Topics for Exam 2
Principles of Macroeconomics
Wednesday May 14, 2008


You will need a calculator for this exam.
Readings: chapters 5, 6, 10, 11


I. Measuring National Income

A Measures

1. Gross Domestic Product, per capita GDP
    a. expenditures
    b. incomes
2. Net Domestic Product (adjust for depreciation)
3. Gross National Product (adjust for multinational earnings)
4. Disposable Personal Income (adjust for taxes, transfers, etc)
5. Measurement issues:     
    a. household production; underground economy      
    b. Real GDP

B Approaches

1. Expenditures approach

a. GDP= C+I+G+(X-Im)

b. final goods and services

            i) not intermediate goods

            ii) not used goods

            iii) not financial transactions
2. Incomes approach
C. Changes in the Price level
            1. Nominal GDP
            2.
Real GDP

II.
Price level and Inflation

A. Measuring the Price Level

1. Consumer Price Index
2. calculating inflation rates
3. calculating real prices
4. calculating real interest rates
5. Measurement issues

            a. quality changes
            b. market basket changes

B. Inflation Costs

C. Policy  

        1. contractionary policy
            a. fiscal policy
                i. decrease spending
                ii. increase taxes
                iii. decrease transfers
            b. monetary policy
                i. decrease money supply
                ii. increase interest rates
        2. other responses
            a. indexing
            b. Fisher effect

            c. adjustable interest rates
         3. extreme measures
                a. price controls
                b. new currency
                c. exchange rate anchors


III. Unemployment
A. Measurement and classification
            1. employed,

            2. unemployed,

            3. not in the labor force
            4. measurement issues

                        a. discouraged workers

                        b. underemployment

                        c. underground economy

 

B. Causes of unemployment

            1. frictional unemployment

            2. structural unemployment

            3.cyclical unemployment

C. Costs of unemployment
    1. lost production (Okun’s Law)
    2. social costs
    3. unequal burden

D. Theories
    1.Classical economists
    2. Marx
    3.
Keynes
        a. flexible vs. sticky wages         
            i. unions, contracts
            ii.
efficiency wages
     b. the natural rate of unemployment

E. Policy 
    1.expansionary policy
    a. fiscal policy
        i. increase spending
        ii. decrease taxes
        iii. increase transfers
    b. monetary policy:
        i. increase money supply
        ii. decrease interest rates
   2. retraining

   3. unemployment compensation


IV. Money
    A. Functions of Money
        1. medium of exchange
        2. unit of account
        3. store of value

    B. Types of Money
        1. liquidity
        2. M1
        3.
M2
        4.
fiat vs. commodity money

V. The Federal Reserve System

    A. Structure
        1. Board of Governors
        2.
Federal Open Market Committee
        3.
Twelve Regional Banks

    B. Functions
        1. Control monetary policy
        2.
Act as bank for banks
        3. Bank regulation

VI. Banking

    A. Financial intermediaries
        1. assets-- reserves & loans
        2. liabilities-- deposits

    B. Fractional Reserve Banking
        1. required reserves
        2. excess reserves
        3. deposits-- loans
        4. risk of failure
            a. bank runs
            b. deposit insurance

    C. Money creation
        1. Fed increases reserves through open market purchase
        2. banks lend excess reserves
        3. money expansion process
            a. loans
            b. spending
            c. deposits
            d. more loans . . .
        4. deposit expansion factor = 1/reserve requirement

VII. Monetary Policy [if time]

    A. policy tools
        1. open market operations
            a. buy bonds-- increase money supply
            b. sell bonds -- decrease money supply
        2. reserve requirements
        3. discount rate

    B. Policy effects-- short-term
        1. interest rates
        2. exchange rates
        3. business and financial markets

    C. Policy effects-- long-term
        1. monetary neutrality
        2. price level


 


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