You will probably want a calculator for this exam.

Chapters: 8, 9, 10, 11, 12, 13, 14, 15

A. Stabilization
1. expansionary policy to reduce unemployment

a. fiscal policy -- increase government spending, decrease taxes, increase transfers
b. monetary policy-- increase money supply, decrease interest rates
c. increases National Income, reduces unemployment

a. fiscal policy -- decrease government spending, increase taxes, decrease transfers
b. monetary policy-- decrease money supply, increase interest rates
c. decreases National Income, reduces inflation

4. Inflation
    a. indexing
    b. adjustable interest rates
    c. extreme measures

i. price controls
ii. new currency
iii. exchange rate anchors

2. Capital

a. investment
b. invention

a. education, experience
b. health
c. immigration

a. enhancement: reforestation, soil conservation, pollution control
b. exploration

A. Total Spending
1. Consumption

a. autonomous consumption
b. marginal propensity to consume
c. shifting the consumption function
    i. wealth effects
    ii. inflation and real balances
    iii. permanent income hypothesis

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. Savings
1. MPS= 1-MPC
2. paradox of thrift

E. Taxes
1. C = a + b (Y-T)
2. tax multiplier (negative)

F. 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. Policy and Aggregate Demand and Aggregate Supply
    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
    3. long-run policy
        a. increase Aggregate Supply
        b. Long run AS is vertical
        c. stimulating AD is not effective in the long run
 

II. Money

A. Functions of Money
1. medium of exchange
2. unit of account
3. store of value

B. Types of Money
1. liquidity
2. M1
3. M2
4. fiat vs. commodity money

III. The Federal Reserve System

B. Functions
1. Control monetary policy
2. Act as bank for banks
3. Bank regulation

IV. Banking

B. Fractional Reserve Banking
1. required reserves
2. excess reserves
3. deposits-- loans
4. risk of failure

a. bank runs
b. deposit insurance

C. Money creation
1. Fed increases reserves through open market purchase
2. banks lend excess reserves
3. money expansion process

a. loans
b. spending
c. deposits
d. more loans . . .

V. Monetary Policy

a. buy bonds-- increase money supply
b. sell bonds -- decrease money supply

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

VI. The Equation of Exchange

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

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