From the national accounts up through production, capital, money, and the short-run/long-run distinction — the identities and models that make up the standard macro toolkit. Interactive versions of the calculators I built for this course, from 33040: Macroeconomics.
The starting identity of the whole course: GDP can be measured as income, production, or expenditure, and all three give the same number.
Every dollar spent on final goods is simultaneously income to whoever sold them — which is why these four ways of measuring the same economy always reconcile.
Goods and services sold to domestic customers.
Goods sold to domestic businesses, or held as inventory.
Goods sold to a domestic government.
Net goods sold to a foreign consumer, business, or government.
Nominal GDP mixes together "more stuff got produced" and "prices went up" — dividing by a price index strips out the second effect, so real GDP tracks actual quantities produced.
Choose which quantity to solve for, then edit the other two.
Matching workers to firms simply takes time — even in a healthy labor market, this never goes to zero.
Workers want to work and have the right skills, but can't find a job — a short-term force, tied to the business cycle.
A persistent mismatch between the skills workers have and what firms need.
A Cobb-Douglas production function is the workhorse of the course: it turns capital, labor, and technology into output, and its exponents are also each factor's share of income under profit maximization.
The exponents (0.3 on capital, 0.7 on labor) are capital's and labor's shares of total output — a stable empirical regularity across many economies. If firms hire labor up to the point where its marginal product equals the real wage, MPN and W/P are the same number, which is what lets this production function double as a theory of factor pricing.
The portion of output growth that isn't explained by more capital or labor — technology, know-how, organizational efficiency.
The real wage W/P and employment N* where labor supply meets labor demand.
The output level associated with N*: Y* = AF(K, N*) — the economy's potential output when the labor market clears.
Output per worker, Y/N — rises with more capital per worker or higher TFP, and is the main long-run driver of real wage growth.
Capital share fixed at 0.3, labor share at 0.7, matching the exponents from the course.
Capital doesn't just accumulate — it also wears out. Firms invest up to the point where the marginal benefit of one more unit of capital just covers its marginal cost.
The "user cost" r + δ is what it really costs to hold a unit of capital for a period: the forgone interest (r) plus the physical depreciation (δ). A firm keeps adding capital as long as its marginal benefit (the extra output it produces, valued at the output price) exceeds this user cost — which is exactly the condition MPK = r + δ at the optimum.
Solves MPK = r + δ for the capital stock a firm should target, given its labor force and TFP.
Two competing pictures of how people decide how much to spend: a simple rule of thumb tied to current income, versus a forward-looking model where people smooth consumption across their whole lifetime.
The Keynesian consumption function: c₀ is autonomous consumption (spent even with zero income), and c is the marginal propensity to consume out of disposable income — the fraction of each extra dollar of income that gets spent rather than saved.
The Permanent Income Hypothesis says people set consumption so the present value of lifetime consumption (PVLC) equals the present value of lifetime resources (PVLR) — wealth on hand (a), current income (y), and future income (yf) discounted back. In a simple two-period version, "smoothing" means choosing the same consumption c in both periods, which pins down exactly how much to consume today versus save for later.
Solves for the constant consumption level (c = cf) that spends down exactly PVLR over both periods.
MPC ≈ 0 — if you saw it coming, you already smoothed your consumption around it.
MPC ≈ 1/(remaining lifetime) ≈ 0 — a windfall gets spread thin across the rest of your life, so almost all of it is saved right now.
MPC = 1 — if your income is permanently higher starting now, you might as well spend the entire increase immediately, since every future period is higher too.
Because tax revenue and many transfer payments automatically move with the business cycle, the headline budget deficit is partly a story about where the economy happens to be — not just about policy choices.
tn is the tax rate and g is the rate at which transfer payments (like unemployment benefits) rise as income falls — both scale with output, which is exactly the automatic-stabilizer mechanism. Swapping in potential output Y* instead of actual Y strips out that cyclical component, leaving the structural deficit — the part of the budget picture that reflects actual tax-and-spending policy rather than where the economy happens to be in the cycle.
Positive = deficit, negative = surplus. The cyclical component is the part of the current deficit that's just due to output being below (or above) potential.
Banks turn a monetary base set by the Fed into a much larger money supply — how much larger depends entirely on how much cash the public wants to hold versus deposit, and how much reserve banks keep on hand.
The money multiplier isn't just 1/m — that's only true if the public holds zero cash. In reality some of the base leaks out as currency the public holds directly (cu), which never gets redeposited and re-lent, so the realistic multiplier folds in both the currency-to-deposit ratio and the actual reserve ratio banks hold (m*, which need not equal the required ratio m).
Raising or lowering it changes the money multiplier directly.
Buying or selling government securities changes the monetary base directly.
Paying banks to hold reserves changes the multiplier indirectly, through their choice of m*.
Quantitative easing (buying bonds beyond just treasuries) and direct lending to non-financial institutions — both work by changing the base itself, outside the normal reserve-ratio channel.
The quantity theory of money: velocity (V) is just whatever number makes this identity hold, measuring how many times each dollar of money turns over to support a year's worth of nominal spending (PY). It becomes a genuine theory once V (and Y, in the classical case) are assumed roughly stable — then changes in the money supply pass straight through to the price level.
Choose which quantity to solve for, then edit the other two.
What savers actually care about is purchasing power, not the number of dollars they earn in interest — which is exactly the gap the Fisher equation closes.
A nominal rate of 6% sounds great until inflation is running at 5% — in real, purchasing-power terms, you're only earning 1%. Every nominal interest rate implicitly bundles compensation for expected inflation together with the true, real return.
Choose which quantity to solve for, then edit the other two.
Nominal money demand scales one-for-one with the price level — double all prices and people want to hold twice as many dollars to buy the same real basket of goods. In real terms, money demand rises with income (more transactions to fund) and falls with the nominal interest rate (the opportunity cost of holding non-interest-bearing money instead of an interest-bearing asset).
The single biggest organizing distinction in the course: in the short run, nominal wages are sticky and the labor market doesn't have to clear; in the long run, everything adjusts and the economy settles at its potential.
A quick-reference map of every curve in the course, what's on its axes, and what moves it.
Shifts with: PVLR, tax rates (tn, tv), value of leisure (VL), population.
Substitution effect: higher real wage → higher reward to working → want to work more. Income effect: higher real wage → richer → need fewer hours to consume the same goods.
Shifts with: A (TFP), K (capital).
Shifts with: A, K, PVLR, tax rates, value of leisure, population.
Shifts with: A, N.
Shifts with: C, I, G, NX. Through higher C: higher A, higher PVLR, higher transfers or lower taxes, stronger consumer confidence. Through higher I: higher future TFP, lower capital tax, stronger business confidence. Through higher G: higher government spending directly.
Shifts with: Y.
Shifts with: M, P. Point on the curve: money demand = money supply.
Shifts with: C, I, G, NX.
Shifts with: A, K, N, raw materials prices.