Gallaway
ECO 385

Study Guide Test #3

To prepare for this test, students should study their text, notes, and homework. Also, study your tests and homeworks from the first two units.    To help you get started, here is a list of topics with which you should be familiar.

This study guide may not be fully updated until dead day.

Ch. 13

• Money Creation
• Monetary Base (High Powered Money)
• OMOs
  • effect on MS and r
  • advantages
  • defensive vs dynamic operations
• Discount loans
• Reserve Requirements
• Potential and actual multiplier

Ch. 14

• Policy Instruments (Tools)
• Goals/Constraints (Final target variables)
• Intermediate Target Variables
• Activist Paradise
• Types of Rules
• Positive and Negative case for rules
• Lags
• Uncertainly of Multiplier
• Time Inconsistency Problem

Ch 17

• Keynesian SRAS
• Friedman SRAS
• Lucas SRAS
• Policy Ineffectiveness Proposition
• Real Business Cycle Theories.
• Critique of New Classical Theories
• Contribution of New Classical Theories
• New Keynesian Economics

Ch 18 Overview

What we know
1.  In LR, production determines standard of living
2.  In SR, AD shapes Y
3.  In LR, rate of money growth affects inflation but not unemployment
4.  In SR, there is tradeoff between inflation  and unemployment

 Remaining Questions
1.  How to increase Yn?
2.  Should policy makers be activists?
3.  How costly is inflation and how costly is reducing inflation?
4.  How big of a problem is the national debt?

Homework Questions

1. On this question, you should have paid particular attention to the actual money multiplier and variables in this equation over which the Fed has no control.
2. On this question, you should have paid particular attention to the assumptions of each model, note whether or not the labor market clears, and be able to explain, for each model, why changes in the price level cause changes in output.