Final Econ Study Guide

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Study Guide for Final Exam!!

Your final exam will be 60 multiple choice questions and 3 FRQ’s.

Graphs

1) Consumption Schedule

2) Aggregate Demand and Aggregate Supply

3) Foreign Exchange Market

4) Loanable Funds Market

5) Long-Run Phillips Curve

6) Investment Demand Curve

7) Money Market Graph

Multiple Choice

1) Unit 1

a) Production Possibilities Curve

A production possibilities curve allows you to analyze the options for an economy that can produce two goods.

i) Calculate the opportunity cost of production of a good from a PPC curve

The opportunity cost of moving from point R to point T is 3 units of computers and the opportunity cost of moving from point R to point Q is 1 unit of food.

b) Calculating opportunity cost in general

John is a lawyer and can earn $150 an hour at his job. His lawn needs mowed and trimmed and it will take him only 3 hours to complete the task. To hire someone to mow the lawn for him would cost him $30 an hour but take 5 hours to complete. Should John hire someone or mow the lawn himself? John would be giving up $450 (3 X $150) to mow the lawn or $150 (5 X $30) to hire someone

John has a comparative advantage in law so he should specialize in law and hire someone to mow his lawn.

Also know how to calculate opportunity cost and comparative advantage in the following examples:

Amount that can be produced in one hour

Country Food Clothing

X 20 hours 50 hours

Y 10 hours 20 hours

c) Circular Flow Model

Households are demanders in the product market and suppliers in the factor market. Businesses are suppliers in the product market and demanders in the factor market. Money flows clockwise and goods and services flow counterclockwise.

2) Unit 2

a) GDP

A region's gross domestic product, or GDP, is one of the ways of measuring the size of its economy. The GDP of a country is defined as the total market value of all final goods and services produced within a country in a given period of time. It is not always an accurate indicator of a nation’s well being. GDP per capita (GDP divided by the population) is a better indicator of a nation’s well being but it still does not present the whole picture of a nation’s economic state. GDP = C+I+G+Xn

i) What counts?

Look it up!!!

What does NOT count:

· Financial transactions from the government to you, for example: welfare, unemployment and social security

· Private transfer payments: private exchange of money

· Stock market transactions: buying stocks on the stock market (or selling them) do not count in GDP.

· Second hand sales: if you buy my car, it does not count in GDP

· Illegal (“under the table”) transactions: If someone works for cash it does not count toward GDP

· Any work that someone does on their home does not count.

ii) Understand the relationship between real GDP, nominal GDP and price level.

Real GDP = nominal GDP

Price index

If nominal GDP increases faster than real GDP than there is an increase in price level, if real GDP increases faster than nominal GDP than the nation is experiencing growth. If they both grow at the same time what does that mean?

iii) Potential GDP - Including an increase in and decline in potential GDP.

Potential GDP is the highest amount of GDO that can be sustained over a long period of time. It is represented by the LRAS curve in the AD/AS model, also in the business cycle graph as the straight line that remains constant.

This is the potential GDP

Anything that would change potential GDP would also shift the LRAS. For example an increase in investment will increase potential GDP.

b) Inflation

i) Price index

c) Interest rates

i) Nominal vs. Real – how does inflation affect these interest rates?

d) Unemployment

i) Why is the unemployment rate not an accurate indicator of actual unemployment?

ii) Types of unemployment

iii) How unemployment compensation affects the unemployment rate

(a) Affects on Phillips Curve (long-run and short-run)

3) Unit 3

a) Classical Economics & Keynesian Economics

i) Basic arguments

In classical economics there is a very laissez-faire idea of economics. There is no need for the government to step in because markets are self adjusting and eventually will get itself out of the recessionary or inflationary gap that may be occurring at any specific time.

b) Aggregate Demand /Supply

One of, or the, key graph in macroeconomics

The determinants of aggregate demand are: Consumption, this is spending done by consumers in the economy, investment spending, government spending and Net Exports. If one of these decreases than so does AD and vice versa.

The determinants of aggregate supply are resource prices, actions of the government and productivity/technology. Examples of resources are energy costs, wages, taxes. An action of the government would be a subsidy given to a farmer to help him produce a specific crop. Productivity/technology increases are anything from a new, more productive way of producing to a new invention.

i) How will a change in a determinant affect the AS/AD curve and equilibrium?

An increase in AD will increase both PL and GDP (output)

A decrease in AD will decrease both PL and GDP (output)

An increase in SRAS will increase GDP (output) and decrease PL

A decrease in SRAS will increase PL and decrease GDP (output)

(1) How will this change affect output, employment, unemployment and price level?

If GDP/Output (same thing) goes down then we stop producing as many goods and companies will have to fire employees since they are no longer needed with the decrease in output. Therefore unemployment will do up.

If GDP/output increases then companies will have to hire more employees in order to maintain production at the new level. Unemployment will do down.

c) Stagflation

d) Fiscal Policy

i) Automatic stabilizers

ii) How do changes in fiscal policy affect aggregate demand, output, and price level?

e) Crowding Out

f) Leakages in the economy – How they decrease the effects of government policies

g) Government Budget

i) What do deficits cause? What will occur?

If the government enacts policies in which it spends more than it receives in tax revenues then the government is in a deficit. A deficit will add to the economy’s growing national debt which is currently at over $9 trillion!!!

The government must find a way to finance its debt, whether it is to cut spending, raise taxes, and borrow money (which includes bonds).

h) Spending multiplier

i) Know it and what affects it.

i) Consumption schedule

i) Know how to read the consumption schedule.

ii) Be able to calculate the required increase in spending necessary to reach full employment.

j) Keynesian Aggregate Expenditure Model

i) When income changes what will happen to savings and consumption

k) MPC & MPS

4) Unit 4

a) Banking

i) What decreases the banks’ ability to make money?

ii) Finding the reserve ratio: given the appropriate information on an increase in banking deposits and reserves.

iii) Given the reserve requirement, a deposit of x amount will increase reserves how?

Increase the reserves of that bank

b) Monetary Policy

i) How does the Fed increase/decrease the money supply?

(1) During which type of gap (inflationary or expansionary) would the Fed increase or decrease the money supply?

(2) How does changing the money supply (different monetary policies) affect interest rates, investment, aggregate demand and output?

c) Money market

The money market graph has two parts, quantity of money demanded and quantity of money supplied. The quantity of money supplied is vertical because the money supply is affected only by the actions of the Federal Reserve. The Federal Reserve uses monetary policy to increase and decrease the money supply. The money demanded is controlled by consumers and businesses. We hold money to buy the goods we need every day and so that we can hold some of our wealth in “liquid” form. If we (consumers) decide to hold more money than the amount of money demanded would increase (shift to the right). Other things can affect money demanded, for example if the income level increased than the amount of money demanded would increase too (more money needed to pay incomes)

(1) How quantity demanded and supplied affects interest rates

Shifting either money market curve (like discussed above) changes interest rates. If the money demanded curve shifts to the right so that more money is now demanded than supplied, than the interest rates will rise in order to reach a Md & Ms equilibrium (vice versa for a leftward shift in the money demand curve)

(2) M1, M2, M3

5) Unit 5/6

a) International Economics

i) Benefits of specialization

ii) Domestic effects of tariffs

iii) How does a change in the demand for goods/services in one nation affect the currency exchange rate, the demand for currencies, and supply of currencies?

Relate changes in interest rates to changes in the value of the dollar