ECO 241
Study Guide for Exam 4
During this segment of the course we have covered three areas in considerable depth and
two other areas more briefly. I will draw one or more questions from each area in
constructing the final exams.
Aggregate Supply Theory
• Know the three theories of short-run aggregate supply: how they are derived,
how they are similar to one another, and how they differ from one another.
• What testable propositions follow from the theories?
• Be able to use the complete AD/SRAS/LRAS model to answer questions about the
behavior of the economy in response to shocks or policy changes.
• The SRAS curve contains a price-level expectations term. Know what difference
it makes whether Pe is based on adaptive or rational expectations.
• The Phillips Curve is a cousin to the SRAS curve. You should understand how
the Phillips Curve works. In particular, why is the short-run Phillips Curve
negatively sloped, while the long-run Phillips Curve is vertical? Why isn’t the
long-run Phillips Curve negatively sloped?
• The Phillips Curve can be modeled with either adaptive or rational expectations.
How does the choice of expectations-formation process affect the behavior of the
model?
• What is the sacrifice ratio? How does the expectations-formation process
affect it?
Stabilization Policy
• As a stabilization tool, fiscal policy has its good points and its bad points. Know
what they are.
• We examined monetary policy at greater length. When talking about
discretionary policy, why is monetary policy “the only game in town”?
• What problems make optimal discretionary monetary policy difficult (if not
impossible)?
• What are the main arguments in favor of conducting monetary policy according to
established rules, rather than by discretion?
• What’s the difference between an active rule and a passive rule?
• What is the Taylor Rule?
• What is credibility and why is it important to policymakers?
Government Debt
• According to the “traditional view,” what harmful effects can follow from
persistently large deficits that give rise to a large government debt?
• What, precisely, is Ricardian Equivalence? What assumptions are required to
derive this proposition? How might you explain the fact that empirical studies
tend to show that partial Ricardian equivalence – perhaps 40 or 50 percent –
appears to exist?
• What are the major problems bedeviling those who would reform the U.S. Social
Security and Medicare systems? What will be true of any overhaul of the system?
Epilogue
• What are the four most important lessons economists have learned from
macroeconomics?
o Do you understand these lessons?
• What are the four most important unresolved questions in macroeconomics?
o Do you understand why economists haven’t been able to resolve these
questions?