Dr. Reed Olsen - Review
terminology and economic systems
1 & 2
the production possibility model
Demand and Supply basics
Demand and Supply equilibrium and
measuring GDP, NI, PDI, PI, etc.
types of taxes, market failure, public goods,
definitions of inflation and
unemployment, costs of both,
indices, real vs. nominal variables, etc
6 & 7
classical model (very simply) and
Keynesian (more detail)
taxation, Keynesian equilibrium,
expansionary/recessionary fiscal policy, automatic
stabilizers, discretionary fiscal policy, the public
debt, deficits, surpluses
11 & 15
types/uses of money, creation of
money, classical/Keynesian/monetarist monetary theory,
12 & 14
The FED, expansionary/recessionary
13 & 14
AD & AS
determination of AD/AS, shifts in
both, equilibrium in the model, predictions if variables
classical, Phillips curve, rational
expectations, stagflation, supply side
The following is a brief review of the
topics that could be on the final exam.
- - 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 Qd
vs. D D.
- - What shifts D?
- - What is Supply?
- - D Qs vs.
- - What shifts S?
- - Equilibrium
- - Predictions. What happens to P & Q with
- - applications
(4) Measuring the economy
- - National Income (GDP)
- - definition (what is the difference between GDP
- - 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 -
- - 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 = Ca + mpc*Yd
- - mpc = marginal propensity to consume = D
- - apc = average propensity to consume =
- - Ca = autonomous consumption
(what does autonomous mean?)
- - mpc*Yd = induced consumption
- - S = -Ca + mps*Yd
- - mps = marginal propensity to save = D S/D
- - aps = average propensity to save = S/Yd
- - 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 Yd)?
- - what is the relationship between I and i (the
- - 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
- - AE = C + I + G + (X - M)
- - but AE = Ca + mpc*Yd
+ I + Ga + (Xa - Ma)
- - what does the AE function look like
- - Equilibrium in the Keynesian Model
- - Equilibrium exists when:
- - Y = AE; leakages = injections;
unplanned I = 0
- - Equilibrium Y = (AEa-mpc*Ta)/(1-mpc)
- - if Y is not equal to AE what force moves us to
- - multipliers
- - the Keynesian autonomous spending
multiplier (m); if AE increases by $1 how
much does equilibrium Y increase by?
- - tax multiplier (mt) = -
mpc/mps = - (m - 1) (why?)
- - balanced budget multiplier (what is it
- - equals m + mt = 1
- - equilibrium Y = m*AEa + mt*Ta
- - what is full employment income/output (Yf)?
- - 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
- - can you think of any examples and how they
- - The Full Employment Budget
- - if the budget is in deficit at Yf
then it's expansionary (why?).
- - if the budget is in surplus at Yf
then it's recessionary (why?).
- - The Public Debt
- - when is the government in surplus/deficit?
- - differences between the debt and deficit?
- - what is money (types/characteristics).
- - uses of money?
- - measures of money (M1, M2, M3,
- - difference = as money more narrowly defined
- - fractional reserve banking
- - required (legal) reserve ratio (rr)
- - creation of money
- - the potential money multiplier = mp
= 1/rr (why?)
- - the actual money multiplier = ma
= 1/(rr + xr) (why?)
- - what is the monetary base (MB)?
(currency plus reserves)
- - Hence, ma = MS/MB or MS = ma*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
- - legal reserve requirements
- - open market operations
- - when the FED buys bonds then
- - when the FED sells bonds then
- - 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
- - how do changes in the money supply affect the macro
- - 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
- - 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
- - why is the AS upward sloping?
- - short-run vs long-run AS curves; ranges in the
- - shifts in AS
- - demand pull inflation
- - cost push inflation
- - equilibrium and predictions
- - Phillips curve (plus long-run Phillips curve), rational
expectations, stagflation, supply
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