Exam is worth 150 points

A majority of the questions come from Part III (Chapters 11 – 19)

Break down of questions:

Part I
Chapters 1 – 5
Part II
Chapters 6 – 10
Part III
Chapters 11 – 19
Chapter 13 has the most questions.

Final Exam Study Guide

Summary
Part I
Opportunity cost
Supply and Demand
Production Possibility Frontier
Part II
GDP
Aggregate Expenditure Model
Consumption Function
Multiplier
Demand Side Equilibrium = GDP = Aggregate Expenditure
Part III
Basics of Fiscal Policy
Basics Monetary Policy
Effectiveness of Policy
Short run equilibrium vs Long Run Equilibrium
National Debt and Deficits – Costs
Inflation Unemployment Short run and Long Run
Advantages of Trade
Exchange Rates
Part I Exam I
Chapters 1 –5
Chapter 1: What is Economics?
Opportunity Costs
-Value of your next best alternative
-What must be given up in order to acquire an item?
Law of Comparative Advantage – one country is said to have a comparative advantage
Over another in the production of a particular good relative to other goods if it produces that
good less inefficiently as compared with the other country.
-Why is this important?
It explains why trade benefits both counties
Free Trade is mutually beneficially to both countries
Both parties gain in free voluntary trade
-Short Run Trade off between Inflation and Unemployment
-Normative vs. Positive economics
Chapter 2: Myth and Reality
-US Economy
Private enterprise
Factors of production controlled privately not by Government
Marketized Economy
GDP – Gross Domestic Product
Relatively Closed Economy vs. other countries
% of GDP which is comprised of imports and exports
Recession – period in which GDP declines – Business Cycle
Inputs of Production – Land, Labor, Capital
American Workforce – production, service sector, government, agricultural
Role of Government
Chapter 3: Fundamental Economic Problem – Scarcity and Choice
-Resources scarce wants unlimited
-Trade offs
-Opportunity Costs
-Production Possibility Frontier
Shape of curve
Marginal Analysis
Efficient – Optimal Choice
Law of Increasing Costs
-Adam Smith
Specialization
Division of Labor
Invisible Hand Concept
-Law of Comparative Advantage – revisited –
-Market Prices
-Free markets
-Market Mechanism
Chapter 4 – Supply and Demand
-Law of Demand
-Law of Supply
Change in quantity demand vs. change in demand
Change in quantity supply vs. change in supply
Movements along the curve vs. shifts in the whole function
-Equilibrium
Surplus
Shortages
Price ceiling and price floors
Chapter 5: An Introduction to Macroeconomics
GDP and the Price Level
-Aggregate Demand and Supply
Economic Growth
Inflation
Recession and Unemployment
GDP – for a particular year includes only goods and services produced with the year.
Nominal GDP – GDP in current $
Real GDP – constant $ GDP. GDP taking account for inflation
What is growth – Change in Real GDP
Economics an indicator of Well being –
Externalities
Great Depression
John Maynard Keynes – Market Economy will not naturally gravitate toward full employment
Stagnation
Supply Side Shocks
Part II - Exam II
Chapters 6 - 10
Chapter 6: Goals of Macroeconomic Policy
Economic Growth – Full Employment – Low Inflation
Production Function
Potential GDP
Growth of Labor Force
Growth of Capital Stock
Rate of Technical Progress
What is Unemployment?
Frictional/Structural/Cyclical
Discouraged Worker
Inflation
Consumer Price Index
Who is impacted by inflation?
Real vs. Nominal interest rates
Chapter 7 Economic Growth: Theory and Policy
Factors which determine economic growth
Pillars of productivity growth
Land/Labor/Capital
Production Function
Technology
Labor Quality: Education and Training – Human Capital
Convergence Hypothesis – If growth rate of poorer country is higher than richer country the
poorer country will close the economic growth gap. Why?
GDP Growth – Innovation vs. Imitation
Potential GDP
Growth Policy: Encouraging capital formation/Interest rates/Tax provisions/technical change
Chapter 8 Aggregate Demand and the Powerful Consumer
Circular Flow diagram
Aggregate Demand = Domestic Product = National Income
Total Spending = Total Production = Total Income
Aggregate Demand = Total spending in economy = C + I + G + (X – M)
National Income = all the income that individuals earned in producing goods and services.
National Income = Wages + Interest + Rents + Profits
What are the components or factors that influence Consumption?
Disposable Income C = f (DI)
Disposable Income DI = (Y-T)
Consumer Spending and Income
MPC = change in Consumption/Change in Disposable Income
Factors that shift the Consumption function – Wealth/Price Level/Real Interest Rates &
Future Income Expectations
Chapter 9 Demand Side Equilibrium: Unemployment or Inflation
Expenditure Schedule
Real Expenditure = Real GDP = Equilibrium
Inventory Level
Y = GDP = C + I + G + (X-M)
Factors which shift the function
Aggregate Expenditure Model assumes the Price Level is fixed
Changes to price level shift function – lead to construction of the Aggregate Demand Function
Demand Side Equilibrium and Full Employment
Recessionary Gap
Inflationary Gap
Multiplier – simplistic = (1/(1-MPC))
Understand why multiplier works
Infinite geometric progression
Factors which dampen the multiplier
-Inflation/Imports a function of income/Taxes
Chapter 10 Supply Side Equilibrium
Unemployment and Inflation
Aggregate supply
Recessionary and Inflationary Gaps
Economies self-correcting mechanism – Long Run
Why does self-correcting mechanism not always work?
Part III
Chapter 11 - 19
Chapter 11 – Fiscal Policy Tools
Government Expenditures/Taxation
Changes in equilibrium output when G and T changes
Chapter 12 Money and the Banking System
Functions of money
Barter vs monetary exchange
The banking system
Banks and money creation
Fractional Reserve banking
Banks and money creation
Reserve requirement and the money multiplier
Chapter 13 Managing Aggregate Demand: Monetary Policy
Federal Reserve
Tools of Monetary Policy
Required Reserve Ratio/Discount Rate/Open Market Operations
How does expansionary or contractionary Monetary Policy impact GDP – Keynesian Model
Relationship between Bond Prices and Interest Rates
Calculation of Yield
Chapter 14 – Financial Crisis and The Great Recession
A Case study – No questions on Final
Chapter 15 Debate over Monetary and Fiscal Policy
Quantity Theory of Money = MV = PY
Monetarism – The Quantity Theory of Money
What are the assumptions of this model?
-Stable and predictable measure of velocity
Effectiveness of Fiscal and Monetary Policy
Shape of Aggregate Supply function will impact policy
Understand impact to output and prices
Implementation vs impact of monetary or fiscal policy
Monetary Policy philosophical argument:
-Rules vs Discretion
Should monetary policy aim to control growth of money stock or interest rates?
Should Monetary policy follow a set guidelines or rules; or should it be at the discretion of the
monetary policy makers.
Chapter 16: Budget Deficit and Surplus
Difference between National Debt and Budget Deficit
Structural Deficit or Surplus
Deficits and inflation
National debt and burden to the public
Impact of Fed Monetization of Debt
“Crowding out” when the monetary policies drive up interest rates and crowds out private
investment opportunities.
Chapter 17 The Tradeoff between Inflation and Unemployment
Phillips Curve – short run phenomena
Demand side and Supply Side inflation – what is the difference.
What does the Phillips curve look like in the Long Run?
Natural Rate of Unemployment = Long Run Aggregate Supply.
Assume the economy is operating at the Natural Rate of Unemployment
-What is the result of expansionary MP or FP to output and price level?
Chapter 18 International Trade and Comparative Advantage
Comparative Advantage
Chapter 19 International Monetary Systems
Exchange Rates
Appreciation depreciation
Price of good with various exchange rates.
Types of Question
Definition concepts
Critical Thinking
Calculation