• (Lesson 05, Page 12)Also called the implicit price deflator for GDP.
• (Lesson 05, Page 12)Measures the price of output relative to its price in the base year.
• (Lesson 05, Page 12)It reflects what’s happening to the overall level of prices in the economy.

• (Lesson 05, Page 12) GDP Deflator = (Nominal GDP / Real GDP) × 100

• (Lesson 05, Page 12)The rate of change of the GDP deflator is the inflation rate.
• (Lesson 05, Page 12)An example calculation is provided showing how to calculate the inflation rate from the GDP deflator for consecutive years.

• (Lesson 06, Page 17)Prices of capital goods: Included in GDP deflator (if produced domestically); excluded from CPI.
• (Lesson 06, Page 17)Basket of goods: The basket for the GDP deflator changes every year (as it reflects all goods and services produced); the CPI basket is fixed.

• (Lesson 04, Page 11)The value of final goods and services measured at current prices.
• (Lesson 04, Page 11)Can change over time due to:
  • A change in the amount (real value) of goods and services.
  • A change in the prices of those goods and services.
• (Lesson 04, Page 11)Formula: Nominal GDP (Y) = P × y (where P is the price level & y is real output).

• (Lesson 04, Page 11)The value of goods and services measured using a constant set of prices (base-year prices).
• (Lesson 04, Page 11)Formula: Real GDP (y) = Nominal GDP (Y) / Price Level (P) (where P is the GDP Deflator/100).
• (Lesson 04, Page 11)This conversion from nominal to real units eliminates problems created by a changing measuring stick (dollar value) as the price level changes.

• (Lesson 04, Page 11)Apple & Orange economy illustrates how Real GDP is calculated using base-year prices to compare output across different years.
• (Lesson 04, Page 11)For example, Real GDP in 2003 = [(2002 P(A) × 2003 Q(A))] + [2002 P(O) × 2003 Q(O)] if 2002 is the base year.

• (Lesson 05, Page 12)Nominal GDP: Multiply Ps & Qs from the same year.
  • e.g., 2001: (P_A2001 × Q_A2001) + (P_B2001 × Q_B2001)
• (Lesson 05, Page 12)Real GDP: Multiply each year’s Qs by base year (e.g., 2001) Ps.
  • e.g., Real GDP for 2003 (base 2001) = (P_A2001 × Q_A2003) + (P_B2001 × Q_B2003)

• (Lesson 05, Page 12)Using base year prices from 10-20 years ago can be misleading (e.g., for computers).
• (Lesson 05, Page 12)Chain-weighted measure is better as the base year changes continuously over time, ensuring prices are not too out of date.
• (Lesson 05, Page 12)Average prices in 2001 and 2002 are used to measure real growth from 2001 to 2002, and so on. These growth rates are “chained” to compare output between any two dates.

• (Lesson 05, Page 12; Lesson 14, Page 14) Y = C + I + G + NX
• Where:
  • Y = GDP = Total demand for domestic output / Value of total output.
  • C = Consumption Spending by Households.
  • I = Investment spending by businesses and households.
  • G = Government purchases of goods and services.
  • NX = Net Exports = Exports (EX) – Imports (IM).
• C + I + G + NX = Aggregate expenditure.

• (Lesson 04, Page 10)Illustrates “Expenditure = Income”. In every transaction, the buyer’s expenditure becomes the seller’s income. The sum of all expenditure equals the sum of all income.

• (Lesson 14, Page 14)Unsold output goes into inventory and is counted as “inventory investment” (whether intentional or not). Firms are assumed to purchase their unsold output.

• (Lesson 07, Page 18; Lesson 09, Page 22 & 23)No NX (Net Exports).
• (Lesson 07, Page 18; Lesson 09, Page 22 & 23)Y = C + I + G
• (Lesson 07, Page 18; Lesson 09, Page 22 & 23)Equilibrium in the goods market: Y = C(Y-T) + I(r) + G

• (Lesson 14, Page 37 & 38)Y = C + I + G + NX
• (Lesson 14, Page 37 & 38)Alternatively, NX = Y – (C + I + G) (Net Exports = Output – Domestic Spending).
• (Lesson 14, Page 38)Net Foreign Investment and Trade Balance:
  • National Saving (S) = Y – C – G.
  • Substituting S into the identity: S = I + NX.
  • Therefore, S – I = NX.
  • S – I is Net Foreign Investment (net outflow of “loanable funds” or net purchases of foreign assets).
  • NX is the Trade Balance.
  • Thus, Net Foreign Investment = Trade Balance.

• (Lesson 05, Page 12; Lesson 13, Page 13)Value of all goods and services bought by households.
• (Lesson 05, Page 12; Lesson 13, Page 13)Includes:
  • Durable goods: Last a long time (e.g., cars, home appliances).
  • Non-durable goods: Last a short time (e.g., food, clothing).
  • Services: Work done for consumers (e.g., dry cleaning, air travel).

• (Lesson 13, Page 13)Spending on capital (a factor of production) and spending on goods bought for future use.
• (Lesson 13, Page 13)Includes:
  • Business Fixed Investment: Spending on plant and equipment by firms.
  • Residential Fixed Investment: Spending on housing units by consumers and landlords.
  • Inventory Investment: Change in the value of all firms’ inventories.
• (Lesson 13, Page 13)Investment vs. Capital:
  • Capital is a stock (economy’s overall stock at a point in time).
  • Investment is a flow (spending on new capital over a period).

• (Lesson 13, Page 13; Lesson 14, Page 14)All government spending on goods and services.
• (Lesson 13, Page 13; Lesson 14, Page 14)Excludes transfer payments (e.g., unemployment insurance) as they don’t represent spending on G&S.

• (Lesson 14, Page 14, 37)NX = EX – IM
• (Lesson 14, Page 14, 37)EX = Value of total exports (foreign spending on domestic goods).
• (Lesson 14, Page 14, 37)IM = Value of total imports (C^f + I^f + G^f = domestic spending on foreign goods).
  (Note: C^f refers to consumption of foreign goods, I^f to investment in foreign goods, G^f to government purchases of foreign goods.)
• (Lesson 14, Page 14, 37)If NX > 0: (Lesson 14, Page 14, 37)If NX < 0: Trade deficit.

• (Lesson 01, Page 1; Lesson 19, Page 53)Macroeconomics studies determinants & movements of productivity and growth. Economic growth theories (like the Solow Model) are designed to show how growth in capital stock, labor force, and technological advances interact and affect a nation’s total output.

• (Lesson 19, Page 53)Examines how savings, population growth, and technological progress affect output over time.
• (Lesson 19, Page 53)Assumptions differ from short-run models: K (capital) and L (labor) are no longer fixed.
• (Lesson 19, Page 53)Production Function: Y = F(K, L). In per-worker terms: y = Y/L = f(k), where k = K/L.
• (Lesson 19, Page 53)Assumes constant returns to scale.

• (Lesson 19, Page 54-55)Investment (i = sy = sf(k)) increases capital stock. (s = saving rate)
• (Lesson 19, Page 54-55)Depreciation (δk) decreases capital stock. (δ = depreciation rate)
• (Lesson 19, Page 54-55)Change in capital stock: Δk = sf(k) – δk (equation of motion for k).
• (Lesson 19, Page 54-55)Steady State: Δk = 0, so sf(k*) = δk*. Capital per worker k* and output per worker y* are constant.

• (Lesson 20, Page 59)Higher saving rate (s) leads to higher steady-state capital per worker (k*) and higher steady-state output per worker (y*).
• (Lesson 20, Page 59)Predicts countries with higher saving/investment will have higher K/L and Y/L in the long run.

• (Lesson 21, Page 61)The steady state k* that maximizes consumption per worker (c*).
• (Lesson 21, Page 61)c* = f(k*) – δk*.
• (Lesson 21, Page 61)Maximized when the gap between f(k*) and δk* is largest, which occurs when MPK = δ.

• (Lesson 20, Page 63-64)Break-even investment becomes (δ + n)k.
• (Lesson 20, Page 63-64)Equation of motion: Δk = sf(k) – (δ + n)k.
• (Lesson 20, Page 63-64)Higher population growth (n) leads to lower steady-state k* and y*.
• (Lesson 20, Page 63-64)Golden Rule with population growth: MPK – δ = n.

• (Lesson 22, Page 65-66)Assumed to be labor-augmenting (increases labor efficiency E at rate g).
• (Lesson 22, Page 65-66)Output per effective worker: y = Y/(L×E). Capital per effective worker: k = K/(L×E).
• (Lesson 22, Page 65-66)Break-even investment: (δ + n + g)k.
• (Lesson 22, Page 65-66)Equation of motion: Δk = sf(k) – (δ + n + g)k.
• (Lesson 22, Page 65-66)In steady state, k is constant. Y/L (output per worker) grows at rate g. Total output Y grows at rate n+g.
• (Lesson 22, Page 65-66)Golden Rule with tech progress: MPK – δ = n + g.

• (Lesson 23, Page 69)Sustained growth in living standards is due to technological progress, which is endogenous (explained within the model).
• (Lesson 23, Page 69)Basic model: Y = AK (MPK is constant). If sA > δ, income grows forever.

• (General knowledge, PDF reference: initial course outline)Economic growth is a central topic in macroeconomics, focusing on long-run increases in a country’s productive capacity and standard of living.

• (Lesson 06, Page 15)A measure of the overall level of prices.
• (Lesson 06, Page 15)Published by the Federal Bureau of Statistics (in the context of the document).
• (Lesson 06, Page 15)Used to:
  • Track changes in the typical household’s cost of living.
  • Adjust many contracts for inflation (e.g., “COLAs“: Cost of Living Adjustments).
  • Allow comparisons of dollar figures from different years.

1. (Lesson 06, Page 15)Survey consumers: Determine the composition of the typical consumer’s “basket” of goods.
2. (Lesson 06, Page 15)Collect data: Every month, collect data on prices of all items in the basket; compute the cost of the basket.
3. (Lesson 06, Page 15)Calculate CPI: CPI in any month = (Cost of basket in that month / Cost of basket in base period) × 100.

• (Lesson 06, Page 16)A basket of 20 pizzas and 10 compact discs is used to show year-by-year calculation of the cost of the basket, CPI, and inflation rate.

• (Lesson 06, Page 16)The CPI is a weighted average of prices.
• (Lesson 06, Page 16)The weight on each price reflects that good’s relative importance in the CPI’s basket.
• (Lesson 06, Page 16)These weights remain fixed over time (leading to potential biases).

• (Lesson 06, Page 16)Substitution bias: CPI uses fixed weights, so it cannot reflect consumers’ ability to substitute toward goods whose relative prices have fallen.
• (Lesson 06, Page 16)Introduction of new goods: New goods make consumers better off (increase real value of the dollar), but this is not reflected as a reduction in CPI because CPI uses fixed weights and a fixed basket.
• (Lesson 06, Page 16)Unmeasured changes in quality: Quality improvements increase the value of the dollar but are often not fully measured, so CPI may not fully account for them.

• (Lesson 06, Page 17)Prices of capital goods: Excluded from CPI; included in GDP deflator (if produced domestically).
• (Lesson 06, Page 17)Prices of imported consumer goods: Included in CPI; excluded from GDP deflator.
• (Lesson 06, Page 17)The basket of goods: CPI uses a fixed basket; GDP deflator’s basket changes every year (reflects current production).

• (Lesson 01, Page 1; Lesson 10, Page 27)A rise in the general level of prices of goods and services in an economy over a period of time.
• (Lesson 01, Page 1; Lesson 10, Page 27)Can also be defined as increases in the money supply (monetary inflation) which cause increases in the price level.
• (Lesson 01, Page 1; Lesson 10, Page 27)Represents a decline in the real value of money, i.e., a loss of purchasing power.
• (Lesson 12, Page 12; Lesson 10, Page 27)The inflation rate is the percentage change in a price index (e.g., CPI or GDP deflator) over time.

• (Lesson 01, Page 1; Lesson 03, Page 5)Macroeconomics studies determinants and movements of inflation.
• (Lesson 01, Page 1; Lesson 03, Page 5)An objective is to understand causes and consequences of inflation.
• (Lesson 01, Page 1; Lesson 03, Page 5)“Why does the cost of living keep rising?” is a key macroeconomic question.

• (Lesson 10, Page 27)Applies in the long run.
• (Lesson 10, Page 27)Assumes prices are flexible & markets clear.

• (Lesson 11, Page 30)Based on the quantity equation: M × V = P × Y
  (M=Money Supply, V=Velocity of Money, P=Price Level, Y=Real GDP/Output)
• (Lesson 11, Page 30)In terms of growth rates: ΔM/M + ΔV/V = ΔP/P + ΔY/Y.
• (Lesson 11, Page 30)If V is constant (ΔV/V = 0), then inflation rate π = ΔP/P = ΔM/M – ΔY/Y.
• (Lesson 11, Page 30)Predicts a one-for-one relationship between changes in the money growth rate and changes in the inflation rate, given real GDP growth. (This implies monetary neutrality in the long run).

• (Lesson 11, Page 32)Revenue raised by the government printing money is called seigniorage.
• (Lesson 11, Page 32)Printing money to raise revenue causes inflation. Inflation is like a tax on people who hold money.

• (Lesson 11, Page 32; Lesson 12, Page 33)Nominal interest rate (i): Not adjusted for inflation.
• (Lesson 11, Page 32; Lesson 12, Page 33)Real interest rate (r): Adjusted for inflation: r = i – π.
• (Lesson 11, Page 32; Lesson 12, Page 33)Fisher Effect: i = r + π. An increase in inflation (π) causes an equal increase in the nominal interest rate (i), assuming the real interest rate (r) is determined by S=I.
• (Lesson 11, Page 32; Lesson 12, Page 33)Expected Inflation (π^e):
  • Ex-ante real interest rate: i – π^e (what people expect when buying a bond/loan).
  • Ex-post real interest rate: i – π (what people actually earn/pay).

• (Lesson 13, Page 35-36)Costs when inflation is expected:
  • Shoe leather cost: Costs and inconveniences of reducing money balances to avoid the inflation tax (more frequent trips to the bank).
  • Menu costs: Costs of changing prices (printing new menus, catalogs).
  • Relative price distortions: Firms change prices infrequently and at different times, leading to microeconomic inefficiencies.
  • Unfair tax treatment: Some taxes (e.g., capital gains tax) are not adjusted for inflation, distorting true gains.
  • General inconvenience: Inflation makes it harder to compare nominal values from different time periods, complicating financial planning.
• (Lesson 13, Page 35-36)Additional cost of unexpected inflation:
  • Arbitrary redistributions of purchasing power: If π ≠ π^e, some gain at others’ expense (e.g., lenders vs. borrowers).
• (Lesson 13, Page 35-36)Additional cost of high inflation:
  • Increased uncertainty: High inflation is often more variable and unpredictable, creating higher uncertainty and making risk-averse people worse off.

• (Lesson 13, Page 36)Allows real wages to reach equilibrium levels without nominal wage cuts (as nominal wages are rarely reduced). Moderate inflation can improve labor market functioning.

• (Lesson 13, Page 36)Defined as inflation ≥ 50% per month.
• (Lesson 13, Page 36)All costs of moderate inflation become huge.
• (Lesson 13, Page 36)Money may cease to function as a store of value, unit of account, or medium of exchange. People may resort to barter or a stable foreign currency.
• (Lesson 13, Page 36)Cause: Excessive money supply growth.
• (Lesson 13, Page 36)Why governments create it: When a government cannot raise taxes or sell bonds, it finances spending by printing money. Solution is drastic fiscal restraint.

• (Lesson 10, Page 27)Inflation is described as a decline in the real value of money, which means a loss of purchasing power in the medium of exchange.
• (Lesson 10, Page 27)When the general price level rises, each unit of currency buys fewer goods and services.

• (Lesson 11, Page 30)M/P = Real money balances, representing the purchasing power of the money supply.

• (Lesson 13, Page 36)Leads to arbitrary redistributions of purchasing power between, for example, borrowers and lenders if contracts are not indexed.

• (Lesson 17, Page 47)A doctrine stating that goods must sell at the same (currency-adjusted) price in all countries.
• (Lesson 17, Page 47)The nominal exchange rate adjusts to equalize the cost of a basket of goods across countries.
• (Lesson 17, Page 47)Reason: Arbitrage (the law of one price).

• (Lesson 17, Page 47)e × P = P*
  • e = nominal exchange rate (foreign currency per unit of domestic currency).
  • P = cost of a basket of domestic goods, in domestic currency.
  • P* = cost of a basket of foreign goods, in foreign currency.
• (Lesson 17, Page 47)Solving for e: e = P*/P.
• (Lesson 17, Page 47)PPP implies the nominal exchange rate between two countries equals the ratio of the countries’ price levels.

• (Lesson 17, Page 47)The real exchange rate ε = (e × P) / P*.
• (Lesson 17, Page 47)If PPP holds, then e × P = P*, so ε = 1.

• (Lesson 17, Page 47)No, for two main reasons:
  1. International arbitrage is not always possible:
     • Non-traded goods (e.g., services like haircuts).
     • Transportation costs.
  2. Goods of different countries are not perfect substitutes.

• (Lesson 17, Page 47)It’s simple and intuitive.
• (Lesson 17, Page 47)In the real world, nominal exchange rates tend to move toward their PPP values over the long run.

• (Lesson 01, Page 1)Macroeconomics studies the determinants and movements of interest rates.

• (Lesson 09, Page 22)The investment function I = I(r) depends on the real interest rate (r).
• (Lesson 09, Page 22)The real interest rate is the nominal interest rate corrected for inflation.
• (Lesson 09, Page 22)It represents:
  • The cost of borrowing.
  • The opportunity cost of using one’s own funds to finance investment spending.
• (Lesson 09, Page 22)An increase in the real interest rate (↑r) leads to a decrease in investment (↓I).

• (Lesson 11, Page 32)Nominal interest rate (i): Not adjusted for inflation.
• (Lesson 11, Page 32)Real interest rate (r): Adjusted for inflation.
• (Lesson 11, Page 32)Formula: r = i – π (where π is the inflation rate).

• (Lesson 11, Page 32)The Fisher equation: i = r + π.
• (Lesson 11, Page 32)It states that the nominal interest rate (i) can change for two reasons:
  • Because the real interest rate (r) changes.
  • Because the inflation rate (π) changes.
• (Lesson 11, Page 32)The theory suggests that S = I (Saving = Investment) determines the real interest rate (r).
• (Lesson 11, Page 32)Therefore, an increase in inflation (π) causes an equal increase in the nominal interest rate (i). This one-for-one relationship is called the Fisher effect.
• (Lesson 11, Page 32)International data (graph on page 32) shows a general positive correlation between inflation and nominal interest rates across countries, supporting the Fisher effect.

• (Lesson 12, Page 33)π = actual inflation rate (not known until after it has occurred).
• (Lesson 12, Page 33)π^e = expected inflation rate.
• (Lesson 12, Page 33)Ex-ante real interest rate:
  • Formula: i – π^e.
  • Definition: What people expect at the time they buy a bond or take out a loan. This is the real interest rate relevant for decisions, as future inflation is unknown when the decision is made.
• (Lesson 12, Page 33)Ex-post real interest rate:
  • Formula: i – π.
  • Definition: What people actually end up earning on their bond or paying on their loan after actual inflation is known.

• (Lesson 12, Page 34)When people decide whether to hold money or bonds, they don’t know what inflation will turn out to be. Hence, the nominal interest rate relevant for money demand is r + π^e.

PPP and Inflation

• (Lesson 17, Page 47; Lesson 16, Page 46) PPP states that the nominal exchange rate (e) adjusts to equalize the cost of a basket of goods: e = P*/P (where P* is foreign price level, P is domestic price level).
• (Lesson 17, Page 47; Lesson 16, Page 46) In terms of rates of change, this implies that the rate of change of the nominal exchange rate is related to inflation differentials: Δe/e ≈ ΔP*/P* – ΔP/P = π* – π
  (This formula for nominal exchange rate change is explicitly given on page 46 in the context of e = ε × (P*/P) where ε is the real exchange rate. If PPP holds in the long run, ε is constant, so Δε/ε = 0).

Nominal Interest Rate and Inflation (Fisher Effect)

• (Lesson 11, Page 32) The nominal interest rate (i) is related to the real interest rate (r) and expected/actual inflation (π) by the Fisher equation: i = r + π.

Linking the Concepts

• If PPP holds, changes in nominal exchange rates are driven by inflation differentials (π* – π).
• Nominal interest rates are driven by domestic inflation (π) and the real interest rate (r).
• Therefore, through the common variable of inflation, nominal interest rates and the conditions for PPP (and changes in exchange rates under PPP) are linked. For example, a country with higher inflation (which would lead to a higher nominal interest rate via the Fisher effect) would expect its currency to depreciate under PPP (Δe/e would be negative if π > π*).
• If we assume real interest rate parity (r = r*) and PPP holds, then i – π = i* – π*. This means i – i* = π – π*. Since from PPP, Δe/e = π* – π, it follows that Δe/e = -(i – i*). This is the uncovered interest rate parity (UIP) condition, which states that the expected rate of depreciation of a currency is equal to the nominal interest rate differential (foreign minus domestic).
  (Note: Uncovered Interest Rate Parity itself is not explicitly named or detailed in the provided PDF excerpts, but this is the logical connection based on the given components).

• (Lesson 10, Page 28)The control over the money supply.
• (Lesson 10, Page 28)Conducted by a country’s central bank (e.g., State Bank of Pakistan – SBP).
• (Lesson 10, Page 28)Monetary policy is generally referred to as either:
  • Expansionary policy: Increases the total supply of money in the economy.
  • Contractionary policy: Decreases the total money supply.

• (Lesson 10, Page 28; Lesson 45, Page 141)The State Bank (Central Bank) controls the money supply in three main ways:
  1. Open Market Operations (OMOs) (buying and selling Treasury bills).
  2. Changing Reserve Requirements.
  3. Changing the Discount Rate.

• (Lesson 28, Page 90)Central banks often target interest rates as their policy instrument.
• (Lesson 28, Page 90)When a central bank “lowers interest rates,” it typically means it has conducted expansionary monetary policy (increasing money supply) to shift the LM curve to the right until the target interest rate is achieved.
• (Lesson 28, Page 90)Central banks may target the discount rate or another short-term interest rate.

• (Lesson 45, Page 141)While these instruments give the central bank substantial power, it cannot control the money supply perfectly.
• (Lesson 45, Page 141)Bank discretion in lending (e.g., holding excessive reserves) or changes in the amount banks borrow from the discount window can cause the money supply to change in ways not anticipated by the central bank.

• (Lesson 10, Page 28; Lesson 45, Page 141)The purchase and sale of government bonds (e.g., Treasury Bills) by the central bank.
• (Lesson 10, Page 28; Lesson 45, Page 141)To expand the Money Supply: The State Bank buys Treasury Bills from the public/banks and pays for them with new money. This increases the monetary base and thus increases the money supply.
• (Lesson 10, Page 28; Lesson 45, Page 141)To reduce the Money Supply: The State Bank sells Treasury Bills to the public/banks. The money it receives is taken out of circulation, reducing the monetary base and hence the money supply. (Page 28 mentions “destroys” the existing dollars, implying a reduction in the monetary base).
• (Lesson 10, Page 28; Lesson 45, Page 141)OMOs are a frequent tool used by central banks.

• (Lesson 10, Page 28; Lesson 45, Page 141)The interest rate that the central bank charges when it lends to commercial banks.
• (Lesson 10, Page 28; Lesson 45, Page 141)Banks borrow from the central bank when they find themselves with too few reserves to meet reserve requirements or other obligations.
• (Lesson 10, Page 28; Lesson 45, Page 141)Effect of changing the discount rate:
  • A lower discount rate makes it cheaper for banks to borrow reserves, encouraging more borrowing. This increases the monetary base and the money supply.
  • A higher discount rate makes borrowing reserves more expensive, discouraging borrowing, and thus tends to reduce the monetary base and money supply.
• (Lesson 10, Page 28; Lesson 45, Page 141)A reduction in the discount rate raises the monetary base and the money supply.

• This topic essentially encompasses the three tools mentioned above.

• (Lesson 10, Page 28; Lesson 45, Page 141)Central bank regulations that impose on banks a minimum reserve-deposit ratio (the fraction of deposits that banks must hold in reserve).
• (Lesson 10, Page 28; Lesson 45, Page 141)Effect of changing reserve requirements:
  • An increase in reserve requirements raises the reserve-deposit ratio. This means banks can lend out a smaller portion of each deposit, which lowers the money multiplier and thus lowers the money supply.
  • A decrease in reserve requirements lowers the reserve-deposit ratio, allowing banks to lend more, which increases the money multiplier and the money supply.

• (Lesson 11, Page 30; Lesson 45, Page 142)One of the various measures of the money supply.
• (Lesson 11, Page 30; Lesson 45, Page 142)Components:
  • C = Currency (notes and coins held by the public).
  • Demand deposits (funds in bank accounts that depositors can access on demand by writing a check or using a debit card).
  • Travelers’ checks.
  • Other checkable deposits.
• (Lesson 11, Page 30; Lesson 45, Page 142)Formula: M1 = C + Demand Deposits + Travelers’ Checks + Other Checkable Deposits.
• (Lesson 11, Page 30; Lesson 45, Page 142)M1 is considered a narrow measure of money, focusing on the most liquid assets used for transactions.

• (Lesson 10, Page 28)The stock of assets that can be readily used to make transactions.

• (Lesson 10, Page 28; Lesson 44, Page 140)The quantity of money available in the economy.
• (Lesson 10, Page 28; Lesson 44, Page 140)Simplest definition used in many models: M = C + D
  • C = Currency held by the public.
  • D = Demand Deposits at banks that households use for transactions.

• (Lesson 10, Page 28)The ease with which an asset can be converted into the economy’s medium of exchange (i.e., money) or directly into other things (goods and services).
• (Lesson 10, Page 28)Money is the most liquid asset.

• (Lesson 10, Page 28)Medium of exchange: Used to buy goods and services.
• (Lesson 10, Page 28)Unit of account: The common unit by which everyone measures prices and values.
• (Lesson 10, Page 28)Store of value: Transfers purchasing power from the present to the future. (Portfolio theories of money demand emphasize this role).

• (Lesson 07, Page 19)The extra output a firm can produce using an additional unit of labor, holding other inputs (like capital) fixed.
• (Lesson 07, Page 19)Formula: MPL = F(K, L + 1) – F(K, L) (where F(K,L) is the production function).

• (Lesson 08, Page 20)The MPL is the slope of the production function when output (Y) is plotted against labor (L), holding capital (K) constant.

• (Lesson 08, Page 20 & 21)As more labor is added (holding capital fixed), the MPL tends to fall.
• (Lesson 08, Page 20 & 21)Intuition: With a fixed amount of capital (e.g., machines), each additional worker has less capital to work with, leading to lower productivity for that additional worker. Fewer machines per worker implies lower productivity.

• (Lesson 07, Page 19; Lesson 08, Page 21)Firms hire labor up to the point where the benefit of an additional unit of labor equals its cost.
• (Lesson 07, Page 19; Lesson 08, Page 21)Cost of labor: Real wage (W/P), where W is the nominal wage and P is the price of output.
• (Lesson 07, Page 19; Lesson 08, Page 21)Benefit of labor: Marginal Product of Labor (MPL).
• (Lesson 07, Page 19; Lesson 08, Page 21)Thus, a firm hires labor until MPL = W/P.
• (Lesson 07, Page 19; Lesson 08, Page 21)The MPL curve, therefore, represents the firm’s demand curve for labor. As the real wage falls, firms demand more labor (moving down along the MPL curve).

• (Lesson 08, Page 21)States that each factor input (like labor) is paid its marginal product.
• (Lesson 08, Page 21)Total labor income = (W/P) × L = MPL × L.

• (Lesson 06, Page 17)Employed: Working at a paid job.
• (Lesson 06, Page 17)Unemployed: Not employed but looking for a job.
• (Lesson 06, Page 17)Labor force: The amount of labor available for producing goods and services; all employed plus unemployed persons.
• (Lesson 06, Page 17)Not in the labor force: Not employed and not looking for work.

• (Lesson 06, Page 17)Unemployment Rate: Percentage of the labor force that is unemployed.
  • Unemployment Rate = (Number of Unemployed / Labor Force) × 100
• (Lesson 06, Page 17)Labor Force Participation Rate: The fraction of the adult population that ‘participates’ in the labor force.
  • Labor Force Participation Rate = (Labor Force / Adult Population) × 100

• (Lesson 06, Page 17)Describes the negative relationship between unemployment and real GDP.
• (Lesson 06, Page 17)States that a one-percent decrease in unemployment is associated with (approximately) two percentage points of additional growth in real GDP.
• (Lesson 06, Page 17)Formula: Percentage Change in Real GDP = 3% – 2 × (Change in the Unemployment Rate). (The 3% represents typical long-run growth).

• (Lesson 01, Page 1; Lesson 03, Page 5)Macroeconomics studies determinants and movements of unemployment.
• (Lesson 01, Page 1; Lesson 03, Page 5)Understanding why millions are unemployed, even when the economy is booming, is a key question.
• (Lesson 01, Page 1; Lesson 03, Page 5)The macroeconomy affects society’s well-being through unemployment (social problems like suicides, homicides, mental health issues, crime, domestic violence, homelessness are associated with higher unemployment).
• (Lesson 01, Page 1; Lesson 03, Page 5)Unemployment also affects individual well-being (e.g., earnings growth).
• (Lesson 01, Page 1; Lesson 03, Page 5)Inflation and unemployment in election years can affect politics and current events.

• (Lesson 17, Page 47)The average rate of unemployment around which the economy fluctuates.
• (Lesson 17, Page 47)In a recession, the actual unemployment rate rises above the natural rate.
• (Lesson 17, Page 47)In a boom, the actual unemployment rate falls below the natural rate.

• (Lesson 17, Page 48)Notations:
  • L = # of workers in labor force
  • E = # of employed workers
  • U = # of unemployed
  • s = rate of job separations (fraction of employed who lose jobs each month)
  • f = rate of job finding (fraction of unemployed who find jobs each month)
• (Lesson 17, Page 48)Steady-state condition: The labor market is in steady state if the unemployment rate is constant. This occurs when the number of people finding jobs equals the number of people losing jobs: f × U = s × E.
• (Lesson 17, Page 48)Since E = L – U (Labor Force – Unemployed), then f × U = s × (L – U).
• (Lesson 17, Page 48)Solving for the natural rate of unemployment (U/L): U/L = s / (s + f).
• (Lesson 17, Page 48)Policy Implication: To reduce the natural rate of unemployment, policies must either lower s or increase f.

1. (Lesson 17, Page 48; Lesson 18, Page 50)Job Search: The time it takes for workers to search for a job.
2. (Lesson 17, Page 48; Lesson 18, Page 50)Wage Rigidity: Wages are “stuck” above the market-clearing level.

• (Lesson 17, Page 48)Caused by the time it takes workers to search for a job that is appropriate for their skills and tastes.
• (Lesson 17, Page 48)Occurs even when wages are flexible and there are enough jobs.
• (Lesson 17, Page 48)Reasons it occurs:
  • Workers have different abilities and preferences.
  • Jobs have different skill requirements.
  • Geographic mobility of workers is not instantaneous.
  • Flow of information about vacancies and job candidates is imperfect.

• (Lesson 18, Page 49, 50)Changes in the composition of demand among industries or regions (e.g., technological change increasing demand for computer repair, decreasing demand for typewriter repair; new trade agreements shifting demand between export and import-competing sectors).
• (Lesson 18, Page 49, 50)These shifts cause frictional unemployment because it takes time for workers to change sectors.
• (Lesson 18, Page 49, 50)Even smaller (but significant) sectoral shifts occur frequently.

• (Lesson 18, Page 50)Government programs can affect unemployment.
• (Lesson 18, Page 50)Government employment agencies disseminate information about job openings.
• (Lesson 18, Page 50)Public job training programs help displaced workers get skills for growing industries.

• (Lesson 18, Page 50)Pays part of a worker’s former wages for a limited time after losing their job.
• (Lesson 18, Page 50)Increases search unemployment because:
  • Reduces the opportunity cost of being unemployed.
  • Reduces the urgency of finding work (thus reducing f, the rate of job finding).
• (Lesson 18, Page 50)Benefit of UI: By allowing workers more time to search, UI may lead to better matches between jobs and workers, leading to greater productivity and higher incomes.

• (Lesson 18, Page 51)Unemployment resulting from real wage rigidity and job rationing.
• (Lesson 18, Page 51)Occurs when the real wage is stuck above the equilibrium level, so there aren’t enough jobs to go around. Firms must ration scarce jobs among workers.

1. (Lesson 18, Page 51)Minimum wage laws:
   • May exceed the equilibrium wage for unskilled workers, especially teenagers.
   • A 10% increase in the minimum wage is cited to increase teenage unemployment by 1-3%.
2. (Lesson 18, Page 51)Labor unions:
   • Exercise monopoly power to secure higher wages for members.
   • If union wage > equilibrium wage, unemployment results.
   • “Insiders” (employed union workers) vs. “Outsiders” (unemployed non-union workers).
3. (Lesson 18, Page 52)Efficiency wages:
   • Theories where high wages increase worker productivity. Firms may pay above-equilibrium wages because:
     • Attracts higher quality job applicants.
     • Increases worker effort and reduces “shirking.”
     • Reduces turnover (which is costly).
     • Improves health of workers (especially in developing countries).
   • The increased productivity justifies the higher wage cost, but the result is unemployment.

• (Lesson 18, Page 52)More spells of unemployment are short-term than medium or long-term.
• (Lesson 18, Page 52)However, most of the total time spent unemployed is attributable to long-term unemployed.
• (Lesson 18, Page 52)Long-term unemployment is probably structural and/or due to sectoral shifts.

• (Lesson 34, Page 109-111)States that inflation (π) depends on:
  • Expected inflation (π^e).
  • Cyclical unemployment (deviation of actual unemployment u from natural rate u_n).
  • Supply shocks (v).
• (Lesson 34, Page 109-111)Formula: π = π^e – β(u – u_n) + v (where β > 0).
• (Lesson 34, Page 109-111)Adaptive Expectations: π^e = π_-1 (expected inflation is last year’s actual inflation). This leads to the Phillips Curve: π = π_-1 – β(u – u_n) + v. This implies inflation has inertia.
• (Lesson 34, Page 109-111)Sacrifice Ratio: The percentage of a year’s real GDP that must be foregone to reduce inflation by 1 percentage point. A typical estimate is 5. (This implies a cost in terms of increased unemployment to reduce inflation).

• (Lesson 34, Page 112)Natural Rate Hypothesis: Changes in aggregate demand affect output and employment only in the short run. In the long run, the economy returns to its natural levels.
• (Lesson 34, Page 112)Hysteresis: The long-lasting influence of history on variables like the natural rate of unemployment. Negative shocks might increase the natural rate (u_n) itself, so the economy may not fully recover.
  • Skills of cyclically unemployed workers may deteriorate.
  • Cyclically unemployed may lose influence on wage-setting; “insiders” bargain for higher wages, making “outsiders” structurally unemployed.

• (Lesson 01, Page 1)The “Outline of this Course” includes “Microeconomic Foundations” which lists Consumption, Investment, and Money supply and demand. This implies that macroeconomic models are often built upon microeconomic principles of firm and household behavior.

• (Lesson 03, Page 7-8)This is used as an example of an economic model.
• (Lesson 03, Page 7-8)Demand for Cars (Qd): Qd = D(P, Y) where P is price of cars, Y is aggregate income.
• (Lesson 03, Page 7-8)Demand curve shows an inverse relationship between quantity demanded and price (ceteris paribus).
• (Lesson 03, Page 7-8)Increase in income (Y) shifts the demand curve right, increasing equilibrium price and quantity.
• (Lesson 03, Page 7-8)Supply for Cars (Qs): Qs = S(P, Ps) where P is price of cars, Ps is price of steel (an input).
• (Lesson 03, Page 7-8)Supply curve shows a positive relationship between quantity supplied and price (ceteris paribus).
• (Lesson 03, Page 7-8)Increase in price of steel (Ps) shifts the supply curve left, increasing equilibrium price and reducing quantity.
• (Lesson 03, Page 7-8)Equilibrium: Where the upward sloping supply curve and downward sloping demand curve intersect.
• (Lesson 03, Page 7-8)Endogenous Variables: P, Qd, Qs (determined within the model).
• (Lesson 03, Page 7-8)Exogenous Variables: Y, Ps (determined outside the model).

• (Lessons 07 & 08)As discussed under MPL, firms demand factors of production (like labor and capital) up to the point where the marginal product of the factor equals its real price.
• (Lessons 07 & 08)For labor: MPL = W/P.
• (Lessons 07 & 08)For capital: MPK = R/P (where R/P is the real rental rate of capital).

• (from student feedback, not explicitly in PDF)The student feedback listed “Supply and demand analysis of firm” as one of the items to be identified as a micro or macro issue.
• Micro Perspective: Analysis of a single firm’s decisions regarding how much to produce, what price to charge, and what inputs to use, based on market conditions for its specific product and inputs.
• Macro Link/Aggregation: While individual firm analysis is micro, the aggregation of many firms’ supply and demand decisions forms the basis for aggregate supply and aggregate demand in the macroeconomy. Concepts like the firm’s response to input prices (e.g., steel for cars) can be scaled up to understand how changes in general input costs affect aggregate supply.

• (Lesson 07, Page 18)K = capital.
• (Lesson 07, Page 18)Defined as tools, machines, and structures used in production.

• (Lesson 13, Page 13)Capital is one of the factors of production.
• (Lesson 13, Page 13)At any given moment, the economy has a certain overall stock of capital.
• (Lesson 13, Page 13)Investment is spending on new capital (a flow).
• (Lesson 13, Page 13)Example: If on 1/1/2002, economy has Rs500b worth of capital (stock), and during 2002, investment = Rs37b (flow), then on 1/1/2003, the capital stock will be Rs537b (assuming no depreciation).

• (Lesson 07, Page 19; Lesson 08, Page 21)The price per unit that firms pay for the factors of production.
• (Lesson 07, Page 19; Lesson 08, Page 21)The rental rate is the price of K.
• (Lesson 07, Page 19; Lesson 08, Page 21)Real rental rate = R/P.
• (Lesson 07, Page 19; Lesson 08, Page 21)Firms rent capital until MPK = R/P.

• (Lesson 40, Page 132)For firms that own and rent out capital, the cost includes:
  • Interest on loans to buy capital (iP_K). (P_K = price of capital)
  • Change in the price of capital (-ΔP_K if it’s a gain, or +ΔP_K if it’s a loss in value).
  • Depreciation (δP_K).
• (Lesson 40, Page 132)Total cost of capital = P_K (i – ΔP_K/P_K + δ).
• (Lesson 40, Page 132)Real cost of capital = (P_K/P) (r + δ) if ΔP_K/P_K = π (overall inflation).

• (Lesson 23, Page 68)In the Solow model, there’s one type of capital.
• (Lesson 23, Page 68)In the real world, capital can be categorized:
  • Private capital stock (plant, equipment).
  • Public infrastructure (roads, bridges).
  • Human capital (knowledge and skills of workers acquired through education).

• (Lesson 06, Page 17)Included in GDP deflator (if produced domestically).
• (Lesson 06, Page 17)Excluded from CPI.

• (Lesson 02, Page 3 – Principle #6)Markets are usually a good way to organize economic activity.
• (Lesson 02, Page 3 – Principle #6)A market economy allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
  • Households decide what to buy and who to work for.
  • Firms decide who to hire and what to produce.
• (Lesson 02, Page 3 – Principle #6)Adam Smith observed that households and firms interacting in markets act as if guided by an “invisible hand.”
• (Lesson 02, Page 3 – Principle #6)Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social costs of their actions.
• (Lesson 02, Page 3 – Principle #6)As a result, prices guide decision-makers to reach outcomes that tend to maximize the welfare of society as a whole.

• (Lesson 02, Page 3 – Principle #7)The “invisible hand” works well when markets are efficient.
• (Lesson 02, Page 3 – Principle #7)Market failure occurs when the market fails to allocate resources efficiently.
• (Lesson 02, Page 3 – Principle #7)When the market fails, government can intervene to promote efficiency and equity.
• (Lesson 02, Page 3 – Principle #7)Causes of market failure include externalities and market power.

• (Lesson 01, Page 1)One of the two major branches of economics.
• (Lesson 01, Page 1)Focuses on the behavior of individual economic units, such as households, firms, and specific markets.
• (Lesson 01, Page 1)Examples from the list based on typical economic definitions and the PDF’s content:
  • Consumer behavior: Microeconomics analyzes how individual consumers make decisions about what to buy, how much to save, and how much to work, given their preferences, income, and prices. (Consumption theories like Fisher’s model, Life-Cycle Hypothesis, Permanent-Income Hypothesis are micro-foundations for aggregate consumption).
  • Supply and demand analysis of a firm: Microeconomics studies how individual firms decide what to produce, how to produce it, and what price to charge, based on market demand, costs of production, and market structure. (The car market example in Lesson 03 is a microeconomic model).

• (Lesson 01, Page 1)The other major branch of economics.
• (Lesson 01, Page 1)Provides a framework for the study of the determinants and movements of key aggregate economic variables.
• (Lesson 01, Page 1)Studies the likely response of these key aggregate variables to public policies (fiscal, monetary, trade).
• (Lesson 01, Page 1)Examples from the list based on the PDF’s extensive coverage:
  • Unemployment: Macroeconomics studies the overall level of unemployment in the economy, its causes (frictional, structural), the natural rate of unemployment, and policies to address it. (Covered extensively from Lesson 06 onwards).
  • Inflation: Macroeconomics examines the general rise in the price level, its causes (e.g., money supply growth, supply shocks), its costs, and policies to control it. (Covered extensively from Lesson 10 onwards).
  • Economic Growth: Macroeconomics analyzes the long-run increase in a nation’s production of goods and services, the factors driving it (capital accumulation, labor force growth, technological progress), and its implications for living standards. (Covered extensively in the Solow Model, Lessons 19-23).

• While “Consumer Behavior” as a standalone topic often falls under microeconomics (studying individual choices, utility maximization, demand curves for specific goods), macroeconomic models of aggregate consumption are built upon these micro-foundations.

• (Lesson 09, Page 22; Lesson 37, Page 120)C = C(Y-T) (Aggregate consumption depends on aggregate disposable income).
• (Lesson 09, Page 22; Lesson 37, Page 120)Keynes’s conjectures:
  1. Marginal Propensity to Consume (MPC) is between 0 and 1.
  2. Average Propensity to Consume (APC) falls as income rises (short-run).
  3. Current income is the primary determinant of consumption.

• (Lesson 37, Page 122; Lesson 38, Page 124-125)Analyzes how rational, forward-looking individual consumers make choices about consumption and saving across different time periods.
• (Lesson 37, Page 122; Lesson 38, Page 124-125)Considers the consumer’s budget constraint over time and their preferences (represented by indifference curves).
• (Lesson 37, Page 122; Lesson 38, Page 124-125)How changes in income and real interest rates affect individual consumption choices (income and substitution effects).

• (Lesson 39, Page 128-129)Extends Fisher’s model; individual consumption depends on lifetime income.
• (Lesson 39, Page 128-129)Individuals save to smooth consumption over their lives, especially for retirement.
• (Lesson 39, Page 128-129)Aggregate consumption function: C = αW + βY (where W is wealth, Y is income, α is MPC out of wealth, β is MPC out of income). Solves the “consumption puzzle” by explaining why APC is constant in the long run (as W and Y grow together) but falls in the short run (as W doesn’t vary proportionately with short-run income changes).

• (Lesson 39, Page 130)Current individual consumption is proportional to permanent income (YP), not just current income (Y).
• (Lesson 39, Page 130)Current income Y = YP + YT (permanent + transitory income).
• (Lesson 39, Page 130)Consumption function: C = αYP.
• (Lesson 39, Page 130)Explains why APC varies in the short run (if current income changes due to transitory components) but is stable in the long run.

• (Lesson 39, Page 130)If the permanent-income hypothesis is correct and consumers have rational expectations, then changes in individual consumption over time should be unpredictable (follow a random walk). Only unexpected changes in income or wealth should alter consumption.

• The sum of individual consumer behavior determines aggregate consumption, which is a major component of Aggregate Demand. Understanding the micro-level determinants of consumption helps macroeconomists understand and predict changes in aggregate consumption and AD.

• (Lesson 04, Page 10; Lesson 07, Page 18)Households:
  • Supply factors of production (e.g., labor) to firms.
  • Receive income (e.g., wages, rent, profit) from firms.
  • Consume goods and services (C).
  • Save (Private Savings) through financial markets.
  • Pay Taxes (T) to the government.
• (Lesson 04, Page 10; Lesson 07, Page 18)Firms:
  • Demand factors of production from households.
  • Produce and sell goods and services.
  • Pay income to households.
  • Undertake Investment (I), often financed by borrowing from financial markets (which channel household savings).
  • Pay Taxes.
• (Lesson 04, Page 10; Lesson 07, Page 18)Government:
  • Purchases goods and services (G).
  • Collects Taxes (T) from households and firms.
  • Makes Transfer Payments (not directly part of G in GDP calculation).
  • Engages in borrowing (if G > T, i.e., budget deficit) or saving (if T > G, i.e., budget surplus – Public Saving).
• (Lesson 07, Page 18; Lesson 09, Page 23)Financial Markets:
  • Facilitate the flow of funds between savers (households, government if surplus) and borrowers (firms for investment, government if deficit).
  • The “loanable funds” market.

• (Lesson 05, Page 12; Lesson 14, Page 14, 37)This identity explicitly shows the expenditure contributions of households (C), firms (I), and the government (G) to total output (Y). In an open economy, the foreign sector’s role is captured by Net Exports (NX).

• (e.g., Lessons 25-26, Pages 80-82; Lesson 35-36, Page 113-119)Fiscal Policy (G and T): Directly impacts aggregate demand and saving. (e.g., Government spending multiplier, tax multiplier discussed in Keynesian Cross). Government debt and deficits also play a role.
• (e.g., Lessons 10, 27-29, Pages 28, 83-95)Monetary Policy (Central Bank): Influences money supply, interest rates, and thereby investment and aggregate demand.

• (e.g., Solow Model, Lessons 19-23; Investment Theories, Lessons 40-43, Pages 131-139)Investment decisions by firms are crucial for capital accumulation and long-run growth and are a key component of short-run aggregate demand, influenced by interest rates and expectations.

• (e.g., Consumption Theories, Lessons 37-39, Pages 120-130)Consumption is the largest component of aggregate demand. Household saving decisions provide the funds for investment.

• (Lesson 02, Page 3)Market failure occurs when the market (left to its own devices, i.e., the “invisible hand”) fails to allocate resources efficiently.
• (Lesson 02, Page 3)When market failure occurs, government intervention can potentially promote efficiency and equity.

1. (Lesson 02, Page 3-4)Externality:
   • Definition: The impact of one person’s or firm’s actions on the well-being of a bystander (who is not directly involved in the transaction).
   • Externalities can be positive (e.g., research leading to public knowledge) or negative (e.g., pollution).
   • Markets may overproduce goods with negative externalities and underproduce goods with positive externalities because private costs/benefits do not equal social costs/benefits.
2. (Lesson 02, Page 3-4)Market Power:
   • Definition: The ability of a single person or firm (or a small group) to unduly influence market prices.
   • Examples include monopolies or oligopolies.
   • Firms with market power may restrict output to raise prices, leading to an inefficiently low quantity of goods produced compared to a competitive market.

• (Lesson 23, Page 68)One argument for industrial policy (government actively encouraging investment in specific sectors) is that some industries may have positive externalities (by-products) that private investors don’t consider. This is essentially an argument that market failure (due to positive externalities) might warrant government intervention to achieve a more efficient allocation of investment.

• (Lesson 15, Page 42)Definition: The relative price of domestic currency in terms of foreign currency.
• (Lesson 15, Page 42)It’s the rate at which a person can trade the currency of one country for the currency of another.
• (Lesson 15, Page 42)Example given: Yen per Dollar (e.g., 110 Yen per Dollar). Or Rs. per Dollar.
• (Lesson 15, Page 42)Exchange rates as of Feb 26, 2005, are listed for various currencies against the Rupee.

• (Lesson 15, Page 42)Definition: The relative price of domestic goods in terms of foreign goods.
• (Lesson 15, Page 42)It’s the rate at which a person can trade the goods and services of one country for the goods and services of another.
• (Lesson 15, Page 42)Example given: Japanese Big Macs per U.S. Big Mac.
• (Lesson 15, Page 42)Formula: ε = (e × P) / P*
  • e = nominal exchange rate (foreign currency per unit of domestic currency)
  • P = price level of domestic goods (in domestic currency)
  • P* = price level of foreign goods (in foreign currency)
• (Lesson 15, Page 42)Understanding the Units (Example):
  • ε = (Yen per $) × ($ per unit U.S. goods) / (Yen per unit Japanese goods)
  • This simplifies to Units of Japanese goods / per unit of U.S. goods.
  • Example calculation given: If P (US Burger) = 2.50, P*(JapaneseBurger) = 200Yen, e = 120Yen/$.
    then ε = (120 × 2.50) / 200 = 1.5 Japanese Burgers per U.S. Burger.

• (Lesson 15, Page 42)In a macro model with just one good (“output”), ε is the relative price of one country’s output in terms of the other country’s output.

• (Lesson 15, Page 42)↑ε (real appreciation of domestic currency) ⇒ Domestic goods become more expensive relative to foreign goods ⇒ ↓EX (Exports fall), ↑IM (Imports rise) ⇒ ↓NX (Net exports fall).
• (Lesson 15, Page 42)↓ε (real depreciation of domestic currency) ⇒ Domestic goods become cheaper relative to foreign goods ⇒ ↑EX, ↓IM ⇒ ↑NX.

• (Lesson 17, Page 47)If Purchasing Power Parity holds, e × P = P*, which means the real exchange rate ε = 1.

• Definitions: Requiring precise definitions of key economic terms.
  • Example from feedback: “Definition of Capital” (Lesson 07, Page 18; Lesson 13, Page 13).
  • Example from feedback: “Definition of money supply and liquidity” (Lesson 10, Page 28; Lesson 11, Page 30).
• Calculations/Problem Solving: Requiring application of formulas or concepts to find a specific value.
  • Example from feedback: “Finding the interest rate” (Could be nominal or real, possibly using Fisher equation or data from a scenario – Lesson 11, Page 32).
  • Example from feedback: “Marginal product of labor” (Could involve a small calculation or interpretation from a production function/schedule – Lesson 07, Page 19).
• Identification/Classification: Requiring categorization of economic issues.
  • Example from feedback: “Identify micro and macro issues from the given list” (The list included: Unemployment, Inflation, Consumer behavior, Economic growth, Supply and demand analysis of firm – Lesson 01, Page 1 for general distinction).
• Differentiation: Explaining the differences between related concepts.
  • Example from feedback: “Differentiate between real and nominal exchange rate” (Lesson 15, Page 42).
• Application of Identities/Formulas: Writing out standard economic identities.
  • Example from feedback: “Write national income identity of open and close economy” (Open: Y=C+I+G+NX, Close: Y=C+I+G – Lesson 05, Page 12; Lesson 09, Page 23; Lesson 14, Page 37).

• Likely drawn directly from concepts and examples covered in the handouts/lectures.

• Descriptive/Explanatory: Requiring detailed explanations of economic processes or theories.
  • Example from feedback: “Money supply through the central bank in the open market and discount rate” (Explaining how these tools work – Lesson 10, Page 28; Lesson 45, Page 141).
  • Example from feedback: “Money supply control through the central bank” (A broader question encompassing the tools and mechanisms – Lesson 10, Page 28; Lesson 45, Page 141).
  • Example from feedback: “Unemployment” (Could be about types, causes, natural rate, or policies – Lessons 06, 17, 18, 34).
  • Example from feedback: “Invisible hands” (Explaining Adam Smith’s concept – Lesson 02, Page 3).
• Graph-Based: Requiring the use or interpretation of economic diagrams.
  • Example from feedback: “Included graph-based questions.”
  • Many topics lend themselves to this: Supply/Demand (Lesson 03, Page 7-8), Production Function/MPL (Lesson 07-08, Page 19-21), Loanable Funds Market (Lesson 09, Page 23-24), IS-LM framework (Lessons 27-29), Aggregate Demand/Supply (Lessons 24-25).
• Conceptual: Testing deeper understanding of economic relationships and implications.
  • Example from feedback: “Conceptual questions, e.g., related to money and purchasing power” (Could involve explaining how inflation affects purchasing power or the implications of the quantity theory of money – Lesson 10, Page 27; Lesson 13, Page 35).
  • Example from feedback: “Question on the relation between nominal interest rate and PPP” (This would require linking Fisher effect with PPP through inflation – as discussed in Part C of these notes).