Dr. Reed Olsen - Review
Economics 155
Final Exam

The following is a brief review of the topics that could be on the final exam.

(1) Introduction

- What is Economics?

- Basic Economic Questions.

- Definition of Terms.

- opportunity cost

- scarcity.

- efficiency.

- fallacy of composition

- invisible hand

- the post hoc fallacy

- etc.

(2) Production Possibility Model.

- what does the model show and how?

- how does the frontier shift and why?

(3) Supply and Demand.

- What is Demand?

- D Q_d vs. D D.

- What shifts D?

- What is Supply?

- D Q_s vs. D S.

- What shifts S?

- Equilibrium

- Predictions. What happens to P & Q with different shifts?

- applications

(4) Measuring the economy

- National Income (GDP)

- definition (what is the difference between GDP & GNP?)

- uses of GDP?

- How do you measure GDP?

- expenditure approach: GDP = C+I+G+(X-M)

- income approach: NI = wages + proprietor's income + corporate profit + rent + interest

- what is value added?

- how are GDP and NI reconciled?

- NDP = GDP - depreciation

- NI = NDP - indirect business taxes + net income earned abroad

- National Income

- less corporate profits, social security taxes, and net interest

- plus transfer payments, personal interest, and dividends

- equals Personal Income (PI)

- Disposable Personal Income (DPI) = PI - personal taxes

- what are the problems with GDP?

- Government and taxes

- definitions of different types of taxes

- regressive, progressive (when are income and sales tax each?)

- public goods

- what is a public good?

- pure public good?

- externalities

- inflation and unemployment

- voluntary/involuntary unemployment, labor force, full employment.

- types of unemployment

- frictional, structural, seasonal, cyclical, and induced unemployment.

- definition of inflation

- construction of a price index

- use of a price index

- real (constant dollar) vs. nominal (current dollar) variables

- types of price indices

- CPI, PPI, GDP Deflator

- what are the differences between them?

- costs and benefits of inflation

- who wins/loses from inflation?

(5) Macroeconomic Models

- Classical macroeconomics

- what is Say's law?

- how do flexible wages and prices ensure that the economy is always at full employment?

- Keynesian macroeconomics

- what is Aggregate Expenditures? (AE = C+I+G+(X-M))

- C = C_a + mpc*Y_d

- mpc = marginal propensity to consume = D C/D Y_d

- apc = average propensity to consume = C/Y_d

- C_a = autonomous consumption (what does autonomous mean?)

- mpc*Y_d = induced consumption

- S = -C_a + mps*Y_d

- mps = marginal propensity to save = D S/D Y_d

- aps = average propensity to save = S/Y_d

- mpc + mps = 1; 0 < or = mpc < or = 1 and 0 < or = mpc < or = 1

- apc + aps = 1; apc > 0 but aps may be < 0 (how?)

- what else affects C (besides Y_d)?

- what is the relationship between I and i (the interest rate)?

- what else affects I (besides i)? How?

- how does an increase in I affect AE?

- Government spending (G) and Taxation (T)

- both autonomous

- Net Exports = Exports (X) - Imports (M)

- Both X and M are assumed to be autonomous

- AE = C + I + G + (X - M)

- but AE = C_a + mpc*Y_d + I + G_a + (X_a - M_a) (why?)

- what does the AE function look like graphically?

- Equilibrium in the Keynesian Model

- Equilibrium exists when:

- Y = AE; leakages = injections; unplanned I = 0

- Equilibrium Y = (AE_a-mpc*T_a)/(1-mpc)

- if Y is not equal to AE what force moves us to equilibrium?

- multipliers

- the Keynesian autonomous spending multiplier (m); if AE increases by $1 how much does equilibrium Y increase by? m=1/mps

- tax multiplier (m_t) = - mpc/mps = - (m - 1) (why?)

- balanced budget multiplier (what is it conceptually?)

- equals m + m_t = 1

- equilibrium Y = m*AE_a + m_t*T_a

- what is full employment income/output (Y_f)?

- what are recessionary, inflationary, and GDP gaps?

- Fiscal Policy = changes in G, T or both

- expansionary (increase in G, decrease in T, both, or balanced budget increase in G)

- recessionary (decrease in G, increase in T, both, or balanced budget decrease in G)

- Non-discretionary Fiscal Policy

- changes in government spending or taxes that are automatic.

- can you think of any examples and how they work?

- The Full Employment Budget

- if the budget is in deficit at Y_f then it's expansionary (why?).

- if the budget is in surplus at Y_f then it's recessionary (why?).

- The Public Debt

- when is the government in surplus/deficit? (plus definitions)

- differences between the debt and deficit?

(6) Money

- what is money (types/characteristics).

- uses of money?

- measures of money (M₁, M₂, M₃, and L)

- difference = as money more narrowly defined liquidity increases.

- fractional reserve banking

- required (legal) reserve ratio (rr)

- creation of money

- the potential money multiplier = m_p = 1/rr (why?)

- the actual money multiplier = m_a = 1/(rr + xr) (why?)

- what is the monetary base (MB)? (currency plus reserves)

- Hence, m_a = MS/MB or MS = m_a*MB

- what is the organization of the FED?

- what is the purpose of the FED?

- what are the tools of the FED in controlling the money supply?

- legal reserve requirements

- open market operations

- when the FED buys bonds then what happens?

- when the FED sells bonds then what happens?

- the discount rate

- moral suasion/regulatory controls

- which is the most powerful tool of the FED?

- which is the most used tool of the FED?

- who else, besides the FED, affects the money supply in the U.S. and how?

- what kind of assets make up wealth?

- the supply of money (who controls it and how?)

- the demand for money - why do people hold money?

- transactions demand

- precautionary demand for money

- speculative demand for money

- what variables affect money demand and how?

- the market for money

- what is equilibrium?

- impact of changes in MD & MS on market interest rates?

- how do changes in the money supply affect the macro economy?

- the Keynesian transmission mechanism (indirect)

- the classical transmission mechanism (direct)

- the equation of exchange.

- the velocity of money.

- the monetarist transmission mechanism

- differences between the three theories?

- final impact on economy

- monetary policy

- what is monetary policy (increases or decreases in the money supply)

- expansionary and recessionary monetary policies

- how effective is it compared to fiscal policy?

(7) Aggregate Demand (AD) and Aggregate Supply (AS)

- why is the AD downward sloping; what causes AD to shift?

- why is the AS upward sloping?

- short-run vs long-run AS curves; ranges in the AS curve

- shifts in AS

- demand pull inflation

- cost push inflation

- equilibrium and predictions

- Phillips curve (plus long-run Phillips curve), rational expectations, stagflation, supply side economics.

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