Review for Final (Last 1/3 of the book)
Chapter 11: Short-Run Fluctuations
Key Terms
Aggregate demand, p. 370
Aggregate expenditure (AE), p. 340
Autonomous expenditure, p. 363
Cash flow, p. 352
Consumption function, p. 347
Inventories, p. 341
Marginal propensity to consume, p. 347
Marginal propensity to save, p. 350
Multiplier, p. 363
Multiplier effect, p. 363
Concepts
 Definition: aggregate expenditure=GDP
 Key role of inventories (the difference between planned and actual investments)

Planned inventories are part of investments

Unplanned inventories serve as a buffer between aggregate expenditure and GDP
 Difference between GDP function and AE function: planned investment
 Components of aggregate expenditure and major variables affecting them
 Consumption function and marginal propensity to consume
 Be able to calculate MPC as the slope of the consumption function
 Be able to calculate MPC given changes in income and consumption in a table
 Keynesian cross
o Components of the graph (name of lines, axis, equilibrium point, area above the
45 degree line, area below the 45 degree line)
o What happens when aggregate expenditure exceeds output (inventories shrink
causing increase in production)
o What happens when output exceeds expenditures (inventories expand causing a
decrease in production)
 Why is aggregate demand curve downward sloping?
 Understand the variables affecting inventories (expected future profits, interest rates,
taxes, cash flow).
Chapter 12: Short-Run Fluctuations
Key Terms
Aggregate demand and aggregate supply model, p. 384
Aggregate demand curve, p. 384
Fiscal policy, p. 386
Long-run aggregate supply curve, p. 390
Menu costs, p. 393
Monetary policy, p. 386
Short-run aggregate supply curve, p. 384
Stagflation, p. 400
Supply shock, p. 395
Concepts
 Know why the AD curve is downward sloping.
 Be able to explain what shifts the AD and what causes a movement along the AD curve.
(p. 398)
 Be able to explain what shifts the SRAR and what causes a movement along the SRAR
curve. (p.403)
 Be able to explain what shifts the LRAS and what causes a movement along the LRAS
curve. (p. 399)
 Show a recession (actual GDP<potential GDP) using AD/AS analysis.
 Show an expansion (actual GDP>potential GDP) using AD/AS analysis.
 Know the difference between the SR equilibrium and the LR equilibrium.
 If we are initially in LR equilibrium what happens when a supply shock occurs? Show
where we will end up using a dynamic AD/AS analysis.
Chapter 13: Money, Banks, and the Federal Reserve System
Key Terms
Asset, p. 422
Bank panic, p. 437
Bank run, p. 437
Commodity money, p. 422
Discount loans, p. 437
Discount rate, p. 437
Excess reserves, p. 430
Federal Open Market Committee (FOMC),
p. 438
Federal Reserve System, p. 424
Fiat money, p. 424
Fractional reserve banking system, p. 437
M1, p. 426
M2, p. 428
Monetary policy, p. 438
Money, p. 422
Open market operations, p. 439
Quantity theory of money, p. 442
Required reserve ratio, p. 440
Required reserves, p. 430
Reserves, p. 430
Simple deposit multiplier, p.432
Velocity of money, p. 442
Concepts
 Know the types of money- commodity money and fiat money.
 Know the functions of money- Medium of exchange, unit of account, store of wealth, and
standard of deferred payment.
 What can serve as money?
 How do we measure money, or how do we define money? (M1, M2, M3)
 If I withdraw money from my savings accounts how are M1, M2, M3 affected? If I
withdraw money from my checking account how are M1, M2, and M3 affected?
 How do central banks (the fed) create money?
1
 𝑑𝑒𝑝𝑜𝑠𝑖𝑡 (𝑚𝑜𝑛𝑒𝑦)𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = 𝑅𝑒𝑠𝑒𝑟𝑣𝑒 𝑅𝑎𝑡𝑖𝑜 (𝑅𝑅)
1
 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑐ℎ𝑒𝑐𝑘𝑖𝑛𝑔 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑑𝑒𝑝𝑜𝑠𝑖𝑡𝑠 = 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑏𝑎𝑛𝑘 𝑟𝑒𝑠𝑒𝑟𝑣𝑒𝑠 ×
𝑅𝑅
 How is the Fed organized? What Fed reserve is Wyoming under? Who is the chairman of
the Fed?
 How does the Fed manage money supply? (open market operations, discount policy,
reserve requirements)
 Be able to solve for items out of the quantity equation: 𝑀 × 𝑉 = 𝑃 ×
𝑌 𝑜𝑟 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒𝑠 𝑚 + 𝑣 = 𝑝 + 𝑦
Chapter 14: Monetary Policy
Key Terms
Contractionary monetary policy, p. 465
Expansionary monetary policy, p. 464
Federal funds rate, p. 462
Inflation targeting, p. 475
Monetary policy, p. 456
Concepts
Know the goals of monetary policy- price stability, high employment, economic growth, stability
of financial markets.
Be able to replicate the money market model (Money supply=Money demand)
Through the money market model, show how the nominal interest rate changes when money
supply increases/decreases.
Why does the money demand shift?
What is the federal funds rate?
How do interest rates affect AD?
If we were in a recession how would the Fed bring us back to potential GDP?
If we were in an expansion how would the Fed bring us back to potential GDP?
Be able to show the above two questions using AD/AS analysis.
Chapter 15: Fiscal Policy
Key Terms
Budget deficit, p. 515
Budget surplus, p. 515
Crowding out, p. 512
Cyclically adjusted budget deficit/surplus, p. 516
Fiscal policy, p. 496
Multiplier effect, p. 504
Concepts
 Be able to explain fiscal policy verbally and graphically using AD/AS analysis.
(Expansionary and contractor policy)
 How does the government spending multiplier work? Explain verbally and graphically
using AD/AS analysis.
 How does the tax multiplier work? Explain verbally and graphically using AD/AS
analysis.
 How does fiscal policy affect the budget deficit?
 Why is fiscal policy more complicated than it appears?
Chapter 16: Phillips Curve
Key Terms
Natural rate of unemployment, p. 546
Phillips curve, p. 544
Concepts
 Be able to relate the Phillips curve to the AD/AS model.
 Know why the short run Phillips curve is downward sloping.
 Know why the long run Phillips curve is vertical.
 How do supply shocks affect the Phillips curve.
“Macroeconomic policy is more of an art than a science.” (Macroeconomics, Colander)