Topics for Exam 1
Principles of Macroeconomics
Wednesday April 23, 2008
A. Global Economy
1. interdependence
2. specialization
3. self-interest
4. financial connections
B. National Income
1. Production Possibilities frontier
a. efficiency
- trade-offs
-opportunity cost
b. resources
c. growth
2. Circular flow of income
a. income = spending
b. GDP = C + I + G + Net exports
C. The World Economy
1. National Income
a. relative size of US and other countries
b. price differences complicate measurement
2. Per capita GDP
a. measure of economic performance
b. correlation between per capita
GDP and material well-being
D. Macroeconomic relations
1. consumption and income
(Consumption function)
2. inflation and unemployment
(Phillips curve)
II. Supply and Demand
1. Demand
a. relation between price and
quantity demanded
b. preferences, income,
complements, substitutes, number of consumers
c. increase in demand (shift to
right)
d. decrease in demand (shift to
left)
e. Shifts in demand vs. changes in
quantity demanded
2. Supply
a. relation between price and quantity supplied
b. costs of production, number of producers
c. increase in supply (shift to right)
d. decrease in supply (shift to left)
e. shifts in supply vs. changes in quantity supplied
3. Demand and Supply
a. finding equilibrium price and quantity
b. effects of changes in supply or demand
i. price
ii. quantity
III. Growth
A. Growth, in the short run
1. stimulative
policies
2. GDP = C + I + G + Net exports
3. policies to increase spending
4. works when actual GDP<
potential
B. Growth, in the long run.
1. shifting production
possibilities frontier
2. increasing resources (factors of
production)
a. investment
b. education, immigration, health
c. conservation, resource
enhancement, exploration
d. technological change
C. Geometric growth
1. Calculation
2. importance of compounding
a. growth rate (or interest rate)
b. time period
c. small differences in growth rates
yield large differences over time
3. "rule of 72"
IV. Financial Markets
A. Present value
1. meaning
2. calculations
a. time
b. impact of interest rate
B. Bond Markets
1. debt :
maturity, face value (par value) and coupon
2. calculate present value
3. secondary market value inversely related to
interest rates
4. risk
a. bonds are low risk
b. default risk
i. US Treasury
securities: "risk free"
ii. bond ratings
iii. risk
premium
c. trading risk
d. inflation
e. exchange rate
f. time
C. Stock Markets
1. equity or ownership
2. value
a. market value of assets
b. stream of future earnings (PE ratio)
c. future price
3. expectations
a. myopic
b. adaptive
c. rational
4. financial bubble
5. efficient markets
a. assumptions
b. implications
6. financial instruments
a. mutual funds
b. index funds
c. options
d. futures
e. short selling
f. margin
D . Portfolios [we
will discuss this after the exam]
1. combination of various financial
assets
2. optimal mix will vary
a. diversification
b. risk/return
c. needs
d. liquidity
E. Credit Markets [we will discuss this in more detail after the exam]
1. supply,
demand, and interest rates
2. investment and interest rates
3. savings and investment