Topics for Exam 2
Principles of Economics
Friday February 22, 2013


You will need a calculator for this exam.
Readings: Mankiw chapters 10, 11, 6, 8, 23, 20, 16        


I. The Role of Government

A. Institutional Framework for markets
    1.
legal system

            a. contracts

            b. property

            c. liability

            d. prevent fraud/violence
    2. system of standards

            a. weights & measures

            b. quality

            c. accounting
    3. monetary system

            a. central bank

            b. Federal Reserve

B. Address market failure

            1. Externalities
            a. negative
                        i. price too low, quantity too high
                        ii. too much pollution
                        iii. policy
            b. positive
                        i. quantity too low
                        ii. policy

            2. Monopoly
            a. price too high, quantity too low
            b. policy
                         i. antitrust
                        ii. regulation
                        iii.public ownership

          3. The problem of public goods
            a. non-rival and non-excludable
            b. private markets won't provide an efficient amount
            c. quasi-public goods
                        i. open access resources (overuse)
                       ii. excludable public goods (quantity too low)
            d. Policy

C. Equity
            1. alternate views on fairness

                        a. utility

                        b. equity

                        c. property

            2. policy

                        a. taxes deductions and credits
                        b. transfers
                        c. special programs and market intervention
                                    i. price floors
                                    ii. price ceilings
                                    iii. quotas

                                    iv. subsidies

D.  Taxes

            1. taxes change incentives

            2. sales tax analysis
                        a. price to consumer increases
                        b. quantity decreases
                        c. price to producer decreases
                        d. revenue to government
                        e. deadweight loss

          3. tax systems

                        a. vertical equity

                                    i. progressive

                                    ii. proportional

                                    iii. regressive

                        b. horizontal equity

                        c. benefits principle

 

E. Government Decision Making

            1. Cost Benefit Analysis

                        a. widely used

                        b. problems

                                    i. valuing non-monetary cost or benefits

                                    ii. subject to manipulation

            2. Public Choice Theory

                  1) voters

                        a. rent-seeking

                        b. rational ignorance

                 2) politicians

                        a. votes

                        b. money

 

II Economic Fluctuation & Macroeconomic Policy

A. Business cycle
        1. short run
        2. recession
        3. expansion 
   

 

B. Stabilization Policy
       1. expansionary policy reduces unemployment
             i. fiscal: increase government spending, decrease taxes
             ii. monetary: decrease interest rates, increase money supply, depreciate exchange rate
       2. contractionary policy reduces inflation
             i. fiscal: decrease government spending, increase taxes
             ii. monetary: increase interest rates, decrease money supply, appreciate exchange rate           


C. Long-run policy: growth
       a. enhance supply of productive resources
       b. efficient use of resources
       c. long-run goal

 

III. 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

 


IV. 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


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


V. 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

            1.Redistribution

                        a. borrowers gain

                        b. lenders, fixed incomes lose

                        c. tax issues

            2. hyperinflation

            a. massive redistribution

            b. extreme transactions costs

            c. economic failure

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 (interest rates increase as expected inflation increases)

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

VI. Economic Fluctuation in the 20th century

    A. Keynes and the Great Depression

        1. Investment drops

        2. National Income drops by a multiple

        3. Policy

            a. The New Deal

            b. expansional fiscal policy
            c. not enough to reach full employment

        3. WWII

            a. huge increase in government spending

            b. National Income increases

            c. unemployment disappears

    B. Post-War

        1. Economic fluctuation

            a. National Income

            b. Unemployment

            c. Inflation

        2. Policy

            a. expansionary

            b. contractionary

        3. Long term

            a. growth

            b. resources

            c. productivity




 


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