Topics for Final Exam
Principles
of Macroeconomics
Spring 2008
At the scheduled
final exam time: Tuesday June 9, 1:00pm
The final exam will be comprehensive. You will
want to review the Topics for
Exam 2: and Topics for
Exam 1. You will need a calculator for this exam.
The following topics have been covered since the
second exam
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
A. MV=PY
B. Classical School
1. velocity
is constant
2. income
is at full employment
3. increasing
the money supply causes inflation
C. Critique
1. Classical assumptions are not
valid in the short-run
2. monetary
policy can have real short-run effects
D. Monetarists
1. velocity
is predictable
2. income
will return to full-employment levels in the long run
3. expansionary
monetary policy causes price increases in the long run
4. inflationary
expectations are important
a. The Fisher effect
b. nominal
interest rates adjust to preserve real rates
E. Policy
prescriptions
1. classical
2. monetarist
3. Keynesian
4.
III. Economic Fluctuation
A. Business cycle
1. short
run
2. recession
3. expansion
B. The Great Depression
1. unemployment
is persistent
2. government
spending
a. New Deal programs
b. WWII
IV. A Keynesian Model of
Income Determination
A. Total Spending
1. Consumption
a. autonomous consumption
b. marginal propensity to consume
2. Investment
3. Government
Spending
4. Net Exports (Exports-Imports)
B. Equilibrium
1. Y = C + I +G + (X –Im)
2. C = a + bY
3. Yeq =
(1/1-b)[a + I + G + (X-Im)]
C. Changes in Spending and
Changes in Income
1. the
multiplier
2. volatility
3. policy
leverage
D. Fiscal Policy
1. adjust
government spending and/or taxes to reach target level of national income
2. budget
deficit is expansionary
3. budget
surplus is contractionary
A.
Economic Fluctuation: Price Level and National Income
1. Aggregate Demand: based on total
spending
a.
C+I+G+NX
b. shifts
2. Aggregate Supply: based on productive
capacity
a. resources, technology
b. shifts
3. Equilibrium
B. Policy
1. expansionary
policy (AD increases)
2. contractionary policy (AD decreases)
3. short-run
policy trade-off between inflation and unemployment
(Phillips Curve)
4. stagflation
a. high
inflation and high unemployment
b. supply
shocks
5. long-run
policy
a. increase
Aggregate Supply
b.
c. stimulating
AD is not effective in the long run
C. Policy issues
1. fiscal policy
a. political decision making
b. stimulative bias
c. automatic stabilizers
d. crowding out
2. monetary policy
a. expert decision-makers
b. time lags
IV. International
A. Development
1. Multiple economic problems
2. Good policy can help
3. Unintended consequences
4. short run and long run implications
B. Currency markets
1. Exchange rates determined by supply and demand
a. Supply of foreign currency
-people willing to trade their currency for $
- foreign demand for US exports and assets
b. Demand for foreign currency
- people who want foreign currency and are willing to
pay dollars
- US demand for imports and foreign assets
c. Speculative buying and selling
- expectations
2. Any currency market can be expressed two ways
a. $1 US = X pesos
b. 1 peso = $ 1/X
3. Exchange rate fluctuation
a. depreciation
b. appreciation
c. causes
1. change in imports
2. change in exports
3. change in GDP (acts through imports or exports)
4. relative inflation (faster rate of inflation
leads to currency depreciation)
5. changes in foreign investment
6. relative interest rates (lower rates lead to
currency depreciation)
7. expectations
4. Arbitrage
a.
profit opportunity from price differences
b.
buy in cheap location, sell in expensive location
c.
prices change
i) supply and demand in product
markets
ii) supply and demand in currency markets
d. “law” of
one price
C. National Income and International issues
[if time]
1. Net Exports
a. trade deficit, trade surplus
b. protectionism
i.
high cost
ii. inefficiency
iii. ineffective
2. Immigration
1. AS
2. AD
3. politics
versus economics
3. Capital flows
1. short run
2. long run
B. International flows [if time]
I. Balance of Trade
1. trade
surplus
2. trade
deficit
3. impact
on National Income
4. protectionism
II. Balance of Payments
1. Current Account
a. goods
b. services
c.
investment income
d. transfer
payments
2. Financial
Account (Capital)
change in
assets-- foreign and domestic
a. foreign direct
investment
b. foreign portfolio
investment
3. net
exports = net capital outflow
A. Prosperity
depends on productive resources
1. Capital
2. Labor
3. Natural Resources
B. Economic instability: recession and unemployment
1. aggregate
demand (Consumption, Investment, Government, Net Exports)
2. economic
shocks
C. Policy
1. short run:
stabilize
a. expansionary
i. fiscal
- tax less
- spend more
ii.
monetary
- increase money supply
- decrease interest rates
b. contractionary
i. fiscal
- tax more
- spend less
ii.
monetary
- decrease money supply
- increase interest rates
2. long-run:
growth
a. enhance resources
i. investment
ii.
research and development
iii. education and training
iv.
health care
v.
immigration
vi.
conservation
vii. environmental improvement
b. policies that allow
efficient use of resources
i. legal system
ii.
free trade
iii. non-discrimination
D. Impact of policies can differ in the short run and long
run
To go to my homepage click here