The final is Wednesday December 9, 3.00 p.m., in Bellamy 126 [our usual room]. It is CUMULATIVE and a Departmental exam, of approximately 60 to 65 multiple-choice questions. It will cover Chapters 1 through 16 and 32 thru 34. Chapters 32 and 33 will probably be emphasized a little more than earlier chapters; chapters 1 through 5 will receive little attention, although the jargon of 1 through 3 matters; chapter 34 will probably not get more than one or two very basic questions about economic growth. If you meet University guidelines for a make-up, you may take the make-up on Friday 11 December at 5.30 p.m., but you must get written permission from Dr Cobbe before noon on Wednesday the 9th (CALL on Wednesday if you are sick or have another emergency). If you are taking both ECO 2013 and ECO 2023, 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 by Chapter; items more likely to be examined are in bold.
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 (Production Possibility Curve). 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. Public goods (nonrival consumption, nonfeasible to exclude) versus private goods. External (affecting those not party to a transaction) costs (market tends to overproduce) and benefits (tends to underproduce) [compared to idea of economic efficiency]. Rational ignorance (cost of knowledge exceeds individual benefit) and special interest (concentrated versus diffuse costs/benefits) effects.
5. Government purchases (of final goods and services) versus transfer payments. Incidence of taxes (who bears the burden). Progressive/proportional/regressive taxes. Costs of taxation above revenue received (collection, compliance, deadweight [efficiency] loss). Incentive effects of taxes.
6. 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.
7. 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.
8. Aggregate Demand and Aggregate Supply. Loanable funds market, interest rate and Investment. Resources market (employment) and goods and services (AD, AS) market. Long run and short run. Definitions and tools of fiscal and monetary policy.
9. Shifts in AS and AD. Anticipated versus Unanticipated. Does the economy self-correct, how fast is the self-correcting mechanism?
10. Keynes: Aggregate expenditure model, determinants of consumption, definitions (and calculation) of MPC, MPS, APC, APS, 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].
11. Fiscal policy; non-feasibility of discretionary fiscal policy in the US federal system; automatic stabilizers; 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.
12. 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.
13. 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): transactions, precautionary, speculative motives. Anticipated and unanticipated changes in money supply, effects on macroeconomy. Nominal interest rates, opportunity cost of holding money, velocity.
14. 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 can move as expectations adjust).
15. Stabilization policy: activists versus non-activists. Source of macro instability; speed of self-correcting mechanism; timing difficulties of discretionary policy [because monetary policy has effect after a time lag of uncertain length, plus recognition and decision lags]; impact of rules. How implement: activists -- leading indicators, forecasting, other indicators; non-activists, rules for money supply growth or money GDP growth or price level.
16. Budget deficits and the national debt. Internal borrowing/debt versus external (foreign) borrowing/debt. Traditional view (some effects via interest rates) versus "New Classical" view (future taxes offset present borrowing, so zero difference between tax finance and government borrowing, no effect on interest rates). Valid concerns about national debt: that persistent large deficits and debt may depress capital formation (investment) and thus make future generations poorer; or high interest payments as proportion of GDP may damage confidence and hurt long-term capital market.
32. 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. 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].
33. International finance. 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. Effects of changes in macro policy on balance of payments (under fixed rates) or exchange rate (under flexible rates) [expansionary policy --> b of p deficit or currency depreciation, contractionary policy --> b of p surplus or currency appreciation].
34. Growth and Development. 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.
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.