Macro Intro REVIEW GUIDE
12/8/11
N. Sheflin
The Final Exam will consist of 150 multiple choice questions worth 60% of total points in the course. It is cumulative and comprehensive but NOT tricky or obscure. The questions will be drawn from the entire course, weighted towards what I consider the more important, and memorable, issues. The coverage is reflected in the ESSENTIAL QUESTIONS, the BIG QUESTIONS, the notes in each assignment, and the SUMMARY OF TOPICS below. Exam questions will be like, but not identical to those in the homework, the big questions, and/or questions like homework questions as well as some questions from the current events we have covered and applications. Some additional questions based on the investment game, and other topics will be included. I will try to avoid asking questions requiring memorization of dates, facts, and numbers except for the few most important, and I will try to make sure that any such questions have answers that are distinctly different from each other. There are a few formulas you should know: government spending multiplier, real and nominal interest rate, deflating gdp, rule of 72, simple deposit multiplier, see ESSENTIAL QUESTIONS for a list HOW TO STUDY This will depend on what works for you. My suggestions are: START STUDYING NOW 30 minutes+ each day. Do not reread the text from page 1. Do not get bogged down on any one topic. Repeat a lot. Question yourself a lot. It is better to go through the material several times quickly, using many sources (big questions, notes in each assignment, review guide, essential questions, end of chapter summaries), rather than once very slowly. The first time, focus on definitions and concepts; the second on analysis, and the third time, pull it all together. Also, do the stuff you know the first time and come back to tougher stuff later. Look through the TOPICS guide (below) to refresh your memory about what we have studied this semester; if there are words/terms/concepts you don't recognize, look them up (quickly). Go through the Topics (below), then ESSENTIAL QUESTIONS, then review the `BIG QUESTIONS' AND APPLICATIONS from the assignments, and then the homework questions with these in mind. It will be helpful to study with a group of friends and there will be a chat room for the questions relating to material on the final DO NOT JUST READ THINK, ASK YOURSELF QUESTIONS, GIVE ANSWERS OUT LOUD, LOOK UP MATERIAL YOU CANNOT ANSWER. Study topics in reverse order: from most recently covered to earlier topics (except don't study the topics we have not yet covered, yet) Use the ESSENTIAL QUESTIONS, this REVIEW GUIDE, BIG QUESTIONS, and homework as a guide to what you're responsible for; use the text to fill in the blanks and look up material you don't remember or understand. DO NOT at this time read the text from chapter 1 on - use it as a reference. Make sure that you can explain each concept and each essential question out loud, to an imaginary slightly dumb friend. Be sure you can manipulate simple graphs and do any simple arithmetic and algebra that we have done in homework. Remember that the final exam is multiple choice when studying.- you will not be writingessays, rather recognizing the correct choice. DO NOT waste time attempting to memorize all 700 multiple choice homework questions we have done. Ask yourself questions as you study: what is inflation, you ask the ceiling. Then you ask the ceiling why anyone cares, what the harm, benefits, and policies are? STUDY GROUPS are an excellent, efficient way to study I will put up a chat room to help students organize study groups late in the semester. Come to the Q&A SESSION it will be scheduled near the end of the semester. Cramming will not work studying from now until the final will. SAMPLE QUESTION TYPES (all multiple choice) 1. What impact does an increase in the money supply have in the SHORT RUN? a. Lowers interest rates, increases investment and aggregate demand and output and prices b. Increases the price level, only c. Raises interest rates, lowers investment and aggregate demand and output and prices d. Lowers the price level, only
e. Increases peoples income and spending 2. What impact does an increase in the money supply have in the LONG-RUN? a. Lowers interest rates, increases investment and aggregate demand and output and prices b. Increases the price level, only c. Raises interest rates, lowers investment and aggregate demand and output and prices d. Lowers the price level, only e. Increases peoples income and spending 3. What are the components of aggregate demand? 4. What is meant by the wealth effect 5. What is crowding out 6. The LONG RUN Phillips curve shows the relation between ___ and ____ and has a _____ slope STUDENT STUDY GROUPS Studying with a small group of students is generally very effective. There will be a chat room later for posting times/ places and getting responses indicating how many students will join you QUESTION AND ANSWER CLASS Times and Place will be posted in the home page in Sakai. Come with questions. Along with the chat rooms, these are the primary opportunities to ask questions (one on one office question sessions WILL NOT be available). OFFICE HOURS for emergencies only and by appointment only course questions should be addressed on the chat rooms and in the Question and Answer session. GENERAL HINTS ON TAKING EXAMS 1. Go in fresh; don't "cram" right up to the end. Get sleep. 2. Go through the exam doing the "easy" questions first; come back to the harder ones later 3. Don't change an answer unless you have some basis for doing so -- your first guess is often your best. 4. "Work-out" answers - don't just take a stab at them. Note what concept seems to be involved, if there's a graph, sketch it and manipulate it. 5. Answer all questions no penalty for guessing. 6. DON'T CHEAT guaranteed F if not worse. 7. Bring a calculator. pencil(s), and an eraser. 8. Bring photo ID 9. Use **2** Clocks to get up probability of one not working, say 10% (breaks set it wrong, forget to turn it on). Joint probability of both breaking 10% x 10% = 1%=sleep better Below are the TOPICS COVERED THIS SEMESTER and some of the key concepts to be aware of. Note that this is not everything covered, nor guaranteed to be everything on the exam, but it should be a very substantial fraction of it. Also note that generally just a concept is mentioned below-you must be prepared to define it, know facts about it, do problems with it, and answer big questions about it. We have not finished the course yet so some of the topics have not yet been covered. Also, some topics may not have been included this semester, but most will have. Investment Related treasury bills, notes, bonds, bonds; corporate risk versus return; par value, coupon, maturity, yield; bond prices and interest rates; equities-capital gains, dividends; role of stock market; mutual funds - index funds; money market mutual funds; efficient market theory and random walks; stock index mutual fund; capital gains, buying on margin, selling short; stock listings, exchanges; diversification; discounted dividends model, derivatives- options and futures contracts- definitions, uses, Black-Scholes what is it. Quant finance. Behavioral finance. Macro Controversies Essence of Keynesian SR Macroeconomics, Classical, Neo-Classical, Monetarist, New Classical, New Keynesian, Supply-Side, Rational Expectations, Real Business Cycle and DSGE models. Macro Policy Issues Causes and consequences of the financial crisis and recession of 2007-09. Leverage, easy money, principal-agent problem, invisible hand and deregulation, derivatives, run on shadow banking system argument. Wealth effect, de-leveraging. Activist-Non-Activist Policy Arguments; Policy Lags and Pro-cyclical Policy; Recognition, implementation, response/impact lags; Political Business Cycle; Laisser-faire; Expectations - Rational Expectations; Rules versus Discretion in Monetary Policy; Constant Monetary Growth Rule, Taylor Rule, Inflation Targeting;
Deficits, debt, crowding out, entitlement programs. Credibility and Expectations; Time Inconsistency Problem; Monetary versus Fiscal Policy Government Budget Deficits; Harm of deficits crowding out; Full-employment/ Structural Deficits; National Debt problems; Trickle-down economics. Financial Crisis causes and consequences. Quantitative easing. the financial crisis, speculative bubbles International Macroeconomics comparative advantage; barriers to trade and justifications: exchange rates; floating rates; purchasing power parity; impacts of interest rates and economic activity on exchange rates; balance of payments; current and financial account deficits/surpluses; open macroeconomics; impact of X and M on Demand and output; Monetary policy and open economies; impacts of exchange rate changes on economic activity; Twin deficit problem; Tri-lemma. Bretton woods; Fixed versus flexible exchange rates. Tri-lemma, twin-deficit problem. Drawback of a strong currency. Economic Growth the international experience; productivity and its determinants; policy- which variables are thought to increase economic growth-democracy, investment, saving, trade, deficits, industrial policy (not), R&D, education, human capital; role of savings; diminishing returns; Malthus' law; Classical, Neo-Classical and New Growth Theories; Growth Accounting Basics; Some growth facts; rule of 72; Schumpeter's Creative Destruction concept Unemployment and Wages and LR Inflation unemployed, unemployment rate, labor force; hidden unemployment, discouraged workers, labor supply and demand; sticky wages, structural, frictional and cyclical unemployment; harm from unemployment; policies to counter unemployment; unemployment and prices; real wages and productivity; SR Inflation: demand-pull and cost-push; SR Phillips curve: LR Inflation shifting SR Phillips curve; Vertical Phillips curve; inflationary expectations; wage-price spiral; stagflation;; incomes policies: natural rate of unemployment; wages, prices and productivity; natural rate of unemployment; harm of anticipated and unanticipated inflation; causes of inflation; Prices and Inflation CPI definition, uses, limitations/problems, how it is calculated (very roughly); Compared to the gdp deflator; real and nominal interest rates; deflating real variables; relative prices (P/CPI); short-run Phillips curve meaning, definition, policy implications. Harm of inflation-shoe leather and menu costs for anticipated inflation, distortion of price, tax and financial system for unanticipated inflation. Harm of deflation and hyperinflation; chained price indices; The Classical/Monetarist, Model Classical model: elements, policy; Say's law; loanable funds; flexible wages and prices, quantity theory of money; vertical supply curve; fiscal policy-crowding out; monetary policy-price changes; Keynesian model: rigidity in labor markets-upward sloping supply curve; role of money in each; liquidity traps; monetarists; discretion versus rules in Fed policy; pushing on a string; classical dichotomy=neutrality of money. Real interest rate =nominal rate - inflation Keynesian Monetary Theory and Policy determinants of interest rates In the short-run; impacts of Ms changes on bonds, interest rates, and reserves; aggregate demand curve; Structure of the Federal Reserve system; open market operations; monetary policy; targets; lags; rules versus discretion; discount rate, prime rate; liquidity trap; New policy tools and approaches. Quantitative easing, Money, Banking and the Financial System roles of money: medium of exchange, unit of account, store of value; types of money; measures of money M1, M2; origins of banking system; money creation by banks; required versus excess reserves; money multiplier; fractional reserves; t accounts; financial intermediaries; financial instruments: commercial paper, treasury bills, notes, bonds, corporate bonds; risk versus return; par value, coupon, maturity, yield; bond prices and interest rates; default risk; equities; role of stock market; mutual funds, The Multiplier and Fiscal Policy - The Keynesian View expenditure, tax, and balanced budget multiplier; 45 degree line diagram (what and why but not how ); equilibrium conditions; simple algebra of model; structural (full employment) deficits; paradox of thrift role of saving in the short-run, animal spirits (psychological factors), wealth effect, role of inventories Circular Flow, National Income Accounting, and Other Macro Variables income and expenditure sides, definition of gdp; difference between real and nominal gdp; savings and investment, deflating nominal gdp, C,I,G,X-M; definition of net and gross investment; transfer payments and entitlements;
Aggregate Supply and Demand - The Keynesian Model using the basic model D=C+I+G+X-M; role of Money; fiscal and monetary policy; Supply side economics; determinants of C, I; wealth effect; role of housing and stock markets Other Macroeconomic Issues financial crisis:, housing bubble, securitization, leverage; unemployment, inflation, growth, recession, pushing on a string, role of financial system. Other rule of 72/70/69; calculating simple compound growth rates; discounting (present value); deflating and finding per capita values; basic micro S&D, opportunity cost; invisible hand; Economists: Smith, Friedman, Schumpeter, Keynes; capital, net investment, crowding out; real and nominal interest rates; relation between savings and investment in shortrun; in long-run