Andrea Prof. Civelli Principles of Macroeconomics
Short Study Guide for the preparation of Test 2
The second test is going to cover the material presented in class after the first test, which corresponds to the slides in Lecture 4 and 5 that are posted on Blackboard. These refer to Chapters 5, 6, and 8 (see below for more details). Chapter 5 and 6 were presented together in the lecture set Lecture 4. I have focused more on Chapters 6, so the test will cover only pages 84 to 94 of Chapter 5. You can read th e rest of the chapter for your own personal knowledge and interest. This was a long overview of three important concepts: GDP, Inflation and Unemployment. Make sure you know and understand: 1. The definition of GDP: You have to know the details about measuring GDP. 2. The relationship between GDP and the price level. How does GDP change in response to a shift of the aggregate supply and the aggregate demand? What about prices? What is a recession? What does it correspond to in terms of GDP and Prices? 3. Is economic growth everything we care about? How can we increase production and income? The role of production factors and technological progress. 4. Definitions of unemployment. What is the structural unemployment? What is the difference between structural and cyclical/frictional unemployment? The relationship between unemployment and GDP growth. How do we measure unemployment? 5. Inflation: difference between real and nominal Real variables. wage and real interest rates. 6. Do we like inflation? Can anyone benefit from higher prices? In which case? What if inflation is too high? The cost of high inflation. Chapter 8 is a shorter chapter and we focus more specifically on the study of the consumption function. The first 4 pages of the chapter are very important, but we will be back to that part after the test. Read them as an introduction to the rest of the chapter. The core part of the chapter is from page 158 to 164 and this corresponds to the slides in Lecture 5. The essential points you have to know are: 1. The linear relationship between consumption and disposable income. Is it good? Is it supported by the data? What is disposable income?
2. Consumption is a part of Aggregate Demand. The diagrams of the AD and of the consumption line are very different though. Why? What variables do we consider on the two axes in each case? 3. The role of the intercept and of the slope parameters in the consumption function. The slope is interpreted as the Marginal Propensity of Consumption. What is it? How do we see it from the graph? What is MPC in economics term? Why is it positive and smaller than 1? 4. Movements along the consumption function and shift of the consumption curve. A change of disposable income causes a movement along the curve. What is the difference? What factors shift the entire curve? The importance of wealth for the consumption.