Topics for Final Exam
Principles of Economics 101
Winter 2013
At the
scheduled final exam time: Tuesday March 19, 8:30 am
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.
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
4. Supply Shocks
a. fewer resources
b. stagflation
c. limits to fiscal
and monetary policy
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. Aggregate Supply policy
a. expand resource base
b. this often takes a long time to implement
C. Long-run Aggregate Supply
a. no
long-run relation between price level and real output
b.
c. economy is at full-employment
d.
stimulating AD is not effective at full employment
e. resources matter
A. 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
B.
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
A. Present value
1. meaning
2. calculations
a. time
b. impact of
interest rate
B. Asset Allocation
1.
market risk is unavoidable & unpredictable
2.
some assets are riskier than others
3.
diversification across asset classes is important
C. Bond Markets
1.
debt : maturity, face value (par value) and coupon
2.
calculate present value
3.
secondary market value inversely related to interest
rates
4.
risk
a. bonds are low
risk
b. default risk
i.
US Treasury securities: "risk free"
ii. bond
ratings
iii. risk
premium
c. trading risk
d. inflation
e. exchange rate
f. time
5.
Other credit instruments
a. commercial paper
b. mortgages
c. mortgage backed
securities (MBS)
d. collateralized debt obligations (CDO)
D. Stock Markets
1. equity or ownership
2. value
a. market
value of assets
b. stream of
future earnings (PE ratio)
c. future
price
d.
expectations
3. financial bubble
a. adaptive expectations
b. unsustainable
5. efficient markets
a. assumes price reflects all available
information
b. assumes
rational expectations
c.
implications; can’t beat market
6. related financial instruments
a. mutual
funds
b. index funds
c.
options
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
i) foreign direct investment
ii) foreign portfolio 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
IV. Market
Structure and Profit Maximization
A. Market structures
1. competition
a. many sellers
b. identical products
c. easy entry and exit
2. monopoly
a. one seller
b. no close substitutes
c. barriers to entry
3. oligopoly
a. a few sellers
b. interdependence
4. monopolistic competition
a. many sellers
b. product differentiation
B. Industry versus individual firm demand
1. monopoly: firm = market
2. oligopoly: firm demand is only
part of market
3. monopolistic competition: firm
is a small part of large market
4. competition: firm is an
infinitesimal part of market
a.
competitive firms are price takers
b. firm
demand is horizontal
C. Costs
A. fixed cost and variable costs
B. dimishing returns and increasing marginal cost
C. marginal and average cost
1. U-shaped
2. minimum average cost is
at intersection of AC and MC
D. Costs and Profit
1. profit (P>ATC)
2. loss (P<ATC)
3. breakeven (P=ATC)
E. Sunk Costs
1. unrecoverable
2. no opportunity cost
3. no impact on operating or exit
decisions
4. only affect entry decision
D. Profit Maximization
A. Economic Profit
1. profit = total revenue - total
cost
2. optimal quantity: marginal
revenue = marginal cost
3. find price on demand
curve at q*
B. Economic Loss
1. exit (only in long run)
2. short run
a. minimize loss
b. shutdown
C. Breakeven
1. firm is covering all its costs
2. no excess profit
D. The Long Run
1. Entry and Exit
a. profits attract entry
i. impact on industry
ii. impact on firms
b. losses cause exit
i. impact on industry
ii. impact on firms
2. Scale
a. economies of scale
i. advantages to large firms
ii. Concentrated
markets
b. diseconomies of scale
i. advantages to small firms
ii. Competive markets
c. optimal firm size
i. long run
ii. efficiency
A. Prosperity
depends on productive resources
1. Capital
2. Labor
3. Natural Resources
B. Well-functioning markets allow society to
get the most from its limited resources
1. incentives
are important
2. trade
benefits both sides
3. society
is worse off when markets can’t reach optimal outcomes
a. market failure
b. market
interference
C. Economic instability: recession and unemployment
1. aggregate
demand (Consumption, Investment, Government, Net Exports)
2. economic
shocks
D. Policy can help
1.
need to balance short run and long run
2.
incentives matter
3.
watch for unintended consequences
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