Topics for Exam 2
Principles of Economics
Friday February 22, 2013
You will need a calculator for this exam.
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
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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