ECON 102: Master Visual Reference

Introduction to Macroeconomics · University of Waterloo · Prof. Kate Rybczynski · built from the 338-slide deck (ECON102slides2026CompleteJan4.pdf). PDF page = printed slide number.

The whole course in one sentence Behaviour comes from objectives subject to constraints; curves come from behaviour; markets come from curves; and the economy comes from markets that must agree with each other.

How to drill this. Grey blocks like this one are hidden answers, click to reveal (buttons bottom-right reveal or re-hide everything). Pass 1: read a part, work its numbered SELF-TESTs on paper before revealing. Pass 2 (next day): redo only the self-tests, then run the Gauntlet at the end of Part 9. Pass 3: reproduce Maps 1–2 and Figures 2–6 on blank paper, the exam is a blank page. Printing reveals every answer, so print only after drilling.

Supply-family curve (N^S, S^D, M/P) Demand-family curve (N^D, I^D, L, NX^D) Outcome / annotation Dashed = position after the shock

Part 1 · Sections I–IIFoundations: accounting & measurement

1.1 The national accounts identities [17–33]

GDP = C + I + G + NX                        [17]
Production = Expenditure = Income           [21]   ← true by definition
GNP = GDP + NFP                             [25]
Yd  = Y + NFP + TR + INT − T                [26]
S(pvt)  = Yd − C
S(govt) = (T − TR − INT) − G                [27]
S = S(pvt) + S(govt) = Y + NFP − C − G      [28]
S = I + NX + NFP = I + CA                   [29–30]
National wealth = domestic physical assets + net foreign assets   [33]

Why domestic financial assets vanish from national wealth. Your deposit is your asset and the bank's liability; both parties are residents, so the entries cancel on aggregation. What survives is real things located here plus net claims on foreigners. A country cannot get richer by lending to itself.

1.2 Stock vs flow [32]

Flow = calculated over a period. Stock = calculated at a point. A flow is the rate at which a stock changes.

Flow	Stock	Where
Saving	Wealth	The slide-32 title pair
Deficit	Debt	Q10(c): deficit yr10 = $4, debt yr5 = $20
Investment (I)	Capital stock (K)	I^D = K* − K_t + dK_t [149]
Current account	Net foreign assets	CA builds the NFA stock [33, 266]
Matches / separations	E and U	M(U,V) = δE [113–114]
GDP	—	"during a fixed period of time" [12]

1.3 Prices, inflation, real vs nominal [34–48]

π(t+1) = [P(t+1) − P(t)] / P(t)             [35]
GDP deflator = nominal GDP / real GDP       [36]
Laspeyres = GDP(t+1) at t prices   ÷ GDP(t) at t prices      [41]
Paasche   = GDP(t+1) at t+1 prices ÷ GDP(t) at t+1 prices    [41]
Fisher    = (Laspeyres × Paasche)^½ ; chain by multiplying   [41–42]
(1+r) = (1+i)/(1+π)  ;  r ≈ i − π  ;  expected r ≈ i − πᵉ    [47–48]
r(after tax) = (1 − t)·i − πᵉ                                [132]

Denominator trap. π divides by P(t), the earlier period. Q11: (1.20 − 1.15)/1.15 = 4.35%. Dividing by 1.20 gives 4.17%, wrong. No calculators, so no safety net.

Real vs nominal is one operation, divide by P [34]:

Concept	Nominal	Real	Link
Output	nominal GDP	real GDP	deflator = nom ÷ real [36]
Wage	W	w = W/P	hiring rule MPN = w [80–83]
Interest	i	r	(1+r) = (1+i)/(1+π) [47]
Exchange rate	e_nom	e = e_nom·P/P_for	[280–281]
Money	M	M/P	M/P = L(Y, r+πᵉ) [165]

Self-test

Nominal GDP falls 21% while the single good's price falls 11%. Is real GDP growth base-dependent?
→ No, with one good, real growth is −11.1% on any base year. Q23. And note the published answer box says −11.1% for nominal growth; the correct nominal figure is −21%.

GDP's two-sided critique, both directions are examinable. Under-estimates: home production, the underground economy [Q7, Q8]. Over-estimates: remedial/defensive spending, paying to clean up damage counts as output [Q7b, Q8b]. StatCan puts unpaid household work at roughly 25%–37% of GDP (2019). Cite the percentages, not the dollar figure.

Part 2 · Sections III–IVFoundations: production & the labour market

2.1 The production function [67–75]

Y = F(A, K, N) often Y = A · F(K, N) = A·K^α·N^1−α

MPN = ΔY/ΔN = slope of the production function     [69–70]
MPK = ΔY/ΔK                                        [69]
A   = Y / F(K,N)     ← A is a RESIDUAL             [71]
α = capital owners' income share ; 1−α = labour's  [72]

Figure 1 · Production function and MPN [68–70]

MPN is the slope, not the height. The curve flattens as N rises, so MPN falls: diminishing returns [70]. A higher A (or K) raises the slope at every N, which is why a productivity shock shifts labour demand [74].

Self-test

TFP growth is computed assuming Y = AKN^0.5 when the truth is Y = AK^0.5N^0.5. Does the error matter?
→ Enormously: Q16 gives 300% vs 900%. Slide 72: "this calculation method will be incorrect if we are wrong about the functional form." A is a residual, so every specification error lands in A.

2.2 Labour demand and the hiring rule [80–99]

MRPN = MPN × P ;  hire until MRPN = W  ⇔  MPN = w = W/P   [80–83]
  payroll tax τ on FIRMS:   MPN = (1+τ)w      ← hits MC, not MPN
  income tax t on WORKERS:  N^S = (1−t)w                  [99]
FE = Y* = A·F(K, N*)                                      [105]

Self-test

MPN = 30 − ¼N and N^S = 2w. Derive labour demand and clear the market.
→ Hiring rule MPN = w ⇒ w = 30 − ¼N ⇒ N^D = 120 − 4w. Clear: 2w = 120 − 4w ⇒ 6w = 120 ⇒ w* = 20, N* = 40 [midterm Q3b]. To graph it, plot the INVERSE: w = 30 − N/4 [88, 312].

Figure 2 · Labour market, market clearing vs sticky wage [88, 106–108]

Unemployment = N^S − N^D at the prevailing wage [106]. In panel A the two are equal by construction, so unemployment is always zero: you cannot answer an unemployment question inside that framework. In panel B the wage is stuck above the new clearing level and the horizontal gap is the unemployment. Wages stick only when above w*: wages below w* are not stuck [107].

Slide 108 worked:  N^S = 3w, wage stuck at w = 10, N^D falls to 28 − w
                   N^S = 3(10) = 30 ;  N^D = 28 − 10 = 18
                   Unemployment = 30 − 18 = 12

Why wages stick [109]: institutional factors (wage floors, negotiated contracts) plus efficiency wages: firms pay above clearing to cut turnover, attract and retain better workers, and raise effort. Cross-link: efficiency wages need wage dispersion to work, which is why slide 245 says some inequality may be necessary to motivate effort.

2.3 Search & matching [110–115]

M(U, V) = δE · U* = LF − E*

Solve for a steady state, not an equilibrium point: flows in = flows out. Free entry drives the expected value of posting a job to zero; the wage comes from a bargaining assumption [114].

A ↓ → match productivity ↓ → value of posting a job ↓
    → fewer vacancies → lower matching rate → E* ↓, U* ↑        [115]

Because matching takes time and matches dissolve, there is always some unemployment [110, 112]. This is a pure stock–flow model: U and E are stocks, M(U,V) and δE are flows.

2.4 Labour market measures & unemployment types [116–122]

LF = Employed + Unemployed
Participation rate      = LF ÷ working-age population
Unemployment rate (R4)  = Unemployed ÷ LF
Employment ratio        = Employed ÷ working-age population

Types [117]: frictional (brief, between jobs) · structural (longer, capability or demand-shift) · cyclical (fluctuation around FE). Natural rate = frictional + structural, cyclical excluded.

Measures [119]: R1 (≥1 yr) · R2 (≥3 mo) · R3 (US definition) · R4 official · R5 (+discouraged) · R7 (+involuntary part-time). Measurement issues [118]: discouraged workers, underemployment, long-term unemployment.

Four drivers of changes in unemployment [122]: 1 participation-rate changes · 2 structural change · 3 policy changes affecting incentives · 4 hysteresis (skills and mismatch; insider/outsider theory).

Self-test

Unemployment stays at 100 people but the measured rate rises from 10% to 11.1%. What happened?
→ The labour force shrank. Q23(f). The rate is U ÷ LF, a smaller denominator raises the rate with no change in the number unemployed. This is driver 1 on slide 122.

Part 3 · Section VSaving, investment & the goods market

S^D = Y − C^D − G            (closed economy)        [126]
uc  = (r + d) · p_k          user cost of capital    [141]
Choose K* where MPK^f = uc                           [142]
  with capital tax τ:  uc = (1−τ)MPK^f  ⇔  uc/(1−τ) = MPK^f   [146]
I^D = K* − K_t + dK_t                                [149]
Goods market:  Y = C^D + I^D + G  ⇔  S^D = I^D       [153–154]

Figure 3 · Goods market equilibrium [153–154]

The real interest rate clears the goods market. S^D slopes up (higher r rewards saving), I^D slopes down (higher r raises the user cost). G enters through S^D = Y − C − G, so higher G shifts saving left. Open economy: the same picture becomes NX = S^D − I^D [274].

Shock	Which curve	Direction	r*	Q
Y falls	S^D	left	↑	Q30(a)
Expected future Y falls	S^D	right	↓	Q30(b)
G falls	S^D	right	↓	Q30(c)
MPK^f rises	I^D	right	↑	Q31(a)
Capital tax τ falls	I^D	right	↑	Q31(b)
p_k rises (uc ↑)	I^D	left	↓	Q32(b)

"Temporary" is a keyword. A temporary rise in MPK does not touch MPK^f, so K* is unchanged and I^D does not shift for that reason. The p_k channel still operates. Q32(b) turns entirely on this.

Self-test

Closed economy, S^D = 400 + 175r with G = 0. Find r*. Then set G = 100.
→ Q33: r* = 100/425 = 0.235. With G = 100, S^D = 300 + 175r and r* = 0.471. Higher G ⇒ less saving at every r ⇒ r* rises. Exactly the mechanism in Part 5.

Part 4 · Money and InflationMoney, the asset market & inflation

M^D = P · L(Y, i)  ;  i = r + πᵉ                      [164]
M/P = L(Y, r + πᵉ)      ← asset market equilibrium     [165, 187]
res = RES/DEP ;  cu = CU/DEP                           [174, 178]
M = CU + DEP     ;  BASE = CU + RES                    [178]
mm = M/BASE = (cu + 1)/(cu + res)                      [178–179]
ΔP/P = ΔM/M − ΔL/L                                     [190]

Her multiplier is not 1/RR. External material (Khan, most AP prep) teaches mm = 1/reserve ratio, which is her special case when cu = 0. Q40 has cu = 0.667 and mm = 1.724. Use (cu+1)/(cu+res).

Central banksets BASE = CU + RES
(open-market operations)

× mm ⟶

Money supplyM = CU + DEP
mm = (cu+1)/(cu+res)

cuthe PUBLIC chooses currency vs deposits

resthe BANKS choose reserves vs lending

BASEthe CENTRAL BANK sets it directly

Three actors, three dials [180]: Q41 wants one move from each: cu ↓, res ↓, or an open-market purchase all raise M.

Figure 4 · Asset market equilibrium [165, 187]

The vertical axis is the REAL rate r, not the nominal rate. Real money supply M/P is vertical: the quantity is set by policy and the banking system, not by r. Money demand L(·) slopes down because a higher r raises the opportunity cost of holding money, and shifts right when Y rises.

Erratum [187, 189]. Those two slides label the vertical axis "M/P" but the values on it are r*. The axis is r. Slides 214, 218 and 337 have it right, draw it their way.

Shock	Curve	Direction	r*	Q
Other assets become more liquid	L(·)	left	↓	Q35(a)
Contractionary policy (M ↓)	M/P	left	↑	Q35(b)
cu rises (multiplier shrinks)	M/P	left	↑	Q35(c)
Y rises	L(·)	right	↑	—

Note Q35(b) and Q35(c) look identical on the graph, different causes, same shift.

Self-test

Q35(b) contractionary policy and Q35(c) a rise in cu produce identical graphs. What distinguishes them?
→ Only the actor. Both shift M/P left and raise r*: in (b) the central bank shrinks BASE; in (c) the public raises cu, shrinking mm = (cu+1)/(cu+res). The graph cannot tell you which happened, name the mechanism to earn the marks [180].

Self-test

M = 1,000,000; CU = 400,000; res = 0.3. Find DEP, RES, cu, mm and BASE.
→ DEP = 600,000 · RES = 0.3(600,000) = 180,000 · cu = 400,000/600,000 = 0.667 · mm = (0.667+1)/(0.667+0.3) = 1.667/0.967 = 1.724 · BASE = 1,000,000/1.724 = 580,000. Cross-check: BASE = CU + RES = 400,000 + 180,000 = 580,000 ✓ (Q40)

Three actors change M [180]: the public (cu), the banks (res), and the central bank (BASE, via open market operations). Q41 asks for one of each.

Part 5 · The analytical coreThe three markets together

The single most examinable idea in the course. Every comparative static runs labour → goods → asset, and r* must be the same economy-wide. That cross-market consistency is what resolves within-market ambiguity [212, 214, 334].

Choosing the framework, decide this BEFORE drawing anything

Practice midterm Q2(a) is this tree: which framework can represent unemployment? Only the right-hand branches. Choosing the wrong box loses the whole question, not part of it.

5.1 Temporary negative supply shock: market clearing [212–215]

Map 1 · The causal chain, temporary A ↓, market clearing [212–214]

Read it top to bottom, then say it out loud without looking. One shock, four stages: labour sets N*, output falls, the goods market prices the scarcity of saving (r ↑) while excess demand raises P, and the asset market is forced to agree. The pinned box is the whole trick: within-market ambiguity is resolved by the market that is NOT ambiguous.

Figure 5 · A ↓ propagating through all three markets

The asset market alone cannot sign r. P rises so M/P falls (pushes r up) but Y falls so L(·) falls (pushes r down). The goods market pins r ↑ unambiguously, therefore the M/P effect must dominate in the asset market. That is the argument slide 212 makes, and it is the template for every ambiguous question in this course. Blank-paper rep: draw all three panels from Map 1 without looking, then check here.

A ↓ → MPN ↓ → N^D left → w*, N* fall
FE = Y* = A·F(K,N*) falls          [both A↓ and N*↓]
Y* ↓ → Supply < Demand → P ↑ → M/P falls      (pushes r UP)
Y  ↓ → S^D = Y − C^D − G falls    → r ↑        (goods market)
Y  ↓ → L(·) falls                              (pushes r DOWN)
Asset market ambiguous → goods market pins r ↑ → M/P dominates.
Recessionary: Y is falling.

RBC and its three criticisms [215]: RBC explains cycles with supply shocks. Criticised for (1) reliance on productivity shocks which are unknown, (2) predicting money neutrality, (3) predicting zero unemployment.

5.2 Increase in G: sticky wage [216–219, 333–338]

Map 2 · The causal chain: G ↑, sticky wage [217–219]

Demand shock + rigidity ⇒ P rises and Y rises. The middle lane is why money and fiscal policy are non-neutral here: the price level does the work the nominal wage refuses to do. Blank-paper rep: draw Figure 6's three panels from this map, then check.

Figure 6 · G ↑ under nominal wage rigidity

The engine is the real wage. W is stuck in nominal terms, P rises, so W/P falls: firms move down along N^D, employment rises, and Y rises with it. Nothing about the worker's nominal wage changed. Note also that Y ↑ shifts L(·) right and pushes S^D partly back right, but neither override the original shift [217].

G ↑ → S^D = Y − C − G falls (LEFT) → r ↑
    → AD rises → Demand > Supply → P ↑ → M/P ↓
W stuck, P rising → W/P FALLS → N rises → Y rises   (expansionary)
Numerically [335–336]:
  G = 0    → P = 1.33, Y = 500, r* = 0,     S = 100,  C = 400, N = 5
  G = 100  → P = 1.39, Y = 686, r* = 0.625, S = 68.7, C = 517, N = 7

Wage rigidity is one-directional [219]. The nominal wage is rigid downward only. If the price rise were very large, the most you would see is employment rising to where N^S = N^D, it cannot overshoot into excess labour demand. Never draw N past the clearing point.

5.3 The shock playbook

Shock	Framework	N	w	Y	r*	P
Positive supply (A ↑)	Market clearing	↑	↑ *	↑	↓	↓
Negative supply (A ↓)	Market clearing	↓	↓	↓	↑	↑
Increase in G	Sticky wage	↑	W/P ↓	↑	↑	↑
Decrease in G	Sticky wage	↓	W/P ↑	↓	↓	↓
Increase in M	Sticky wage	↑	W/P ↓	↑	↓	↑

* See errata, the Q47 solution says w* falls; a rightward N^D shift along an upward N^S should raise w*, and its own graph shows w₂* above w₁*. Unresolved.

Sort every shock two ways: supply or demand × market-clearing or rigid. Supply shock + clearing ⇒ P falls. Demand shock + rigidity ⇒ P rises. And: two changes in the same direction ⇒ determinate; opposite directions ⇒ ambiguous. Check each variable separately.

5.4 Model comparison [106–115, 215, 220]

Model	Unemployment?	Money neutral?	Real wage	Weak point
Market clearing	No, always zero [106]	Yes	—	Cannot model unemployment
Sticky wage	Yes, if w stuck above w* [107]	No [220]	Counter-cyclical	Predicts countercyclical real wages [220]
Search & matching	Always [110–112]	—	Bargaining	Wage needs a bargaining assumption
RBC (supply shocks)	No [215]	Yes	Pro-cyclical	A unobservable; zero unemployment

Each model repairs the other's main flaw. RBC's three failures are exactly what sticky wage fixes, and sticky wage breaks the real-wage prediction instead. Q42's release valve: real-wage cyclicality is empirically contested (models disagree; composition effects), so neither is cleanly refuted there.

Self-test

Under a temporary positive supply shock with market clearing, what happens to N*, Y*, r*, I*, P?
→ Q47: N* ↑, Y* ↑, r* ↓, I* ↑ (movement along I^D), P ↓. Mirror image of slides 212–215. The w* direction is the disputed one, see errata.

Part 6 · Trends, Cycles and InequalityCycles, growth & distribution

6.1 Business cycle anatomy [195–208]

Figure 7 · The business cycle and its three dimensions [196–201]

Cycles are recurrent and persistent [207], measured peak-to-peak or trough-to-trough [196], and quantified along depth [198], length/speed [199] and duration [200–201]. There is no universally used definition of a recession [202]: magnitude, duration and scope, with experts sometimes divided, and the label usually applied only in hindsight [203].

Co-movement [207]: procyclical (moves with AEA) · countercyclical (against) · acyclical (no discernible co-movement). Timing [208]: leading (moves before) · lagging (peaks/troughs after) · coincidence (same time). Components of AEA [210]: production; expenditure; employment/unemployment/labour productivity; money growth and inflation; financial variables.

6.2 What drives growth [225–229]

Slide 225: "there are three elements which influence growth", read straight off Y = F(A, K, N).

Source	Mechanism	Catch
1 · N	More population/employment ⇒ more output	Raises aggregate Y, not necessarily Y per person [225]
2 · K	Higher capital stock ⇒ higher Y	Diminishing returns: higher K ⇒ smaller MPK ⇒ convergence; low-K countries grow faster [226–227]
3 · A	Positive supply shock; raises MPN at every N	If A is endogenous, the economy may or may not converge [228]

A higher saving rate moves the steady-state K and raises short-term growth, but the economy still converges to a balanced growth path [227]. Saving raises the level, not the permanent growth rate.

Diminishing returns to K ⇒ convergence [226–227]

Why saving can't buy permanent growth: a higher saving rate moves the steady-state K and lifts growth temporarily, but diminishing MPK drags the economy back to the balanced path [227]. Escape requires A: and if A is endogenous, convergence itself is no longer guaranteed [228].

Self-test

Two countries share A, N and the saving rate; one holds a quarter of the other's capital stock. Which grows faster?
→ The low-K country [Q49: Lomond]. Lower K ⇒ higher MPK ⇒ each unit of investment buys more output growth ⇒ it converges upward toward the shared balanced growth path [226–227].

Growth's drawbacks are examinable [232–233]: structural unemployment and associated human losses, obsolescence of capital, unsustainability and environmental degradation, potential decreases in well-being, and increasing inequality. Slide 233 asks "Growth for whom?"; slide 234 leaves the growth–inequality relationship deliberately unresolved, present it as contested.

6.3 Measuring inequality [238–243]

Figure 8 · Lorenz curve and the Gini [238–241]

Gini = A ÷ (A + B): "the area between the 45° line and the Lorenz curve" over "the area below the 45° line" [238]. Since A + B = ½, this equals 1 − 2 × (area under the Lorenz curve). Perfect equality ⇒ curve = 45° line ⇒ Gini = 0 [239]. Lower Gini = more equality.

Self-test, do this by hand, no calculator

Quintile income shares 5 / 10 / 15 / 25 / 45. Compute the Gini using trapezoids.
→ Cumulative income: 5, 15, 30, 55, 100. Trapezoid strips of width 20: (0+5)/2·20 = 50 · (5+15)/2·20 = 200 · (15+30)/2·20 = 450 · (30+55)/2·20 = 850 · (55+100)/2·20 = 1550. Sum = 3100. Area under the 45° line = 5000. Gini = (5000 − 3100)/5000 = 0.3800, matches slide 240 exactly.

Each strip = (height₁ + height₂)/2 × width. Learn this method, it always comes out clean.

Measure	Strengths	Weaknesses
Gini [238–242]	Intuitive; one number	Different distributions can give the same Gini
Theil / generalized entropy [242]	Invariant to population size and income scale; additively decomposable; rank preserving	Less intuitive; top/bottom sensitivity depends on weights; not directly comparable
Decile ratios (90-10) [243]	Intuitive	Do not use all information, blind between the deciles
Consumption inequality [244]	End result of wage, income and wealth; better welfare summary	Also reflects choice

6.4 Poverty [235–237]

Poverty = deprivation of resources, including the means to participate politically and socially; clearly a relative measure once you take the fuller dimensionality [235]. Canada's official measure is the Market Basket Measure, income needed for a basket meeting basic needs, adjusted for location and family size [236]. Large urban Ontario, 2020: $23,153 single · $46,306 four-person.

Q52, the sharpest distributional trap. If the already-poor get poorer, the poverty rate does not change. A headcount is insensitive to depth. This is the cleanest illustration of why one statistic hides distributional change.

Poverty vs inequality [245]: some inequality may be necessary to motivate effort: "efficiency wages would not be effective without wage differences." But inequality may carry negative health and wellbeing implications, so intervening on it may matter in its own right. Poverty may be the simpler trigger for intervention. Both sides are hers; present both.

Part 7 · Section VIIIMonetary & fiscal policy

7.1 Monetary policy [249–256]

Goal: a stable economy for current and future wellbeing [249]. Method: flexible inflation targeting, BoC target 2% [251]. Too low a target risks contracting the economy; too high risks instability; frequently changing targets destroy credibility [251].

π high/rising → raise i_ON → prime rate ↑ → borrowing dearer
              → C and I demanded fall → inflation slows       [250]
π low/falling → lower i_ON → borrowing cheaper → C, I ↑ → prices bolstered

Other tools [252]: QE, buy government bonds, raising their price and lowering returns; payment increases settlement balances (reserves). QT reverses by selling or letting bonds mature. Plus financial regulation.

Taylor rule: i_ON = π + 0.02 + 0.5y + 0.5(π − 0.02) where y = (Y − FE)/FE [255]

The property that matters: ∂i/∂π = 1.5 > 1. The nominal rate moves more than one-for-one with inflation, so the real rate rises when inflation rises. A rule responding less than one-for-one would be destabilising. Sanity check: at π = 2%, y = 0 ⇒ i = 4% nominal, 2% real.

The Taylor property, drawn, slope 1.5 vs slope 1 [255]

Check the anchor: π = 2%, y = 0 ⇒ i = 0.02 + 0.02 + 0 + 0 = 4%, so r = 2%. Above target the Taylor line pulls away from the slope-1 line: that vertical gap IS the extra real-rate response.

Self-test

Inflation runs at 4% with output at FE (y = 0). What does the Taylor rule set, and what happened to r?
→ i = 0.04 + 0.02 + 0 + 0.5(0.04 − 0.02) = 7%. r = i − π = 3%, a full point above the 2% neutral stance. The rule leans against the boom precisely because ∂i/∂π = 1.5 [255].

Rules vs discretion [256]. Rules: lags make outcomes and timing unpredictable; rules improve credibility. Discretion: the system is too complex for a simple rule; improving forecasts can improve policy. Effectiveness constraints [253–254]: lags, hard to pick the policy and to assess it; credibility, disinflating without a recession requires being believed. Slide 253: monetary policy "may not always be the most effective option, particularly with respect to combatting recessions."

7.2 Fiscal policy [257–262]

Government expenditure = G + TR + INT
Government revenue     = T
surplus = T − G − TR − INT
deficit = G + TR + INT − T
Fiscal policy = changing G, T, or tax rates            [257]

Benefits [258]: increase aggregate demand · capital formation · influence saving, investment and labour.
Drawbacks [259]: deficits · inflexible mechanism · lags · inflation · distortions leading to inefficiencies.

Automatic stabilizers [260]: "budgetary provisions which allow G and T to rise/fall automatically with economic fluctuation." Examples: Employment Insurance and taxes. They exist to defeat the decision-lag drawback, which is the entire answer to Q55. Slide 260 also defines seignorage: raising money to fund spending by printing money.

Targeted policies [261–262]. Lower unemployment: job training, reform EI, reduce market interference, monetary and fiscal policy. Lower inflation: monetary policy, direct wage/price controls (Keynesian).

The Lucas critique [263], the deepest slide in the section. "When you introduce a policy, you change people's behaviour, so if you are not modelling behaviours (those objectives which generate the curves) your predictions could be inaccurate." Curves come from optimisation under constraints [57]; policy changes constraints; so policy moves the very curves you used to predict it. Pair with credibility [254] and the flattened Phillips curve [193], three views of one idea.

Self-test

A government must choose between a discretionary stimulus package and a standing food relief program that scales with need. Which does the course favour, and on what single ground?
→ The food relief program, it is an automatic stabilizer, so it defeats the decision-lag drawback [259–260]. Q55.

Part 8 · Section IXInternational, exchange rates & balance of payments

8.1 Balance of payments accounting [265–270]

CA = NX + NFP                                    [266]
CA balance = sum of all credits − sum of all debits
KA = capital inflows − capital outflows          [268–269]
CA + KA = 0    ← true BY DEFINITION              [269]
But in the data, CA + KA ≠ 0 → statistical discrepancy   [270]

This is double-entry bookkeeping at national scale. CA + KA = 0 has the same status as Assets = Liabilities + Equity, an identity enforced by construction, not an equilibrium condition. Every international transaction is recorded twice with opposite signs. The statistical discrepancy [270] is the national suspense account, and it is the same lesson as the discrepancy in the three GDP approaches [16, 20, 21]. She teaches this twice.

S = GNP − C − G = C+I+G+NX+NFP − C − G = I + NX + NFP = I + CA   [272]
Open goods market:  S^D = I^D + CA ;  with NFP = 0:  S^D = I^D + NX   [273]
                    NX = S^D − I^D                                     [274]

Figure 9 · Open-economy goods market: NX = S^D − I^D [275]

A trade deficit is simply saving falling short of investment. The country funds the gap by borrowing abroad: hence net borrower (Q56). The current account is the flow; net foreign assets [33] is the stock it accumulates into. Same relationship as saving → wealth, one level up.

8.2 Exchange rates [280–285, 303–307]

e_nom = FOREIGN currency per ONE unit of DOMESTIC currency   [280]
        Canadian convention:  e_nom UP  ⇒  CAD STRENGTHENS
Real exchange rate:  e = e_nom × P / P_for                   [281]
PPP:  e = 1  ⇒  e_nom = P_for / P                            [284–285]

The single worst trap in the course. Most US-oriented material quotes the reciprocal. Internalise the wrong direction and you invert every answer in Q58–Q66. Write the convention at the top of your page before starting any FX question.

e_nom = units of FOREIGN currency per 1 unit of DOMESTIC (CAD) [280]

e_nom ↑ ⇒ 1 CAD buys MORE foreign ⇒ CAD APPRECIATES

e_nom ↓ ⇒ 1 CAD buys LESS foreign ⇒ CAD DEPRECIATES

US-oriented sources usually quote the reciprocal (CAD per USD). Reproduce this box at the top of the page before any FX question, one inversion flips every answer in Q58–Q66.

One instrument, one target [303–304, 307]. The Bank of Canada cannot lower the exchange rate and lower inflation simultaneously: Q59 and Q60 both answer no. The same policy rate that fights domestic inflation also moves the currency. This is why FX translation risk on CAD-listed holdings is not avoidable by policy.

Self-test

Mexican pesos depreciate against CAD; Canadian inflation is 50% and Mexican inflation 200%. Has Mexico become cheaper in real terms?
→ No, the opposite. Q62: Mexico moves from ½ to ⅔ of the Canadian price. A nominal depreciation is not a real depreciation when the depreciating country's inflation outruns it.

Self-test, clean arithmetic, no calculator

A Big Mac costs 5,200 won in Seoul and USD 5.58 in the US; the market rate is 1,274 won/USD. Valued how?
→ Implied PPP rate = 5200 ÷ 5.58 = 931.9 won/USD. The market demands 1,274, far more won per dollar than PPP implies, so the won is undervalued ≈ 27% [Q61].

Classify every FX shock [Q58]: does it move the demand for the currency or the supply? Slide 292 (foreign r ↑) moves supply. Two-country adding-up [Q63–64]: one country's NX rise is the other's fall.

Part 9 · TechniqueGraphing conventions & exam craft

9.1 Shift vs pivot [317]

A variable in the intercept shifts. A variable in the slope pivots.

Figure 10 · Shift vs pivot, and where each tax lands

Income tax on workers: N^S = (1−t)w, pivots labour supply about the origin [99, Q19c, Q65]. Payroll tax on firms: MPN = (1+τ)w, pivots labour demand about its N-intercept: set w = 0 and N = 120 for any τ (practice midterm Q3c). Both pivot because both scale w. Wealth shifts supply, because it moves the intercept.

9.2 The graphing convention [88, 312]

Price goes on the vertical axis, so you plot the INVERSE function, still labelled N^D / N^S. Given N^D = 500 − 20w, you graph w = 25 − N/20. Plotting the function as written puts the wrong variable on the wrong axis and costs the graph marks.

9.3 Colour convention in her deck [57–58, 92–95, 128–129, 317–319]

Black = essential. Grey = supplementary ("FYI only – not required" / "you will NOT be required to do any calculus"). Navy = hyperlinks. Green/blue on graphs = emphasis. Grey appears on only ~45 of 338 slides. Where the deck says in words that something is not required, believe the words, slide 332 is black but says it will not be tested.

9.4 How to answer well

Rule	Why it earns marks
Name the mechanism, not just the direction	"A ↑ raises MPN at every N, so N^D shifts right" beats "A ↑ increases demand"
Distinguish a shift from a movement along	Most marks in the course turn on this one distinction
State ambiguity, then pick one	Say what it depends on, but on a paper offering options, circle exactly one. Hedging is penalised. Where "ambiguous" is itself an option (Q3d, Q4d), choosing it is correct
Check the comparison base	Midterm Q4(d) compares to part (b), not part (c)
Use cross-market consistency	r* equal economy-wide resolves within-market ambiguity
Watch for "temporary"	Kills the MPK^f channel but not the p_k channel
Check the exponent sum	Before assuming constant returns to scale
Criticism is examinable	Learning outcome 5. Use the four model-evaluation criteria [63], criterion 1 says assumptions must be appropriate for the research question, not merely realistic
Arithmetic must come out clean	No calculators ⇒ ugly numbers mean you made an error

The best cross-section connections [334], these are what turn a good answer into a top one: Lucas critique [263] ↔ constrained maximisation [57] · credibility [254] ↔ flattened Phillips curve [193] · efficiency wages [109] ↔ "some inequality motivates effort" [245] · technology growth [232] ↔ structural unemployment [117] · A-as-residual [71] ↔ the first RBC criticism [215] · statistical discrepancy [16, 20] ↔ CA + KA ≠ 0 [270] · "disciplines" vs "ties up" monetary policy [307] ↔ rules vs discretion [256].

9.5 The eight mantras: say them, don't read them

Divide by Pnominal → real, everywhere [34]

Intercept shifts, slope pivotstaxes scale w ⇒ pivots [317]

Supply + clearing ⇒ P ↓demand + rigidity ⇒ P ↑ [212, 217]

One r* for the whole economycross-market consistency [212]

Same direction ⇒ determinateopposite ⇒ ambiguous, check each variable

Divide by the EARLIER Pπ = ΔP / P(t) [35]

"Temporary" never touches MPK^fonly the p_k channel moves I^D [Q32b]

cu · res · BASEpublic · banks · central bank [180]

9.6 The gauntlet: twelve cold questions, whole course

Answer aloud before revealing. Wrong or slow ⇒ reread that part today.

Prompt	Answer
Anne Murray performs in Vienna: Canada's GDP, GNP, or both?	GNP only, a Canadian factor of production working abroad [Q6, 25]
The public abandons banks and holds all currency. M = ?	mm → 1, so M = BASE [Q39, 178]
A temporary rise in MPK, what happens to I^D?	Nothing via the MPK^f channel (K* unchanged); only a p_k change would shift it [Q32b, 141–149]
M ↑ under sticky wage: N, W/P, Y, r*, P?	N ↑ · W/P ↓ · Y ↑ · r* ↓ · P ↑, and I* rises by movement ALONG I^D [Q44]
Minimum wage set exactly AT w*, employment and unemployment?	Employment unchanged, unemployment zero [midterm Q4b]
The already-poor get poorer. The poverty rate does…?	Nothing, a headcount is blind to depth [Q52]
Can the BoC cut the exchange rate AND inflation together?	No, one instrument cannot hit two targets [Q59/60, 303–307]
Income tax rises in an open economy: r and NX?	r ↑ unambiguously (S^D left and NX^D right agree); NX ambiguous [Q65]
Two effects push a variable in opposite directions ⇒ ?	Ambiguous, unless another market pins it [212]. Same direction ⇒ determinate.
Natural rate of unemployment = ?	Frictional + structural, cyclical excluded [117]
Deflation with a stuck nominal wage is…?	Contractionary: P ↓ raises W/P, so employment falls [219 logic, run in reverse]
The statistical discrepancy appears twice in this course, where?	The three GDP approaches disagreeing in data [16, 20] and CA + KA ≠ 0 in data [270]

Part 10Errata: flag these

In the slides

Slide	Says	Should be
[191]	In heated growth, "the central bank could reduce the overnight rate"	Raise. Slide 250 is correct, cite 250
[187, 189]	Vertical axis labelled "M/P" but carrying r* values	The axis is r (214, 218, 337 correct)
[185]	Refers to "section XIII"	Section VIII
[281]	Real exchange rate given as 1.167	Her own numbers (0.7 × 2.00 / 1.30) give 1.077. Unresolved, ask her
[184]	"the deposit rate = the target rate"	Correct when written; since January 2025 the deposit rate sits 5bp below target

In the study-question solutions

Question	Issue
Q23(a)	Answer box says −11.1%; correct nominal GDP growth is −21% (the worked line says so). Also writes 65,000 where 8000 × 8 = 64,000. Most consequential error in the set
Q47	Reports w* falling after a rightward N^D shift along an upward N^S; it should rise, and the graph labels w₂* above w₁. Unresolved, ask her*
Q11(b)	Inflation given as 4%; exact 4.35%
Q11(d)	Writes "r = 0.03 − 0.04 = −1"; should be −0.01
Q17(c)	Writes "(100 − 280)/1"; should be (300 − 280)/1
Q57	Cross-references "question 57c)"; means Q56(c)
Q15 / Q33	Rounding: TFP growth −4.39% (given −4%); r* 0.2353 / 0.4706 (given 0.24 / 0.47)

Practice midterm solutions: no errors found, two cosmetic typos only.

Two remain unresolved, slide 281's real exchange rate and Q47's w* direction. Email Prof. Rybczynski rather than memorising a contradiction.