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1. Define economics and understand the importance of the fact that there are
unlimited wants but only limited resources available to satisfy them.
Economics the study of how people allocate their limited resources in an
attempt to satisfy their unlimited wants. As such, economics is the study of how
people make choices.
2. Distinguish the difference between microeconomics and macroeconomics.
microeconomics the part of the economic analysis that studies decision
making undertaken by individuals and by firms.
macroeconomics the part of the economic analysis that studies the behavior
of the economy as a whole.
3. List and discuss the three basic economic questions every society must answer
and the two antithetical answers to these questions of which existing societies
are a mixture.
1. What and how much will be produced? Some mechanism must exist for
determining which items will make it to production and which items will
remain pipe dreams.
2. How will items be produced? An item can be produced with the aim of
maximizing the number of people employed, or to minimize the total
expenses that members of society incur. A decision must be made about
the mix of resources used in production, the way in which they are
organized, and how they are brought together at a particular location.
3. For whom will items be produced? Once an item is produced, who
should be able to obtain it? Determining a mechanism for distributing
produced items is a crucial issue for any society.
centralized command & control a centralized authority decodes what
items to produce (and how many), how the scarce resources will be
organized in the items production, and identifies who will be able to obtain
the items.
price system individuals own all the scarce resources, determine the
quantity of good produced and how to go about producing them, and
determine how to allocate their income to obtain goods.
4. Understand the importance of rationality in economic analysis.
We assume that individuals do not intentionally make decisions that would
leave themselves worse off. Economics makes predictions based on the best
possible outcome.
5. Understand what economics means be self-interest and the important role it
plays in economic models.
Goals are assumed to include those not just associated with monetary gains. By
extension this can also be thought of in terms of individuals in pursuit of what
makes them better off also achieve the betterment of others around them.
Bounded rationality basically assumes that people cannot examine and think
through every possible choice they confront.
8. Distinguish the difference between positive and normative economics.
positive economics analysis that is strictly limited to making either purely
descriptive statements or scientific predictions. A state of what is.
normative economics analysis involving value judgments about economic
policies; relates to whether outcomes are good or bad. A state of what ought to
be.
9. Know how to construct a graph.
Production possibilities curve (PPC) - a curve representing all possible
combinations of maximum outputs that could be produced, assuming a fixed
amount of productive resources of a given quality
10.Distinguish the difference between direct and inverse relationships.
direct relationship an increase in one variable will result in an increase in the
related variable
inverse relationship an increase in one variable will result in a decrease in
the related variable
Chapter 2:
13.Understand the difference between wants and needs and the concept of
economic goods.
The term needs is objectively undefinable; there is no way to know if the person
is stating a vague wish, a want, or a life-saving requirement. Humans have
unlimited wants and no way to satisfy them all, whether they are materialistic
or ephemeral wants.
Chapter 3:
relative price the money price of one commodity divided by the money price
of another commodity; the number of units of one commodity that must be
sacrificed to purchase one unit of another commodity
23.List and explain the other determinants of demand besides the price of the good
or service.
ceteris paribus conditions (determinants of the relationship between price
and quantity that are unchanged along a curve; changes in these factors
cause the curve to shift) consumers income [an increase in income will lead
to an increase in demand], tastes and preferences [changes can shift the
demand curve], the prices of related goods [two goods are substitutes when a
change in the price of one causes a shift in demand for the other in the same
direction as the price change], expectations regarding future prices and future
incomes [customer expectation regarding future prices and incomes will
prompt them to buy more or less of a particular good without a change in its
current money price], and market size (number of potential buyers) [an
increase in the number of potential buyers at any given price shifts the
market demand curve outward]
24.Understand the difference between changes in the quantity demanded and
changes in demand.
quantity demanded a change in a goods own price leads to a change in
quantity demanded for any given demand curve, other things held constant.
This is a movement along the curve.
changes in demand a change in any of the ceteris paribus conditions for
demand leads to a change in demand. This causes a shift of the curve itself.
(The following learning objective is listed twice to indicate that there will be
two questions on this topic.)
25.Understand the difference between changes in the quantity demanded and
changes in demand.
quantity demanded a single point on the curve
demand the entire curve
26.Explain the law of supply.
The law of supply is the observation that the higher the price of a good, the
more of that good sellers will make available over a specified time period,
other things being equal.
27.Understand the determinants of supply.
ceteris paribus conditions of supply [assumed to be constant] prices of
resources used to produce the product, technology and productivity, taxes and
subsidies, producers price expectations, and the number of firms in the
industry
28.Distinguish between changes in the quantity supplied and changes in supply.
changes in quantity supplied a change in price leads to a change in the
quantity supplied, other things being constant. This is a movement along the
curve. A single point on the curve.
changes in supply a change in any ceteris paribus condition for supply leads
to a change in supply. This causes a shift of the curve itself. The entire curve.
(The following learning objective is listed twice to indicate that there will be
two questions on this topic.)
29.Understand the process of determining market equilibrium quantity and
equilibrium price.
equilibrium price clears the market of all excess quantities demanded or
supplied. Consumers are able to get all they want at that price, and suppliers
are able to sell all they want at that price.
market equilibrium quantity the point at which the market quantity supplied
is equal to the market quantity demanded
30.Understand the process of determining market equilibrium quantity and
equilibrium price.
The equilibrium price of a good and the equilibrium quantity of a good that is
produced and sold are determined by the intersection of the demand and supply
curves; at the intersection, there is neither an excess quantity of the good
supplied nor an excess quantity of the good demanded.
Chapter 4
31.Discuss the essential features of the price system.
the price system is an economic system in which relative prices are constantly
changing to reflect changes in supply and demand for different commodities;
the prices of those commodities are signals to everyone within the system as to
what is relatively scarce and what is relatively abundant.
(The following learning objective is listed twice to indicate that there will be
two questions on this topic.)
32.Evaluate the effects of changes in demand and supply on the market
equilibrium price and quantity.
When both demand and supply increase, the equilibrium quantity
unambiguously rises, because the increase in demand and the increase in
supply both tend to generate a rise in quantity. Both increases generate an
increase in quantity demanded and supplied.
33.Evaluate the effects of changes in demand and supply on the market
equilibrium price and quantity.
When demand decreases and supply increases at the same time, the equilibrium
price will fall, because both the decrease in demand and the increase in supply
tend to push down the equilibrium price. The decrease in demand tends to
reduce the equilibrium quantity, whereas the increase the increase in supply
tends to increase the equilibrium quantity.
34.Understand the various methods of rationing.
rationing by waiting first come>first served, rationing by queue; all waiting
in line are paying a higher total outlay than the money price paid for the good.
Personal time has an opportunity cost.
CHAPTER 5
1. Explain how market failures such as externalities might justify the economic
functions of government.
Market failures can justify a governments ability to control prices and
production that bear weight on the opportunity cost paid by society as a whole.
2. Distinguish between private goods and public goods and explain the nature of
the free-rider problem.
private goods goods that can be consumed by only one individual at a time.
Private goods are subject to the principle of rival consumption.
public goods goods for which the principle of rival consumption does not
apply and for which exclusion of nonpaying consumers is too costly to be
feasible; they can be jointly consumed by many individuals simultaneously at
no additional cost and with no reduction in quality or quantity.
free-riders a situation in which some individuals take advantage of the fact
that others will assume the burden of paying for public goods such as national
defense.
Chapter 7:
b) list and describe the various price indices published by the U.S.
government.
Consumer Price Index (CPI) a statistical measure of a weighted average of
prices of a specified set of goods and services purchased by typical consumers
in urban areas. The CPI attempts to measure changes only in the level of
prices of goods and services purchased by consumers.
Producer Price Index (PPI) a statistical measure of a weighted average of
prices of goods and services that firms produce and sell. The PPI attempts to
show what has happened to the average price of goods and services produced
and sold by a typical firm (there are also wholesale price indexes that track
the price level for commodities that firms purchase from other firms).
GDP deflator a price index measuring the change in prices of all new goods
and services produced in the economy. The GDP deflator is the most general
indicator of inflation because it measures changes in the level of prices of all
new goods and services produced in the economy.
Personal Consumption Expenditure (PCE) Index a statistical measure of
average prices that uses annually update weights based on surveys of
consumer spending. The PCE Index measures average prices using weights
from surveys of consumer spending.
17.To be able to measure inflation with a price index, with a good
understanding of how the different price indexes work.
Inflation's impact on the economy:
18.To do the following:
a) explain the difference between anticipated and unanticipated inflation.
anticipated inflation the inflation rate that we believe will occur; when it
does occur, we are in a situation of fully anticipated inflation.
unanticipated inflation inflation at a rate that comes as a surprise, either
higher or lower than the rate anticipated.
19.
b) explain the relation between the nominal interest rate and the real
interest rate.
nominal interest rate the market rate of interest observed in the contracts
expressed in todays dollars.
real interest rate the nominal rate of interest minus the anticipated rate of
inflation.
20.Explain how inflation affects people and what economists think is the main
cost of inflation.
Some people are negatively affected by inflation attempt to halt the loss of
money by investing in nominal plans; others benefit (creditors: 0, debtors: 1).
Economists believe that the main of cost of inflation in the opportunity cost of
resources used to protect against distortions that inflation introduces as firms
attempt to plan for the long run.
Business Fluctuations:
21.Explain what is meant by business fluctuations, list the phases of the
business cycle, and give an overview of the history of business fluctuations
in the United States since 1880.
business fluctuation the ups and downs in business activity throughout the
economy.
expansion a business fluctuation in which the pace of national economic
activity is speeding up.
contraction a business fluctuation during which the pace of national
economic activity is slowing down.
recession a period of time during which the rate of growth of business actvity
is consistently less than its long-term trend or is negative.
depression an extremely severe recession.
Chapter 8:
The Circular Flow of Income and Output:
21.To do the following:
a) define what is meant by National Income Accounting.
national income accounting a measurement system used to estimate national
income and its components. One approach to measuring an economys
aggregate performance.
b) reproduce the circular flow of income and output correctly labeling all
actors, markets, and flows.
c) explain why profits are a cost of production.
Profits are a cost of production because entrenpreneurs must be rewarded for
providing their services or else they wont provide them.
22.To do the following:
a) discuss what is exchanged in the product markets and in the factor
markets.
product markets consumer goods and services flow to household demanders,
while money flows in the opposite direction to business suppliers.
factor markets households sell resources such as labor land, capital, and
entrepreneurial ability in return for receipts or income from business
expenditures.
b) explain why dollar value of all output must equal total income.
Spending by one group is income to another. It is also a mater of simple
accounting and the economic definition of profit as a cost of production.
GDP defined: the total market value of all final goods and services produced
during a year by factors of production located within a nations borders.
23.To do the following:
a) give the definition of GDP
the total market value of all final goods and services produced during a year
by factors of production located within a nations borders.
b) explain why it is a flow concept and not a stock concept
Its a flow of production; it is necessary to specify a time period for all flows.
Income received is a flow.
c) identify two main methods of measuring it.
1. expenditure approach
2. income approach
d) explain why intermediate goods are not included in the definition
using the idea of value added.
To include intermediate goods in the definition is to include it twice, and
value added states that each good has exactly one value; thus, there is no
rationale in including intermediate goods twice.
24.List all other transactions that are not included in GDP and explain why
they are not included.
the buying & selling of securities no producing activity was performed; it is
merely a transfer of ownership
government transfere payments payments for which no productive services
are concurrently provided in exchange
private transfer payments merely a transfer of funds from one individual to
another
Limitations of GDP:
25.Explain some of the limitations of GDP and why GDP is often not an accurate
measure of national well-being.
GDP excludes nonmarket production GDP only includes the value of goods
and services traded in markets; this can cause some problems in comparing the
GDPs of a highly industrialized country and a highly agrarian nation. It can
also cause problems if nations have differing definitions of legal versus illegal
activites.
GDP is not a direct measure of human well-being no measured figure of
total national annual income can take account of changes in the degree of
labor market discrimination, declines or improvements in personal safety, or
the quantity or quality of leisure time. Measured GDP also says little about
environmental quality of life.
c) be able to list the other three measures of national income besides GDP
and NDP, and
d) show how all five are related to one another.
National Income (NI) the total of all factor payments to resource owners; it
can be obtained from NDP by subtracting indirect business taxes and transfers
and adding net U.S. income earned abroad and other business income
adjustments.
Personal Income (PI) the amount of income that households actually receive
before they pay personal income taxes.
Disposable Personal Income (DPI) personal income after personal income
taxes have been paid.
Nominal GDP vs. Real GDP:
To do the following:
a) distinguish between nominal GDP and real GDP.
b) explain why the distinction matters.
nominal values the values of variables such as GDP and investment
expressed in current dollars, also called money values; measurement in terms
of the actual market prices at which goods and services are sold.
real values measurements of economic values after adjustments have been
made for changes in the average of prices between years.
c) be able to correct nominal GDP for changes in the price index (the GDP
deflator).
Chapter 9:
Economic Growth:
31.Explain what is meant by economic growth.
The small differences in growth rates between countries do not matter very
much in the short run; however, those differences compound over longer
periods of time.
Traditional sources of economic growth:
34.Explain how increased productivity contributes unambiguously to greater
annual increases in a nation's per capita GDP.
labor productivity total real domestic output (real GDP) divided by the
number of workers (output per worker)
Increased productivity is based on an individuals ability to produce the same
output with fewer inputs. By definition, labor productivity increases whenever
average output produced per worker (or per hour worked) during a specified
time period increases.
35.Explain why saving is such an important determinant of economic growth.
(Figure 9-3)
To have more consumption in the future, you have to consume less today and
save the difference between your income and your consumption. Savings are
important for economic growth because without saving, we cannot have
investment; if there is no investment in our capital stock, there will be much
less economic growth.
36.Describe the importance of more labor, increased capital, and improved
human capital.
more labor more labor implies greater production rate, which then improves
the economy as the nation has more goods to contribute to world trade
increased capital allows for nations to invest more in research and
development of improved technology and goods for trade
improved human capital nations have a greater pool of intelligence to draw
from concerning the design, production, and trade of goods
new growth theory a theory of economic growth that examines the factors
that determine why technology, research, innovation, and the like are
undertaken and how they interact.
The new theory argues that technology cannot simply be viewed as an outside
factor without explanation; technology must be understood in terms of what
drives it.
38.Explain the connection of innovation, patents, knowledge, new ideas,
improved human capital, an open economy, and R&D to advancements in
technology.
Innovation and new ideas stem from base knowledge granted from improved
human capital; with an open economy, individuals and partners can use
patents to protect their innovative ideas from being copied so that they alone
reap the profits. These profits are what allow these individuals and partners to
invest in further research & development to improve upon their own
innovations such innovations are what contribute to the continual advance of
technology.
Population and economic development:
39.To do the following:
a) discuss the relationship between immigration and economic growth.
The population growth can result in a larger labor force and increases in
human capital, both of which contribute to economic growth. On the other
hand, population growth can be seen as a drain on the economy because for
any given amount of GDP, more population means lower per capita GDP.
c) explain what the world has discovered about the relationship between
economic growth and population growth.
Demand and production have increased to match the needs of the larger
population size. As families become richer, the average family size declines; the
more economic development occurs, the slower the population growth rate
becomes. This can be visualized as a bell-shaped curve graph.
40.List and explain the four factors that seem to be highly correlated to the
pace of economic development.
establishing a system of property rights the more secure private property
rights are, the more private capital accumulation and economic growth there
will be
developing an educated population a more educated workforce aids
economic development because it allows individuals to build on the ideas of
others; as stated in the negative, economic development is difficult to sustain if
a nation allows a sizable portion of its population to remain uneducated.
letting creative destruction run its course allowing new business to
ultimately create new jobs and economic growth after first destroying old jobs,
companies, and industries; although necessary for economic advancement,
many governments in developing nations have had a history of supporting
current companies and industries by discourage new technologies and
companies from entering the marketplace.
limiting protectionism trade encourages people and businesses to discover
ways to specialize so that they can become more productive and earn higher
incomes; thus, having fewer trade barriers promotes faster economic
development.
Chapter 10:
31.To do the following: a) draw a sketch of a long run aggregate supply curve
(LRAS), and b) discuss the relationship between the production
possibilities curve and the LRAS curve.
32.Explain why the long run aggregate supply curve has the shape that it has
and its meaning to economic analysis.
The LRAS is a vertical line because it represents the real output of goods and
services after a full adjustment has occurred; it can also be viewed as
representing the real GDP of the economy under conditions of full employment.
The long run is a sufficiently long period that all factors of production and
prices, including wages and other input prices, can change.
33.Illustrate economic growth with a PPC and with a LRAS curve and list the
sources of that growth.
35.Explain the impact of price level changes on the quantity demanded of all
output with the use of the real balance effect, the interest rate effect, and
the open economy effect.
Chapter 11:
The Classical Model of Macroeconomic Activity:
11. Explain who the Classical Economists were, state what Says Law is and
explain what it means.
Classical Economists = Adam Smith, J.B. Say, David Ricardo, John Stuart
Mill, Thomas Malthus, A.C. Pigou
Says Law = Supply creates its own demand. Hence, it follows that desired
expenditures will equal actual expenditures.
Says Law means that producing goods and services generate the means and
the willingness to purchase other goods and services. People produce more
goods than they want to use only if they seek to trade them for other goods.
Someone offers to supply something only because he or she has a demand for
something else.
12.List the four assumptions of the Classical Model and explain the
implications of these assumptions.
1. Pure competition exists No single buyer or seller of a
commodity or an input can affect its price
2. Wages and prices are flexible Prices, wages and interest rates
are free to move to whatever supply and demand dictates.
Although no individual buyer can set a price, a community of
buyers or sellers can cause prices to rise or to fall to an
equilibrium level
3. People are motivated by self-interest businesses want to
maximize their profit, and households wants to maximize their
economic well-being
4. People cannot be fooled by money illusion buyers and sellers
react to changes in relative prices. For example, workers will not
be fooled into thinking that doubling their wages makes them
better off if the price level has also doubled during the same time
period
The classical economics conclude that the role of government in the
economy should be minimal based on the 4 assumptions. Any
problems in the macro-economy will be temporary. The market will
correct itself.
13.Explain and illustrate why Saving and Investment tend to equality and
explain and illustrate why unemployment will not be a persistent problem
in the labor market.
The desired saving curve is shown as an upward-sloping supply curve of
savings. The equilibrating force is the interest rate. At higher interest rates,
people desire to save more. At higher interest rates, however, businesses wish
to engage less in investment because it is less profitable to invest.
Equilibrium in the labor market the demand for labor is downward sloping.
At higher rates, firms will employed fewer workers. The supply of labor is
upward sloping. At higher wage rates, more workers will work longer, and
more people will be willing to work. If an excess quantity of labor is supplied
at a particular wage level, the wage level must be above equilibrium. By
accepting lower wages, unemployed workers will quickly put back to work.
Thus this will put us back into equilibrium.
14.Describe the short- and long-run determination of equilibrium real GDP
and the price level in the Classical Model based on the LRAS.
An increase in the quantity of labor input increases real GDP.
The classical economist made little distinction between long run and short run.
Prices adjust so fast that the economy essentially always on or quickly moving
toward LRAS (which is the real GDP). Furthermore, because the labor market
adjusts rapidly, real GDP is always at or soon to be at, full employment.
Chapter 12:
The Keynesian Model of Macroeconomic Activity, Basics:
21.List and explain the four simplifying assumptions of the Keynesian Model and
explain the implications of these assumptions.
1. Business pay no indirect taxes (for example sales tax)
2. Business distribute all of their profits to shareholders
3. There is no depreciation, so gross private domestic investment equals net
investment
4. The economy is closed (there is no foreign trade)
Given all these simplifying assumptions, real disposable income, or after-tax
real income, will be equal to real GDP minus net taxes taxes paid less
transfer payments received.
22.Define and explain the relationship between the following terms:
a) consumption spending on new goods and services to be used up out of a
households current income; includes such thing as buying food and going
to concert.
b) consumption goods are goods purchased by households for immediate
satisfaction.
c) saving whatever is not consumed out of spendable income. Saving is an
action measured over time (a FLOW). Savings is an accumulation
resulting from the act of saving in the past (a STOCK).
d) disposable income = consumption + savings
e) investment investment is a FLOW concept. (1) Fixed investments:
expenditures on new machines and buildings (capital goods) that are
expected to yield a futures stream of income, (2) Inventory investment:
change in business inventories.
f) capital goods producer durables; non-consumable goods that firms use to
make other goods.
h) flows an action that occurs at a particular rate (for example $40 per
week, or $2080 per year, this rate is a FLOW). It is expressed per unit of
time, usually a year. Consumption is also a FLOW concept, you consume
from after-tax income at a certain rate per week, per month, or per year.
The Keynesian Model, Consumption Function:
23.Explain what the Keynesian Consumption Function is, and they should be able
graph it on a graph with a 45-degree reference line and be able to interpret such
a graph.
Keynesian consumption function the real consumption and saving decisions
depend primarily on a households current real disposable income
If we plot the combinations of real disposable income and planned real
consumption, we get the consumption table.
As real income rises, planned consumption also rises, but by a smaller amount.
Planned saving also increases with disposable income. There is an income
level where planned saving is actually negative. The further the income drops
below that level, the more household engages in dissaving, either going into
debt or by using up some of its existing wealth.
break even income the income where real disposable income equals planned
real consumption. There is neither positive nor negative real saving.
24.Define, distinguish between, and explain the relationship between the following
concepts related to the Keynesian Consumption Function: a) Autonomous
Consumption, b) Average Propensity to Consume, c) Average Propensity to
Save, d) Marginal Propensity to Consume, and e) Marginal Propensity to Save.
Autonomous consumption = this amount of real planned consumption which
does not depend at all on actual real disposable income
a) Average Propensity to Consume (APC) real consumption divided by real
disposable income.
APC = real consumption / real disposable income
b) Average Propensity to Save (APS) real saving divided by real disposable
income
APS = real saving / real disposable income
c) Marginal Propensity to Consume the ratio of the change in consumption
to the change in disposable income
MPC = change in real consumption / change in real disposable
income
d) Marginal Propensity to Save the ratio of change in saving to the change
in disposable income
MPS = change in real saving / change in real disposable income
with unsold products, and their inventories will begin to rise above the level
they had planned. Businesses will respond to the unplanned increase in
inventories by cutting back production of goods and services and reducing
employment, and we will move toward a lower level of real GDP.
The Keynesian Model with Government and the Foreign Sector Added:
27.Explain and illustrate (using the 45-degree reference line graph) how the
national economy comes to an equilibrium when Government Spending (G)
and Net Exports (X=exports imports) are added to Consumption Spending
and Investment Spending. Students should understand in this context what it
means to say that Investment Spending, Government Spending, and Net
Exports are autonomous from Real GDP.
Lump sum tax = a tax that does not depend on income
Net Exports (X) = exports imports
Real Consumption Function = C + I + G + X
C = consumption function with no government & no taxes
I = autonomous investment
G = government spending
X = net export
Adding government spending and foreign export increase real GDP per year
significantly.
The Keynesian Model and the Autonomous Spending Multiplier under the
assumption of a fixed Price Level (i.e., a horizontal SRAS):
28.Explain what the Multiplier Effect is and how it works in the context of Table
12-3 and Figure C-1.
Multiplier the ratio of the change in equilibrium level of real GDP to the
change in autonomous real expenditures. The number by which a change in
autonomous real investment or autonomous real consumption is multiplied to
get the change in equilibrium real GDP. For example, a permanent increase in
$100 billion in autonomous real investment spent on real GDP per year, will
eventually result in a $500 billion increase in equilibrium real GDP per year.
The multiplier effect happens because the spending of one group represents
income for another. One group will spend, and become income for another
group, which they will then spend to become the income of the next group, and
so on
29.State the two different formulas for the multiplier (First: Multiplier = 1/(1MPC) = 1/MPS; Second: Multiplier = (Ultimate change in equilibrium real
GDP)/(change in autonomous spending)) and be able to solve simple algebraic
problems involving these formulas.
Multiplier = [1 / (1 MPC)] = 1 / MPS
MPC + MPS = 1
The smaller the marginal propensity to save, the larger the multiplier
The larger the marginal propensity to consumer, the larger the multiplier.
This happens because the money needs to be spent to become the income of next
group; and the next group needs to spend to become the income of the group after
that. If everybody saves the money, the multiplier process would stop.
Change in equilibrium real GDP = multiplier x change in autonomous spending
2.
3.
Chapter 13:
Keynesian fiscal policy:
31.Define: discretionary fiscal policy, expansionary, contractionary, policy
tools.
discretionary fiscal policy the discretionary changing of government
expenditures or taxes to achieve national economics goals, such as high
employment with price stability.
expansionary liberal fiscal policy of spending more money on key economic
figures to support
contractionary conservative fiscal policy of spending less money to allow the
economy to tank
policy tools different fiscal policies that can be pursued for various goals
32.Explain how Congress can use fiscal policy to close inflationary and
recessionary gaps, changing both real GDP and the price level.
Congress can use fiscal policy to close recessionary gaps by choosing to spend
more in the economy to shift the aggregate demand curve to the right. Because
of the upward-sloping SRAS, both the price level and the real GDP rise.
On the other hand, it can close inflationary gaps by reducing its spending; this
will reduce aggregate demand, which will force equilibrium to fall real GDP
and price level will fall as well.
33.Be able to show how fiscal policy changes appear on the AD/AS graph and
determine the appropriate policy choice.
37.Be able to draw the Laffer curve and use it to show how supply-side
economists explain how a reduction in marginal tax rates could bring
about an increase in tax revenues.
The Laffer curve indicates that tax revenues initially rise with a higher tax
rate; eventually, however, tax revenues decline as the tax rate increases.
Fiscal policy lags:
38.Define the three fiscal policy lags (recognition, action and effect) and how
they complicate using fiscal policy to 'fine-tune' the economy.
recognition time lag the time required to gather information about the
current state of the economy.
action time lag the time between recognizing an economic problem and
implementing policy to solve it; the action time lag is quite long for fiscal
policy, which requires congressional approval.
effect time lag the time that elapses between the implementation of a policy
and the results of that policy.
The three fiscal policy lags complicate using fiscal policy to fine-tune the
economy because of the sheer amount of time it takes to implement and see the
effects of a new policy being put into place.
Automatic stabilizers:
39.Be able to identify the automatic stabilizers and explain how they minimize
changes in the GDP.
automatic/built-in stabilizers special provisions of certain federal programs
that cause changes in desired aggregate expenditures without the action of
Congress and the president; examples are the federal progressive tax system,
unemployment compensation, income transfer payments, and food stamps.
What Do We Really Know about Fiscal Policy?
40.When is fiscal policy most likely to be effective? Least likely? Why?
during normal times not very effective - Congress does too little too late to
help in a minor recession; automatic stabilizers rather than fiscal policy.
Chapter 14
1. Know the differences between a federal budget deficit, a surplus, and a balanced budget.
Federal budget deficit = government budget deficit. If government spends more than it
receives in taxes during a given period of time. This is called a deficit. In order to cover the
shortfall of the budget (deficit), the government sells IOUs, called Treasury Bonds, to people.
Whoever bought bonds will receive interests from the US government.
Federal budget balanced = balanced government budget. If the government spends an
amount exactly equal to the revenues it collects in taxes during a given period of time.
Federal budget surplus = government budget surplus. If the government spends less than
the revenues it receives in taxes during a given period.
2. Explain the difference between the federal budget deficit and the national debt.
Federal budget deficit is the amount of shortfall (debt) in $$ over a given period of time.
National debt = public debt. This is the total value of all outstanding debt of the federal
government accumulated over all time. It includes all deficit & surplus & balance
periods. So if the government has budget deficit, then the national debt increases, if the
government has surplus, then the national debt decreases.
3. Calculate the effects of spending and taxing on the deficit and debt.
Government spending more than it can collect taxes increase in deficit, and this
increase national debt.
4. Know the historical trend in the U.S. budget deficits and the national debt.
Figure 14.1 and 14.2 showed that the US has annual budget surplus of 13 years since
1940. Most of the time it is has budget deficit and needs to borrow money (IOU).
5. Know the difference between the gross national debt and the net national debt.
Gross national debt = all federal public debt taken together
Net national debt = gross national debt money the Federal government owes to itself.
Gross national debt minus all government interagency borrowing. For example, Social
Security Agencies owes US Treasury bond, thus the Federal is paying Social Security
Agency (itself).
6. Understand the burdens the national debt puts on future generations, particularly
pertaining to the effects of high interest rates and debt owned by foreigners.
Table 14.1 showed federal budget deficit, net public debt (net national debt), per capita
net public debt (national debt per person living in US), net interest payment per year, and
net interest as percentage of GDP (Gross Domestic Product). The net public debt as GDP
fell steady after WWII, and then increases steadily after 2000 (around 50% of GDP).
US government must pay interests on money it owes due to Treasury Bonds. The foreign
residents, businesses, and government agencies hold more than 50% of the US net
national debt. So the US must pay interests to foreigners also.
If the government continue to issue bonds (IOU) without reducing spending or increasing
taxes now, then the National debt can be paid by increase taxes for future generations
because of the increasing in interests due to increasing in national debt.
The rise in interest rates (high interest rates) will cause a reduction in the growth of
investment and capital formation, which in turn slows the growth of productivity and
improvement in societys living standard. This is called a crowding-out effect. In a
close society. Deficit spending increases the total demand for credit but leaves the total
supply of credit unchanges. Thus a reduction in privates investment and capital is
necessary.
For debt owes to the foreigners, future generation will have to pay back the debt +
accumulated interests. Portions of the incomes of the US residents will then be
transferred abroad. However, if the rate of return of government-funded projects with
deficits EXCEEDS the interest rates paid to foreigners, then the future US residents will
be better off. However, if the government is wasting the money, then the future residents
will be worst off.
7. Explain the relationship between the government budget deficit and the trade deficit.
US trade deficit = the value of US imports of goods and services exceeds the value of its
exports (will often accompany a government budget deficit)
When a foreigner purchase new US government bond (due to a budget deficit), they will
have fewer dollar to spend on US items (including US export goods). Hence when the US
government operates with a budget deficit, we should expect to see the foreign dollar
holders spending more on buying US government bonds and less on US produced goods
and services. As a consequence of the US government deficit, therefore, we should see a
decline in US exports relative to US imports (i.e. higher US trade deficit)
8. Understand the long-run and short-run effects the deficits and debt have on real GDP.
Short-run effect. When there is a recession-gap, the increase in aggregate demands (due
to increase expenditure of a budget deficit) can eliminate the recession gap and pushes
the economy toward its full employment real GDP level. Howerver, if the economy is at
full employment real GDP level, an increased in total planned expenditure and higher
demand generated by the deficit will create an inflationary gap (i.e. price level increases)
Long-run effect. In the long-run equilibrium real GDP is unaffected in the face of
increased government deficits. Ultimately, government spending in excess of government
receipts simply redistributes a larger share of the real GDP per year to governmentprovided goods and services. Thus if the government operates with a higher deficits over
an extended period, the ultimate results is a shrinkage in the share of privately provided
goods and services (i.e the government takes up a larger portion of economic activity)
10. Understand the impact of entitlement spending on deficits and the debt.
Todays entitlement expenditures is 1/3 of total federal spending. It is now exceed all
other domestic spending. Entitlements are growing faster than any other parts of the
federal government budget. Entitlement grew 7% - 8%, while the economy grew less
than 3% per year. The federal deficit is not expected to drop in the near future because
entitlement programs are not likely to be eliminated.
Chapter 15
11. Define and explain the four functions of money.
1. Money as a medium of exchange: sell/buy. Sellers accept money as payment.
Otherwise would need to barter: both people must exchange something that the
other wants
2. Money as a unit of accounting: it is a common denominator that people
recognized as a measure of value. It is a yardstick to allows individuals to easy
compare the relative value of good and services. It is a central value of money.
3. Money as a store of value: The ability to hold value over time. The money you
have today can be used to buy things later in the future
4. Money as a standard value of deferred payment: It is used to settle debt in the
future. Bonds can be paid in the future (due at maturity)
12. Identify the key properties that any good that functions as money must possess especially
in a fiduciary monetary system.
1. Accountability: people will accept them in exchange for good and services.
People are accepting money because they have confidence that they can be later
exchange for something else
2. Predictability of value: money retains its usefulness even if its purchasing power
is declining year in and year out as during periods of inflation. People will not
necessary refused to accept money in exchange simply becae you know that its
value will define due to inflation next year
13. Define liquidity. Explain which assets are liquid, which are not, and why not.
Liquidity: the degree to which an asset can be acquired or disposed of without
much danger of any intervening loss in nominal value and with small transaction
loss.
Most liquid = Currency and coins
Transactions deposits
Certificate of deposits (CD)
Stocks and bonds
Cars
House
Old masters paintings
Commercial office buildings
Least liquid = Antique furniture
14. Define the transactions (M1) and liquidity (M2) approaches to defining money making
sure you know which components are in which definition.
Moral hazard: the possibilities that a borrower might engage in behavior that increases
risk after borrowing the funds. For example, the business borrowed money for a low risk
project, but then switch to a high risk project after they get the money.
Liabilities: Amounts owed. The legal claims against a business or household by nonowners
Assets: Amount owned. All items to which a business or household holds legal claim
16. Explain how the Fed is organized, who is included on the Board of Governors and the
Federal Open Market Committee, and the structure and function of the district banks as
well.
Fed = Federal Reserve System. The central bank of US.
(1) Fed is managed by Board of Governors, composed of 7 full-time members
appointed by the US president with the approval of the Senate for a 14
years term
1. Set reserve requirements and approved discount rates as part of
monetary policy
2. Supervises and regulates member banks and bank holding
companies
3. Establish and administers protective regulations in consumer
finance
4. Oversees Federal reserve banks
17. List and explain the functions of the Fed and who is responsible for each function?
1. Fed supplies the economy with fiduciary currency: It provided the economy with
cash (i.e dollar bill). It can print money.
2. Fed provides payment-clearing system: Federal Reserves offers check-clearing
services to commercial banks. For example: when a bank extends a loan to
another institution, it typically transmits the payment using Fedwire. The other
institution repays the loan the next day or few days later by transmitting payment
on the same system.
3. Fed holds depository institutions reserves: the 12 Federal Reserve district banks
hold the reserves of depository institutions. Depository institutions are required
by law to keep a certain percentage of their transaction deposits as reserves.
4. Fed acts as the governments fiscal agent: The government collects large sum of
funds through tax, and spends/distribute equally large sum through an account
with the Federal Reserve. Thus the Fed acts as the governments banker
5. Fed supervised depository institutions: Fed and other regulators periodically and
without warning examine depository instructions to see what kind of loans being
made, and who has receives them. To make sure that the banks are conformed to
banking rules
6. Fed conducts monetary policy: regulate the nations money supply.
7. Fed intervenes in foreign currency markets: sometimes the Fed attempts to keep
the value of the dollar from changing. It does this by buying and selling US
dollars in foreign exchange markets.
8. Fed acts as lenders of the last resort: sometimes and individual bank may be
temporarily low on cash and other liquid assets (i.e illiquid). The Fed can lend to
any temporarily illiquid but other healthy banks. In this way the Fed can restore
depositors confidence.
18. Explain the process through which the Federal Reserve controls the money supply in a
fractional reserve banking system.
Fractional reserve banking system: a system in which depository institutions hold
reserves that are less than the amount of total deposits.
In a fractional reserve banking system, banks do not keep sufficient funds on hand to
cover 100% of their depositors account. Instead, the funds are held as reserves in the
form of cash in banks vault and deposits that banks hold on deposit with Federal Reserve
district banks.
Under fractional reserve banking system, the Fed can add to the quantity of money in
circulation by bringing an expansion of deposits within the banking system by
selling/buying existing US government securities in the open market. For example, Fed
bought $100,000 of US bonds from Bank1, bank1 now can use that $100,000 for loan to
individual (minus the reserved amount). That individual now can deposit that amount to
bank 2, which bank 2 can used that as a loan to another individual and so on. Each banks
receives smaller and smaller amount, but the total money expansion (close to 1 Million)
is much larger than the original $100,000 that the Fed paid to Bank1. In this example, the
Fed spent $100,000 but inject $1M into the money supply.
19. Define the money multiplier and specify it in two functional forms.
Money multiplier = a number that when multiplied by a change in reserves in the
banking system, yields the resulting change in the money supply. The money
multiplier gives the change in the money supply due to a change in reserves.
(1) Potential vs. actual money multipliers: potential money multiplier is the
maximum possible value of money multiplier.
(2) Real-world money multiplier: M1 multiplier usually between 1.5 and 2.0.
M2 multiplier usually about 5
20. Explain the central features of federal deposit insurance, how it can prevent bank runs,
and how its activities can affect asymmetric information and moral hazard.
FDIC (Federal Deposit Insurance Corporation) = a government agency that insures the
deposits held in banks and most other depository institutions.
Bank runs = when many depositors simultaneously rush to their banks to withdraw their
deposits. Banks do not hold enough reserves for everybody.
FDIC provided assurance that the depositors money is insured by the Federal
government. If the bank fails, then the Fed will return money to each depositors. This
gives the depositors the reason to keep their money in the bank without worry about
doing a bank rush to get their money out in a hurry.
The FDIC charged banks premiums based on their total deposits, and this went into a
fund that would reimburse depositor in case of a bank failure.
Asymmetric information = a hazard created by FDIC. When insurance is involved,
people would disguise the fact that they are poor risks. Deposit insurance shields
depositors from the potential adverse effects of risky decisions and so make depositors
willing to take riskier investments strategies from their bank
Moral hazard = insured depositors know that they will not suffer loss if their banks fails.
So they have little incentive to monitor their banks investments activities. Thus their
banks have incentives to take more risks than they otherwise would.
CHAPTER 16
The Demand for Money
21.Explain the three categories of money demand and understand how money
demand responds to changes in iterest rates and GDP and how these
changes are depicted on the money demand graph.
To use money, one must hold money.
reducing the international value of the dollar (i.e. a Dollar depreciation, the
dollar is cheaper), and making US goods more attractive abroad. The net
export effect of expansionary monetary policy will be the same direction as the
monetary effect, thereby amplifying the effect of such policy.
The fall of US dollars maker US exports less expensive for the rest of the world
(i.e. the rest of the world pay less in US dollar for the same good);
consequently, foreign residents demand a larger quantity of our exports as we
therefore demand fewer imports.
The Fed can also engage in Contractionary Monetary Policy. The effect is
the reverse of the Expansion monetary policy.
Monetary Policy and Inflation
25.Define the equation of exchange? Be able to define all four variables.
equation of exchange the formula indicating that the number of monetary
units time the number of times each unit is spent on final goods and services is
identical to the price level times real GDP
MsV = PY = Nominal GDP
Ms = actual money balances held by the nonbanking public/money
supply
V = income velocity of money, which is the number of times (avg. per
year), that monetary unit is spent on final goods and services.
P = price level or price index
Y = real GDP per year
26.List the assumptions made to turn the equation of exchange into the
quantity theory of money? What does this theory predict?
Equation of exchange = states that the total amount of funds spent on final
output, MsV, is equal to the total amount of funds received for final output,
PY.
The following assumptions: (1) the velocity of money V is constant, and the real
GDP, Y is also constant, then the simple equation of exchange tells us that a
change in the money supply can lead only to an equiproportional change in the
price level.
Monetary Policy in Action: the Transmission Mechanism
27.Explain both expansionary and contractionary monetary policy using the
three graph transmission mechanism.
Fed can influence interest rates only by actively entering the market for federal
government securities (Treasury bonds): (1) If the Fed wants to raise interest
rate, it essentially must engage in contractionary open market operations. It
must sell more Treasure securities than its buys, thereby reducing the total
reserves in the banking system, and hence, the money supply. (2) if the Fed
wants to reduce interest rate, it must engage in expansionary open market
operations. It must buy more Treasury securities, and thus increasing reserves
and the money supply.
See Figure 16-7 (three graph transmission mechanism). An increase in
money supply will result from increase in planned investment, this in turns
will shift the aggregate demand curve (AD) outward and to the right.
incur to raise funds, the Federal Reserve often uses that as a yardstick
by which to measure the effect of its policies.
2. The Discount Rate When the Fed does lend reserves directly to
depository institutions, the rate of interest that it charges is called the
discount rate. When depository institution borrow reserves from the Fed
at this rate, they are said to be borrowing through the Feds discount
window.
3. The Interest Rate on Reserves The Fed can pay interest on both
required reserves and excess reserves of depository institutions.
b. the role of the FOMC and the Trading Desk in carrying out monetary
policy;
FOMC Directive a document that summarize the Federal Open Market
Committees general policy strategy, established near-term objective for the
federal funds rate, and specifies target ranges for money supply growth.
The Trading Desk the FOMC leaves the task of implementing the Directive
to officials who manage an office at the Federal Reserve Bank of New York
known as the Trading Desk.
c. the role of the Taylor Rule in carrying out monetary policy.
Taylor Rule an equation that specifies a federal funds rate target based on
an estimated long-run real interest rate, the current deviation of the actual
inflation rate from the Federal Reserves inflation directive, and the gap
between actual real GDP per year and a measure of potential real GDP per
year. Taylor rules recommendations for federal funds rate target values
come close to the actual targets the Fed has selected over time.
Chapter 17:
Active Versus Passive Policymaking
31. Define active and passive policymaking. Why would policy makers prefer one or the
other?
36. Define rational expectations and explain the short run and long run policy
implications of anticipated vs. unanticipated policy changes.
rational expectations a theory stating that people combine the effects of past policy
changes on important economic variables with their own judgment about the future
effects of current and future policy changes.
37. What is policy irrelevance, and how does it relate to rational expectations? What is
the relationship between expectations and SRAS?
policy irrelevance proposition the conclusion that policy actions have no real effects in
the short run if the policy actions are anticipated and none in the long run even if the
policy actions are unanticipated.
SRAS will shift as a result of consumer expectation and actions in regards to future
occurrences.
Another Challenge to Policy Activism
38. Explain the real business cycle theory and supply shocks. Be able to illustrate both
harmful and beneficial supply shocks on the AD-AS graph.
Real, non-monetary forces might help explain aggregate economic fluctuations; these
shocks may take various forms, such as technological advances that improve
productivity, changes in the composition of the labor force, or changes in availability of a
key resource.
Modern Approaches to Rationalizing Active Policymaking
39. Understand the Keynesian justifications for active policymaking: menu costs, sticky
prices and wages and bounded rationality.
small menu costs costs that deter firms from changing prices in response to demand
changes; for example, the costs of renegotiating contracts or printing new price lists.
sticky prices prices, especially wages, that remain inflexible in the short run
40. Explain what is meant by the New Keynesian Phillips Curve and distinguish which
beliefs about how the economy functions would lead an economist to advocate active
or passive policymaking.
The New Keynesian Phillips Curve suggests that sticky prices strengthen the argument
favoring active policymaking as a means of preventing substantial short-run swings in
real GDP and, as a consequence, employment.
EXAM1:
Chapter 1
After reading this chapter, you should be able to:
1. Define economics and understand the importance of the fact that there are
unlimited wants but only limited resources available to satisfy them.
2. Distinguish the difference between microeconomics and macroeconomics.
3. List and discuss the three basic economic questions every society must
answer and the two antithetical answers to these questions of which existing
societies are a mixture.
4. Understand the importance of rationality in economic analysis.
5. Understand what economics means be self interest and the important role it
Chapter 2
After reading this chapter, you should be able to:
11. Define and understand of the concept of scarcity.
12.Explain and distinguish between the factors of production.
13.Understand the difference between wants and needs and the concept of
economic goods.
14.Explain the idea of opportunity cost.
15.Draw a graph a production possibilities curve.
16.Discuss the idea of efficiency and inefficiency
17.Understand the idea of increasing additional cost.
18.Discuss economic growth and the trade-off between consumption and capital
goods.
19.Explain absolute and comparative advantage.
20.Discuss specialization, division of labor and trade between nations.
Chapter 3
After reading this chapter, you should be able to:
21.Explain the law of demand.
22.Discuss the difference between money prices and relative prices.
23.List and explain the other determinants of demand besides the price of the
good or service.
(The following learning objective is listed twice to indicate that there will be
two questions on this topic.)
24.Understand the difference between changes in the quantity demanded and
changes in demand.
25.Understand the difference between changes in the quantity demanded and
changes in demand.
26.Explain the law of supply.
27.Understand the determinants of supply.
28.Distinguish between changes in the quantity supplied and changes in supply.
(The following learning objective is listed twice to indicate that there will be
two questions on this topic.)
29.Understand the process of determining market equilibrium quantity and
equilibrium price.
30.Understand the process of determining market equilibrium quantity and
equilibrium price.
Chapter 4
After reading this chapter, you should be able to:
EXAM2:
Chapters 5 & 6
After reading Chapters 5 & 6, you should be able to:
CHAPTER 5
1. Explain how market failures such as externalities might justify the economic functions
of government.
2. Distinguish between private goods and public goods and explain the nature of the freerider problem.
3. Describe political functions of government that entail its involvement in the economy.
4. Analyze how Medicare affects the incentives to consume medical serives.
5. Explain why increases in government spending on public education have not been
associated with improvements in measures of student performance.
6. Discuss the elements of the theory of public choice.
CHAPTER 6
7. Distinguish beteen average tax rates and marginal tax rates.
Chapter 7
After reading Chapter 7, you should be able to:
The Macroeconomy: Unemployment, Inflation & Deflation, and the Business
Cycle Unemployment:
11. Answer the following:
a) name the government bureau responsible for unemployment data and the
employment categories its uses in doing so, and
b) describe the history of the unemployment rate since 1890.
12. Answer the following:
a) list the four categories an unemployed individual might fall into according to the
Bureau of Labor Statistics,
b) define what is meant by a discouraged worker, and
c) explain why knowing the average duration and costs of unemployment is important.
13. Be able to calculate the unemployment rate or the labor force participation rate from
given data.
The Major Types of Unemployment and the Concept of Full Employment (also
know as the Natural Rate of Unemployment):
14. List and describe the three major types of unemployment according to economists.
15. Define what is meant by full employment and by the natural rate of unemployment and
how they relate to the four types of unemployment is learning objective 4.
Price stability and price indices:
16. To do the following:
a) differentiate inflation from deflation and explain how each affects the purchasing
power of money, and
b) list and describe the various price indices published by the U.S. government.
17. To be able to measure inflation with a price index, with a good understanding of how
the different price indices work.
Inflation's impact on the economy:
18. To do the following:
a) explain the difference between anticipated and unanticipated inflation,
b) explain the relation between the nominal interest rate and the real interest rate.
19. Explain how inflation affects people and what economists think is the main cost of
inflation.
Business Fluctuations:
20. Explain what is meant by business fluctuations, list the phases of the business cycle,
and give an overview of the history of business fluctuations in the United States since
1880.
Chapter 8
Measuring the Economy's Performance: GDP
After reading Chapter 8, you should be able to:
The Circular Flow of Income and Output:
21. To do the following:
a) define what is meant by National Income Accounting,
b) reproduce the circular flow of income and output correctly labeling all actors,
markets, and flows, and
c) explain why profits are a cost of production.
22. To do the following:
a) discuss what is exchanged in the product markets and in the factor markets, and
b) explain why dollar value of all output must equal total income.
GDP defined:
23. To do the following:
a) give the definition of GDP,
b) explain why it is a flow concept and not a stock concept,
c) identify two main methods of measuring it, and
d) explain why intermediate goods are not included in the definition using the idea of
value added.
24. List all other transactions that are not included in GDP and explain why they are not
included.
Limitations of GDP:
25. Explain some of the limitations of GDP and why GDP is often not an accurate measure
of national well-being.
Calculating GDP by the expenditure approach:
26. To do the following:
a) list the components that comprise the expenditure approach to measuring GDP, and
b) explain what is contained in each component.
27. Explain how depreciation (capital consumption allowance) connects GDP to NDP and
gross private domestic investment to net investment.
Calculating GDP by the income approach:
28. To do the following:
a) list the components that comprise the income approach to measuring GDP,
b) explain what is contained in each component,
c) be able to list the other three measures of national income besides GDP and NDP,
and
d) show how all five are related to one another.
Nominal GDP vs. Real GDP:
29. To do the following:
a) distinguish between nominal GDP and real GDP,
b) explain why the distinction matters, and
c) be able to correct nominal GDP for changes in the price index (the GDP deflator).
Comparing GDP per capita of different countries:
30. To do the following:
a) discuss why using purchasing power parity when converting one countrys GDP into
the currency value of another county is preferred to using the current exchange rate,
and
b) be able to describe the per capita GDP of the U.S. as it compares to other countries
using both approaches.
Chapter 9
After reading Chapter 9, you should be able to:
Economic Growth:
31. Explain what is meant by economic growth.
32. To do the following:
a) discuss historical record of economic growth in the U.S.,
b) describe the ranking of the twelve countries growth rates listed in Table 9-1 from
1970 to 2011, and c) discuss criticisms of economic growth
Small differences in growth rates add up over time:
33. Explain why small differences in growth rates between countries can add up to big
differences over the long term and be able to use Table 9-3.
Traditional sources of economic growth:
34. Explain how increased productivity contributes unambiguously to greater annual
increases in a nation's per capita GDP.
35. Explain why saving is such an important determinant of economic growth. (Figure 93)
36. Describe the importance of more labor, increased capital, and improved human capital.
New Growth Theory:
37. Explain how new growth theory differs from traditional growth theory.
38. Explain the connection of innovation, patents, knowledge, new ideas, improved human
capital, an open economy, and R&D to advancements in technology.
Population and economic development:
39. To do the following:
a) discuss the relationship between immigration and economic growth,
b) explain Thomas Malthus' theory of the relationship between population growth and
standards of living, and
c) explain what the world has discovered about the relationship between economic
growth and population growth.
40. List and explain the four factors that seem to be highly correlated to the pace of
economic development.
EXAM3:
Chapter 10
After reading Chapter 10, you should be able to:
Long Run Aggregate Supply and Economic Growth:
1. To do the following:
a) draw a sketch of a long run aggregate supply curve (LRAS), and
b) discuss the relationship between the production possibilities curve and the LRAS
curve.
2. Explain why the long run aggregate supply curve has the shape that it has and its
meaning to economic analysis.
3. Illustrate economic growth with a PPC and with a LRAS curve and list the sources of
that growth.
The Aggregate Demand Curve:
4. Draw a sketch of the aggregate demand (AD) curve and discuss its meaning to
economic analysis.
5. Explain the impact of price level changes on the quantity demanded of all output with
the use of the real balance effect, the interest rate effect, and the open economy effect.
6. Discuss what factors can cause a shift of the AD curve to the right (an increase in AD)
and what factors can cause a shift of the AD curve to the left (a decrease in AD).
Long Run Macroeconomic Equilibrium:
7. Explain how to use the model of the LRAS curve with the AD curve to determine
macroeconomic equilibrium and to further explain what happens if the price level is
not at the equilibrium level.
LRAS/AD Model, Economic Growth, and the Price Level:
8. Explain how economic growth can lead to deflation using the LRAS/AD model.
LRAS/AD Model and Inflation:
9. Use the LRAS/AD model to illustrate and explain supply side inflation.
10. Use the LRAS/AD model to illustrate and explain demand side inflation.
Chapter 11
After reading Chapter 11, you should be able to:
The Classical Model of Macroeconomic Activity:
11. Explain who the Classical Economists were, state what Say's Law is and explain what
it means.
12. List the four assumptions of the Classical Model and explain the implications of these
assumptions.
13. Explain and illustrate why Saving and Investment tend to equality and explain and
illustrate why unemployment will not be a persistent problem in the labor market.
14. Describe the short- and long-run determination of equilibrium real GDP and the price
level in the Classical Model based on the LRAS.
The Keynesian Model: Short Run Aggregate Supply:
15. Explain the circumstances under which the short-run aggregate supply curve may be
either horizontal or upward sloping but not vertical like the LRAS.
16. Explain how the national economy might experience fixed or changing price levels
and output in the short run using the SRAS and shifts in AD.
Shifts in Aggregate Supply, Short-Run and Long-Run:
17. List and explain what factors can cause shifts in the short-run and the long-run
aggregate supply curves respectively.
Consequences of Changes in AD in the Short-Run:
18. Explain and illustrate the consequence of an increase in AD and the consequence of a
decrease in AD (assuming that the SRAS and LRAS curves are stable).
Explaining Short-Run variations in Inflation with the AD/SRAS/LRAS model:
19. Explain what Demand-Pull Inflation and Cost-Push Inflation are and how they differ.
Students should be able to use the AD/SRAS/LRAS model in doing so.
20. Explain how the appreciation or depreciation of the dollar affects the national economy
using the AD/SRAS/LRAS model.
Chapter 12
After reading Chapter 12, you should be able to:
The Keynesian Model of Macroeconomic Activity, Basics:
21. List and explain the four simplifying assumptions of the Keynesian Model and explain
the implications of these assumptions.
22. Define and explain the relationship between the following terms:
a) consumption,
b) consumption goods,
c) saving,
d) disposable income,
e) investment,
f) capital goods,
g) stocks, and
h) flows.
The Keynesian Model, Consumption Function:
23. Explain what the Keynesian Consumption Function is, and they should be able graph it
on a graph with a 45-degree reference line and be able to interpret such a graph.
24. Define, distinguish between, and explain the relationship between the following
concepts related to the Keynesian Consumption Function:
a) Autonomous Consumption,
b) Average Propensity to Consume,
c) Average Propensity to Save,
d) Marginal Propensity to Consume, and
e) Marginal Propensity to Save.
The Keynesian Model, Investment Function:
25. Explain what the Keynesian Planned Investment Function is and how planned
investment is determined by the function. Students should also understand how
investment spending is included in the Keynesian 45-degree graph with consumption
spending, See Figure 12-4.
The Keynesian Model, Consumption and Investment together but excluding the
Government Sector and the Foreign Sector:
26. Explain how equilibrium is determined in a simple Keynesian model that includes only
consumption spending and investment spending in the context of the 45-degree
reference line graph and the Saving and Investment graph. In reference to both these
graphs, students should also be able to distinguish
between Planned and Actual Investment and explain how unplanned changes in
business inventories affect the national economy.
The Keynesian Model with Government and the Foreign Sector Added:
27. Explain and illustrate (using the 45-degree reference line graph) how the national
economy comes to an equilibrium when Government Spending (G) and Net Exports
(X=exports imports) are added to Consumption Spending and Investment Spending.
Students should understand in this context what it means to say that Investment
Spending, Government Spending, and Net Exports are autonomous from Real GDP.
The Keynesian Model and the Autonomous Spending Multiplier under the
assumption of a fixed Price Level (i.e., a horizontal SRAS):
28. Explain what the Multiplier Effect is and how it works in the context of Table 12-3 and
Figure C-1.
29. State the two different formulas for the multiplier (First: Multiplier = 1/(1-MPC) =
1/MPS; Second: Multiplier = (Ultimate change in equilibrium real GDP)/(change in
autonomous spending)) and be able to solve simple algebraic problems involving these
formulas.
The Keynesian Model and the Autonomous Spending Multiplier dropping the
assumption of a fixed Price Level (i.e., a horizontal SRAS) AND the Relationship
between Total Planned Expenditures (45-degree graph) and the Aggregate
Demand Curve :
30. Explain how the Multiplier works when we assume Price Level is not fixed (SRAS
slopes upward) in the context of Figure 12-7, AND the relationship between Total
Planned Expenditure (C+I+G+X) and Aggregate Demand in the context of Figure 128.
Chapter 13
After reading Chapter 13, you should be able to:
Keynesian fiscal policy:
31. Define: discretionary fiscal policy, expansionary, contractionary, policy tools.
32. Explain how Congress can use fiscal policy to close inflationary and recessionary
gaps, changing both real GDP and the price level.
33. Be able to show how fiscal policy changes appear on the AD/AS graph and determine
EXAM4:
Chapter 14
After reading Chapter 14, you should be able to:
1. Define the terms Government Budget Deficit, Balanced Budget, and Government
Budget Surplus.
2. Explain what the Public Debt is and to distinguish the Public Debt from the
Government Budget Deficit.
3. Discuss the history of the Government Budget Deficits and surpluses since 1940 in
terms of constant 2005 dollars and as a percentage of GDP.
4. Discuss the accumulation of the Net Public Debt in constant 2005 dollars in terms of
its absolute size since 1940.
5. Evaluate Net Public Debt in constant 2005 dollars in terms of its per capita size and as
a percentage of GDP since 1940 and to be able to discuss the size of the net interest
payments on the Public Debt as a percentage of GDP.
9. Discuss the short and long run macroeconomic effects of budget deficits.
10. Discuss several different ways the government could reduce budget deficits.
Chapter 15
After reading Chapter 15, you should be able to:
11. Define and explain the four functions of money.
12.Indentify the key properties that any good that functions as money must
possess especially in a fiduciary monetary system.
13.Define liquidity. Explain which assets are liquid, which are not, and why not.
14.Define the transactions (M1) and liquidity (M2) approaches to defining
money making sure you know which components are in which definition.
15.Explain how financial intermediaries lower transactions costs, and define:
"direct financing," "indirect financing," "risk," "moral hazard," "asymmetric
information," "assets," and "liabilities."
16.Explain how the Fed is organized, who is included on the Board of
Governors and the Federal Open Market Committee, and the structure and
function of the district banks as well.
17.List and explain the functions of the Fed and who is responsible for each
function?
18.Explain the process through which the Federal Reserve controls the money
supply in a fractional reserve banking system.
19.Define the money multiplier and specify it in two functional forms.
20.Explain the central features of federal deposit insurance, how it can prevent
bank runs, and how its activities can affect asymentric information and moral
hazard.
Chapter 16
After reading Chapter 16, you should be able to:
The Demand for Money
21.Explain the three categories of money demand and understand how money
demand responds to changes in iterest rates and GDP and how these changes
are depicted on the money demand graph.
Chapter 17
After reading Chapter 17, you should be able to:
Active Versus Passive Policymaking
31.Define active and passive policymaking. Why would policy makers prefer
one or the other?
Natural Rate of Unemployment
32.Define the natural rate of unemployment, cyclical, structural, frictional.