The final is Monday December 13, 3.00 p.m., in UPL 101 [our usual room]. It is CUMULATIVE, of approximately 75 multiple-choice questions, long but many of the questions will be quite easy. It will cover Chapters 5 through 17, 19 and 20, directly. Chapters 8, 10, 13, 19, and 20 will probably be emphasized a little more than other chapters; chapters 1 through 5 will receive little attention, although the jargon of 1 through 4 matters. If you meet University guidelines for a make-up, you may take the make-up on Friday 17 December at 5.30 p.m., but you must get written permission from Dr Cobbe before noon on Monday the 13th (CALL on Monday if you are sick or have another emergency). If you are taking both ECO 2013 and ECO 2023, (see me before the exam if you are in this situation) you must either take them back-to-back (in the same room; tell me you are doing it before the exam starts), or take one in the make-up time (for which you need the standard written permit). What follows are some key concepts/ideas; items more likely to be examined are in bold. Apologies that they do not exactly shadow chapters in the book.
1. Scarcity: unlimited wants, limited resources. Positive (facts) vs normative (opinions). Incentives matter.
2. Opportunity cost (most highly valued alternative foregone). Trade creates value. PPC/PPF (Production Possibility Curve/Frontier). Comparative Advantage. Numerical examples -- compare situation with something to that without (for opportunity cost), or compare relative opportunity costs [in terms of goods/actions] (for comparative advantage).
3. Demand curve and supply curve. How changes in conditions shift supply and demand. Translating common sense into examples (draw a diagram: ask does this change the amount buyers want to buy/sellers want to sell at any arbitrary [fixed, given] price?).
4. Government purchases (of final goods and services) versus transfer payments. GDP. Components and numerical examples. Net [NDP] + Depreciation [Capital Consumption] = Gross [GDP]. Output = income, so expenditure on final goods [C + I + G + (X - M)] equals income [equals uses of income, C + S + T] equals cost of production. Money/nominal GDP/income is in actual prices, Real GDP/income is corrected for price change; price index makes the correction: Money GDP change equals real GDP change plus price level (index) change, if all in percentages; money interest rate equals real interest rate plus inflation rate. Real GDP equals Money GDP divided by price index /100, real wage equals money wage divided by price index/100.
5. The business cycle: recession, recovery/expansion, boom, contraction. Unemployment, employment, not in the labor force. Labor force participation rate. Frictional, structural, and cyclical unemployment. Full employment, the 'natural rate' of unemployment. Actual and potential (at full employment) GDP. Inflation; anticipated versus unanticipated, winners and losers.
6. Aggregate Demand and Aggregate Supply. What AD is -- how much real GDP the economy as a whole wants to buy at different price levels; why it slopes down to the right. Long run and short run; LAS is vertical at potential [full employment] GDP, SAS slopes up to right because it shows output sellers want to sell at different output price levels, fixed input prices (wages) corresponding to level where it crosses LAS. Definitions and tools of fiscal and monetary policy.
7. Shifts in AS and AD. Anticipated versus Unanticipated. The things that shift AS [input prices for SAS, things that change potential GDP, capacity, for LAS and SAS]. Interpretation of diagrams of AS and AD.
8. Keynes: Aggregate expenditure model, determinants of consumption, definitions (and calculation) of MPC, MPS, the expenditure multiplier [one over one minus the MPC]. Planned versus actual expenditure (investment), connection to inventory change and adjustment to new equilibrium. Difference between below full employment (left of LRAS) [change in AE/AD --> change in output and employment mostly] and above full employment (right of LRAS) [change in AE/AD --> change in prices/inflation mostly].
9. Fiscal policy; non-feasibility of discretionary fiscal policy in the US federal system; automatic stabilizers -- they reduce the multiplier; crowding out (interest rates and changes in public spending offset by changes in private spending). Effects deficits -> government borrowing -> interest rates -> international capital flows -> exchange rates -> net exports. Supply-side fiscal policy to reduce natural rate of unemployment. Deficit [flow, G - T] and debt [stock, cumulation of all past deficits]. Tax multiplier as negative of one minus the expenditure multiplier.
10. Money. Definition of money. The Federal Reserve. Banks. Fed liabilities -> bank reserves -> required reserve ratios -> bank loans -> checking account deposits -> money; the deposit expansion multiplier (one over the required reserve ratio). Excess and required reserves. Open market operations, required reserve ratios, the discount rate. Expansionary and restrictive monetary policy.
11. Equation of exchange (MV = PQ), quantity theory of money, velocity of money. Long term versus short run growth rates of money and inflation. Demand for money (means how much of your wealth you hold as the particular asset, money, that does not earn interest/income). Anticipated and unanticipated changes in money supply, effects on macroeconomy. Nominal interest rates, opportunity cost of holding money, velocity.
12. Expectations: adaptive (based on past) versus rational (use all information; random errors). Phillips curve. Anticipated versus unanticipated demand stimulus, evidence that there is no long run ability to deviate from the natural rate of unemployment (i.e. the long run Phillips curve is vertical, the short run Phillips curve shifts as expectations adjust). Phillips curve is graph of inflation (vertical axis) against unemployment rate (horizontal axis).
13. Business Cycles: 'impulses' [what starts them] and 'mechanisms' [what produces the cycle]. AD theories -- Keynesian [investment fluctuates], Monetarists [money supply is unstable], Rational Expectations [unanticipated changes in AD]. Real Business Cycle Theory -- technological shocks causing unanticipated changes in AD as impulse.
14. International trade. Comparative advantage, relative opportunity cost (in terms of goods) again. Imports create (link to) exports -- why would others sell to us unless there was something they wanted to buy from us? Trade restrictions -- tariffs, quotas. Intra-industry trade -- importing and exporting similar goods -- as caused by product differentiation and diversity of tastes. Exports raise domestic price of exported good, benefit producers, hurt consumers; imports lower domestic price of good, hurt producers, help consumers. Costs of protection (widely spread, diffuse, small to any individual, large in total) versus benefits of protection (concentrated, large to individuals affected but small in total) and the special interest effect [benefits and costs of free trade typically distributed similarly to costs and benefits of protection, note change of order B-C/C-B].
15. International finance. Balance of Payments definitions -- credit if US resident receives the payment, debit if a foreign resident receives the payment. Foreign exchange rate is price of one currency (country's money) in terms of another. Demand and supply of a foreign currency; how transactions (e.g. imports, tourist spending) effect D/S for foreign currency, hence the exchange rate. Appreciation (value in terms of other currency up) and depreciation (value in terms of other currency down) of a currency. Balance of payments (payments: credit if payment comes in, debit if payment goes out) and items therein. Current and capital balances, how they offset each other and connect to foreign borrowing. Effects of changes in macro policy on balance of payments and exchange rate [expansionary policy --> b of p deficit or currency depreciation, contractionary policy --> b of p surplus or currency appreciation].
16. Growth. Determinants of output include physical capital, human capital (education and skills of workers), natural resources, technology, and economic organization. Growth requires the PPC to move out, i.e. growth of one or more of these inputs or improvement in technology or organization. Growth theory: Classical [rises of income above subsistence result in population growth, income falls back to subsistence]; Neoclassical [diminishing returns eventually lead to no further growth]; New [externalities in knowledge mean growth can continue indefinitely].
17. Inflation: continuing increase in the price level. Two kinds: demand pull, AD increases and keeps increasing; cost push: SAS shifts up [an input price rises] or LAS and SAS shift left [supply decreases] and that keeps happening. Who gains, who loses, from unanticipated inflation.
18. Labor, Capital Investment, and Saving. Production function -- link employment to real output. Demand for capital [depends on expected profit], supply of saving [given income, depends on interest rate]. Diminishing returns. Job search, efficiency wages. Links (X - M) = (T - G) + (S - I).
Remember: You have two hours for the final. Read the questions (all the responses) carefully, you have plenty of time. Good luck, you should do well.