Macro Exam 1 Cheat Sheet

Econ 104 · Prof. Voorheis. Each section has three parts. Yellow is the short version to copy onto your handwritten sheet. Blue explains it so the yellow makes sense. Red is the mistake the exam is built to catch. Only copy a line once the blue part makes sense to you.

1 · Unemployment & Labor Force

Almost certainly a calculation question. It's easy points if you use the right denominators.

Who counts as what

EMPLOYED = any paid work (even 1 hr/wk) UNEMPLOYED = no job + want work + looked in last 4 wks NOT IN LF = everyone else (students, retirees, discouraged)

The government sorts every adult into one of three buckets. The key word for "unemployed" is actively looking. If you aren't looking, you aren't unemployed. You're simply outside the labor force.

Someone working 5 hours a week who wants 40 hours still counts as employed. That surprises people, and it shows up on exams.

The four formulas

LF = Employed + Unemployed Unemp rate = Unemp ÷ LF × 100 LFPR = LF ÷ Pop × 100 Emp-Pop ratio = Employed ÷ Pop × 100 (Pop = civilian noninstitutional: working age, not prison, not military)

The unemployment rate asks: of the people in the game (working or looking), what share can't find a job? So you divide by the labor force.

LFPR asks: of everyone who could be in the game, what share is in it? So you divide by the population.

Example: Pop 800, employed 500, unemployed 25. LF = 525. Unemp = 25/525 = 4.8%. LFPR = 525/800 = 65.6%. Emp-Pop = 500/800 = 62.5%.

Dividing unemployed by population instead of by the labor force. Unemployment rate → LF on the bottom. The other two → Pop on the bottom.

Hidden unemployment and the U-measures

Hidden unemp: · Part-time for econ reasons (underemployed) – wants more hrs · Marginally attached – looked 5 wks–1 yr ago · Discouraged – gave up looking U3 = official (~4.2%) U4 = +discouraged U5 = +marginally attached U6 = +part-time econ reasons
The official rate (U3) misses people who want work but have stopped looking, and it counts people stuck in part-time jobs as fine. So the headline number makes the job market look better than it really is. The BLS publishes broader measures (U4–U6) to fill that gap. Each one adds another group, so U6 is the biggest.

Types of unemployment

Frictional = between jobs / searching (new grad) Seasonal = by season (lifeguard in winter) Structural = skills mismatch (factory → needs software) Cyclical = recession, not enough jobs FULL EMPLOYMENT = no cyclical ≠ 0%
The first three exist even in a healthy economy, since people are always switching jobs and skills never match perfectly. Cyclical is the bad one, caused by a recession. "Full employment" means there's no cyclical unemployment, so unemployment around 4% can still be full employment.
Current market (said in class): about 4.2% unemployment. It's a "no-fire, no-hire" market. It isn't collapsing, but hiring is slow and recent grads are struggling.

2 · GDP, Real vs Nominal, Inflation

The other guaranteed calculation. Learn the logic and the formulas follow.

Definition

GDP = market value of FINAL goods & services, NEWLY produced, WITHIN borders, in a PERIOD
Every word is a rule. Final: don't count the flour and the bread, only the bread. Newly produced: a used car sold this year doesn't count. Within borders: a Toyota made in Kentucky counts toward US GDP.

Nominal vs Real

Nominal = this yr qty × THIS yr price Real = this yr qty × BASE yr price Deflator = Nominal ÷ Real Real = Nominal ÷ Deflator Nominal = Real × Deflator Base yr deflator = 1.00

Real GDP freezes prices at the base year, so the only thing that can change is how much stuff got made. Nominal GDP mixes "made more" with "prices went up."

Example (coffee and laptops, base 2025):
2026 nominal = 6×110 + 1100×11 = $12,760
2026 real = 5×110 + 1000×11 = $11,550 (2025 prices!)
Deflator = 12,760 ÷ 11,550 = 1.1048, so prices rose about 10.5%.

Memory trick for the triangle: N = R × D. Cover up the one you want and the other two tell you whether to multiply or divide.

Growth & inflation (the same formula)

% change = (NEW − OLD) ÷ OLD × 100 Growth: use REAL GDP Inflation: use CPI or deflator CPI = basket cost this yr ÷ basket cost base yr × 100

Growth and inflation are both just "percent change." Only the input differs.

Growth: real GDP 22.4 → 23.072. (23.072 − 22.4) ÷ 22.4 = 3.0%.
Inflation: CPI 250 → 260. (260 − 250) ÷ 250 = 4.0%.
CPI: basket $8,000 base, $8,400 now → 8,400/8,000 × 100 = 105.

Using nominal GDP for growth. Always use real.

Dividing by NEW instead of OLD. The bottom is always the earlier year.

Inflation is the % change in CPI. It is not the CPI number itself.

CPI vs Deflator

Deflator (BEA) = ALL goods CPI (BLS) = CONSUMER basket only

Problems with GDP

· Unpaid work missing (Marilyn Waring → women's work) · Inequality hidden (avg ↑, most gains to few) · Pollution / resources depleted not subtracted · Repair spending counts as + (hurricane, oil spill) · Leisure, health, happiness not measured Alternatives: GPI, HDI, Better Life Index, Subj. Well-Being
GDP measures market production. It doesn't measure well-being. The strongest exam answer is: "GDP is useful for measuring output, but it should be paired with other indicators, like a dashboard." Don't write that GDP is useless.

3 · Goals, Paradigms, Classical vs Keynes

Matching and short-answer questions. These lists are worth writing down.

Macro goals

Traditional: Employment · Price stability · Growth Modern: Living standards · Stability & security · Sustainability
The modern goals ask "is the economy actually serving people?" Can people afford housing? Can they plan their lives? Can growth continue without wrecking the planet?

Paradigms

Classical – Smith, Say (late 1700s), free markets Neoclassical – return to classical, dominant since 1980s Keynesian – Keynes, Great Depression, demand + govt Marxist/Political econ – Marx (1800s), power, critiques capitalism Institutional – institutions & technology
A paradigm is a lens. Two economists can look at the same recession and blame different causes. That's normal in a social science.

Classical principles (Adam Smith)

Division of labor · Private property · Free wage labor Markets · Profits/incentives · Laissez-faire

Classical vs Keynesian

ClassicalKeynesian
GovtMinimalStep in during recessions
FocusSupply. Say's Law: supply creates its own demandDemand. Rejects Say's Law
RecessionsFix themselves in timeNeed stimulus. "In the long run we're all dead"
UnemploymentWages fall, so it clearsWages are sticky, and firms have "animal spirits"

Say's Law in plain words: making stuff pays people wages, and they spend those wages, so everything made gets bought.

Keynes's objection: people might not spend. They save or panic. Then firms can't sell, cut jobs, people earn less, and spend even less. That's a vicious cycle. Keynes wanted to fix capitalism, not replace it, using government spending, lower interest rates, and support for households.

Three recessions

Depression 1929–41: long, banks + demand collapse, slow policy 2008 Great Rec: housing + finance/leverage, faster policy COVID 2020: health shutdown, super fast, short, huge policy Same: big drops in output/jobs + big govt response
For an essay, compare five things: cause, speed, length, role of banks, policy response. Banks were central in 1929 and 2008 but not in COVID.

4 · PPF, Markets, Circular Flow

PPF

ON curve = efficient | INSIDE = inefficient | OUTSIDE = unattainable Bowed out = increasing opp. cost (resources specialized) Shift OUT: tech, more resources | IN: disaster, depletion Opp. cost = value of BEST alternative given up

Why bowed: if you switch farmers to building computers, the first ones you move are the ones who are worst at farming, so you give up little food. Keep going and you're pulling your best farmers, so each extra computer costs more food.

Calculating it: moving B→C, computers 1→2 and consumer goods 9→7, so 1 computer costs 2 goods. Moving C→D, goods 7→4, so it costs 3. The cost rises.

A movement along the curve is a trade-off. A shift changes how much the economy is able to produce.

"Efficient" does not mean "fair" or "best." The PPF says nothing about who gets the output.

Market failures (6)

1 Public goods – free riders (streetlights) 2 Externalities – spillover on others (pollution) 3 Transaction costs – cost of making deals (legal, search) 4 Market power – one seller sets terms (monopoly) 5 Information & expectations – can't judge quality / future 6 Human needs & equity – can't afford necessities
A market failure is when markets give an inefficient or unfair result. One scenario can have several at once. For example, an expensive lifesaving drug from a single maker, whose quality patients can't judge, involves equity + market power + information.

Circular flow

Households → labor → FACTOR market → firms Firms → wages/income → households Firms → goods → PRODUCT market → households Households → spending → firms PRODUCTION = INCOME = SPENDING

Picture a loop. Goods and labor flow one way and money flows the opposite way. Each dollar you spend at a store becomes someone's income. That's why total production, total income, and total spending are three views of the same number.

Factor market = buying the inputs (labor, land, capital). Product market = buying finished stuff.

Contextual model

3 spheres: CORE (family, unpaid care, community) BUSINESS (for-profit) · PUBLIC PURPOSE (govt, nonprofits) All inside social + natural environment (nature supplies resources, takes waste)
This expands the simple circular flow, which shows only households and firms. It adds unpaid work, government and nonprofits, and the environment, which are all the things the basic model leaves out.

Before you write it out