Final Exam Study Guide – Intro

Final Exam Study Guide – Introduction to Macroeconomics, Econ 104A, C, D, H – Spring 2012
Final Exam:
* Thursday, May 3rd, 10:30 am, Totman Gym (for A Sections)
* Thursday, May 3rd, 8:00am – 10:00am, Totman Gym (For C, D and H Sections)
Review Sessions for Final will be posted on moodle
Officer hours:
* Val will have office hours on Tuesday May 1st and Wednesday May 2nd from 11:00am-3:00pm. On Tuesday they will be in Thompson 908. On Weds a larger room has been requested and will be posted on moodle (and posted on my office door) (I may leave 30 minutes early if no one is there.)
* TA’s will announce their office hours for finals week in discussion sections.

The exam will be heavily weighted to cover the material since the midterm, but the big themes and concepts from the first half of the course will also be on the exam. Note that material from many of the lectures, especially social security, comes from sources other than the textbook as listed on the syllabus. I have also asked you to keep up with the current state of the economy and analysis, and asked you to read the columns of Nobel Laureate Paul Krugman in the New York Times. I would pay extra attention to the material covered in the notes, and on the worksheets (6-9), and on this review sheet. Be able to briefly define terms, answer short answers, compare/contrast different topics, and answer multiple choice questions. You should also be able to analyze and use any covered graphs. There will be problems on the exam so make sure you can do problems such as those on the worksheets. The exam will include a lot of choice. There will be less multiple choice than on the midterm. There will be a one-page essay question (examples below).

New Terms:

Monetary Policy
Liquidity Trap
Paradox of Thrift
Social Security
Aggregate Demand
Aggregate Supply
Supply-Side Policy
Demand Pull-Inflation
Cost-Push Inflation
Stabilization Policy
Trade Deficit
Balance of Trade
Free Trade
Absolute Advantage
Comparative Advantage
Exchange Rate
Supply of Dollars
Demand for Dollars
The value of the Dollar
Weak and Strong Dollar
Social Security Trust Fund
Social Security Cap

Multinational Companies – (MNC’s) Newly Industrialized Countries – (NIC’s)

Old Terms:

Laissez Faire
Consumption Investment
Consumer Price Index
Marginal Propensity to Consume
Government Expenditures
Aggregate Expenditures
Real vs. Nominal values
Balance of Trade
Investment Banks
Fiscal Policy
Federal Reserve Bank
Reserve Requirement
Open Market Operations
Discount Rate
Federal Funds Rate

1. What is economics? What is macroeconomics?
2. What are the main goals of macroeconomics?
3. What is the relationship between macroeconomics and the Great Depression?
4. How do you measure economic growth? How big is the US economy today?
5. What is the difference between real and nominal measurments, such as GDP and wages? Why is this important?
6. How do you calculate unemployment in the macroeconomy? What is “hidden” unemployment? What is underemployment? What is the current unemployment situation?
7. What is Inflation? What is the Consumer Price Index? What is the current situation?
8. According to Keynes when a business decides to invest the impact on the macroeconomy is much greater than that business’ initial investment. What is that called and how does it work?
9. How is money created?
10. What is the money multiplier? What are excess and required reserves?
11. How does the Fed affect the Money Supply (three ways)? What do they mainly do, historically, to change the money supply?
12. How is the Fed Structured? How are decisions made? If the Fed has an economic bias, what is it?
13. Briefly, how does expansionary monetary policy affect the economy?
14. Explain why Keynes believed that Fiscal Policy was more powerful/effective than Monetary Policy.
15. Describe how Keynesian Monetary Policy Differs from Monetarist Monetary Policy.
16. What is the Aggregate Demand Curve? (what equilibriums are behind it?)
17. What causes the AD curve to shift, and how?
18. What could cause shifts in AS?
19. Which curve (AD or AS) is affected by Keynesian Monetary and Fiscal Policy?
20. What are the arguments behind Supply-Side Policy? What incentives are important?
21. What do critics of Supply-side policy say?
22. What is the relationship between Supply-Side Policy and the AD and AS curves?
23. How are the Bush Tax cuts examples of Supply-Side policy?
24. What are the two main theories of inflation/deflation? What do we have in today’s economy?
25. Inflation and unemployment…which is more important to fight? Why?
26. How does the current social security system work? Be specific, giving many details.
27. What is the role of social security? What is social about it?
28. How does social security get revenue? Pay out benefits? Is it in surplus or deficit? What is the Social Security Trust Fund? Why is this important for your (and my) future?
29. Do social security benefits increase with the economy? How are they indexed? How is this an issue?
30. What is the “crisis” of social security? Is there a crisis? What time horizon is and should be used to determine the existence of a crisis? What are the projections for social security, how are they arrived at?
31. How has the globalization, and trade, changed in your lifetime? How has it stayed the same?
32. What role does technology play in globalization, Multinational Corporations, and international production?
33. Who are the biggest trading partners of the U.S.? Imports versus Exports?
34. What is the trade deficit? How is it changing? Why is it an item of concern?
35. What are concerns about energy consumption and the developing world, such as China? Where does most energy consumption take place, both per capita and in total? How does energy factor into international trade?
36. What is the theory of comparative advantage? Discuss with detail.
37. Be able to discuss protectionism and reasons for and against it.
38. Be able to discuss free trade and the positive and negative aspects of it.
39. Be able to discuss the basics of major free trade agreements such as NAFTA and GATT.
40. Be able to analyze the demand and supply of the dollar relative to other currencies, including being able to draw and manipulate graphs. (see sample question).
41. Be able to discuss the connection between the value of the dollar, imports, exports, Aggregate Demand and Equilibrium Income in the economy.
42. What can cause the dollar to appreciate or depreciate? What affect does this have on the economy?
43. What would happen to the value of the dollar if the Chinese sold their dollars (which they have held from the huge trade deficit) and wanted yuan (Chinese currency) instead? You should be able to draw graphs for this question, as well as discuss (see sample question).
44. Be able to discuss the Wall Street 700 billion bailout in terms of the Keynesian Model.
45. Be able to discuss bank deregulation and the prospects and proposals for new bank regulation.
46. Be able to discuss the Obama stimulus package of 2009 with details and in terms of the Keynesian Model. What is its goal, and why is it happening now?
47. In the real world sometimes fiscal policy takes time to have an impact in the economy. Give an example of a timing problem with fiscal policy.
48. Where does the federal government get its revenue? Where does it spend its money?
49. What happens if government revenues are less than its expenditures? What are the problems with the government having debt?

Any big picture type of question from the whole semester is fair game as an essay question for the final. Here are some examples of these themes
* Analyze the financial market 700 billion dollar bailout (TARP) in terms of effectiveness using one or more of the following policies: Keynesian fiscal policy, the Keynesian view of Investment, Supply Side Policy…
* Be able to discuss the Stimulus of 2009 in terms of its effectiveness, using one or more of these same policies.
* What is a Recession and what does it mean? What are different policy options in general? What policy options do we have for the current recession? What are the strengths and weaknesses of these policy options?
* Should the government do more or less in the economy? Currently? Generally? Support with arguments about theory and policy.
* Free market Capitalism or Regulated, Keynesian-style capitalism…which makes sense to you?…support.
* We had to make decisions about the role of government in capitalism during the Great Depression. We are having these same debates today, during this recession. Discuss.

There are several types of problems that could show up, as shown in the worksheets. These could be the expanded Keynesian model (with interest rates), Aggregate Demand and Aggregate Supply, (with or without Supply side analysis, such as the Laffer Curve), International Trade (either the graphs or the charts) and International Finance (also either the graphs or the charts). There are some sample questions below:

Sample Question on International Finance
There has been a disaster in Michigan; a tornado has destroyed the international headquarters of GM, Ford and Chrysler, as well as their development, testing, and a significant amount of their production facilities. The same week, an earthquake and a volcano has hit the island of Japan that houses the international headquarters of Toyota, Honda, Nissan, Mitsubishi and Isuzu, which are destroyed, along with their development, testing and significant amount of production facilities. Before this crisis, Volkswagen was the world’s 8th largest producer of autos; Overnight, it has become #1. And Peugeot, Audi, BMW, and other European auto companies are number 2, 3, etc. (Ignore the fact that Daimler owns Chrysler, etc). Last week, the dollar was worth .5 Euros. Using Graphs and words, consider the market for the Euro in terms of dollars, and the dollar in terms of Euros. Then show how the world’s auto crisis affects the markets for the Euro and the dollar. (show the initial relationship, then the change). Be sure to label all the graphs.
Does the dollar appreciate or depreciate? What affect does this have on the U.S. economy?

Sample Question on Comparative Advantage
Consider the following production possibilities of two countries:
Cigars Autos Cuba 100 cases 2 cars United States 100 cases 2000 cars Which country has an absolute advantage? Explain.
Each country has a comparative advantage. Which good should each country specialize in. How could trading these goods benefit both countries?