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


I. Monetary Policy

    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

II. The Equation of Exchange

    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.
Taylor rule

 

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

  III. Aggregate Demand and Aggregate Supply

      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. Long run AS is vertical
            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 US

            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



VI. Conclusions

    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

 


macro home page

To go to my homepage click here

Kalamazoo College Homepage