between income and leisure
- You can either work and make money or you can have fun
- The number of hours you work (N) is the quantity of labor that you supply
- This decision is made based on N that gives you the highest utility
- Utility comes from the goods and services consumed
- Hence, you work until the marginal cost of working an extra hour (in terms of loss of
leisure time) is greater than the marginal benefit (in terms of utility from income)
- 𝑈(𝑁, 𝐿) utility is a function of the number of hours worked and leisure time

Real wages and labor supply:

- Real wage is the amount of real income a workers gives up for an hour of leisure
- An increase in real wages affects the worker in two ways:
- Income effect: an increase in real wage increases their utility and allows them to
have the same amount of leisure for lesser work. Therefore, they would want to
work less.
 - Substitution effect: The marginal benefit of working an additional hour increases
and therefore, people want to work more.
- These two effects have contrasting results, the substitution effect is normally seen to be
stronger in most people, therefore N is seen to increase with an increase in real wage
- This is only to a certain point, when the income effect takes over and marginal cost of
working an extra hour becomes greater than the marginal benefit
- A one day increase in income will cause a pure substitution effect
- Winning the lottery is an example of a pure income effect
- When your real income increases, the longer you expect it to last, the stronger the
income effect is

Labor supply curve (𝑁 𝑠): positively sloped

- Factors that shift supply:
- Expected future income
- Increase in wealth
- Labor participation rate (women) (probably)
- Working age population

Full employment level: the employment when AD N= AS S

Full employment output (Ȳ): Y when AD N= AS S
Wage at full employment: corresponding wage at full employment output

Types of unemployment:
- Frictional unemployment: the period between jobs for people and the time spent looking
for workers is the frictional unemployment.
- Structural unemployment: when the structure of demand in the economy changes, it
creates redundancies in the economy for certain types of work. They are structurally
unemployed and likely not finding work again.
- Cyclical unemployment: resulting from the short term fluctuations in the business cycle, if
the economy is producing more, there is less unemployment

Unemployment spell: the length of time that a person stays unemployed for

Natural rate of unemployment (ū): Sum of frictional and cyclical unemployment

- When cyclical unemployment is zero and the economy is at full employment
Okun’s law: relationship between the aggregate output in an economy and the rate of
unemployment

Ricardian equivalence: the principle that people’s consumption patterns will not be affected by a
change in taxes as they assume that it will be compensated in the future, an increase in taxes
will be met with a decrease in the future.

Factors affecting consumption and savings:

Factor (Increase) 𝐶
𝑑
𝑆
𝑑

𝑌, current output Increases Increases

𝑟, Interest rates (following assumption that Decreases Increases

substitution effect dominates)

Wealth Increases Decreases

Expected future income Increases Decreases

Taxes - Remains the

same or rises

Government spending - Fall