Nazarbayev University
ECON 202
Review Questions
Final Exam
Important: Final exam will cover Chapters 1-4, 7-11 from ABC textbook and Chapters 3 to 5
from Barro textbook.
Ch. 1, ABC
1. What macroeconomics is about?
2. What is business cycle?
3. What is unemployment?
4. What is inflation and deflation?
5. What is open and closed economy?
6. Define trade surplus and trade deficit.
7. What is fiscal and monetary policy?
8. Describe objectives of macroeconomists
9. What is economic model, economic theory?
10. Why macroeconomists disagree? You should be able to differentiate between classical
and Keynesian approaches to macroeconomics.
Ch. 2, ABC
1. National income accounting (product, income and expenditure approach)
2. Why the three approaches are equivalent?
3. What is GDP?
4. What is underground economy?
5. What are final and intermediate goods and services?
6. What are capital goods and inventories?
7. What is GNP?
8. What are net factor payments from abroad?
9. What is income-expenditure identity?
10. What is personal consumption expenditure?
11. What is gross private domestic investment?
12. What is government spending?
13. What is net exports?
14. What is composition of national income?
15. What is net national product?
16. What is private disposable income?
17. What is net government income?
18. What is national wealth and why is it important?
19. What is private, government and national saving?
Nazarbayev University
ECON 202
20. What is budget deficit?
21. The uses of private saving
22. What are stock and flow variables?
23. What is nominal and real variables?
24. What is real GDP?
25. What is price index, GDP deflator, etc.?
26. Wat are reasons that CPI inflation may overstate the true increase in the cost of living?
27. What is nominal, real, and expected real interest rate?
Ch. 3, ABC
1. What is production function? What factors shift production function?
2. The shape of the production function.
3. What is total factor productivity?
4. What is marginal product of capital? Be able to show it on the graph.
5. What is diminishing marginal productivity?
6. What is marginal product of labor? Be able to show it on the graph.
7. What are supply shocks?
8. How marginal product of labor is related to the production function and labor demand?
9. What is marginal revenue product of labor?
10. How real wage and demand for labor are related?
11. What are the factors that shift the labor demand curve?
12. What is aggregate labor demand?
13. What is aggregate supply of labor?
14. Explain the income-leisure trade-off.
15. Explain income and substitution effects of real wage on labor supply
16. What factors shift the aggregate labor supply curve?
17. How labor market equilibrium is reached?
18. What is full-employment level of employment and market-clearing real wage?
19. What is full-employment output or potential output?
20. What is unemployment rate, labor force, employment ratio, participation rate?
21. What is unemployment spell, duration of unemployment?
22. Why there are always unemployed people?
23. What is structural, frictional unemployment?
24. What is natural rate of unemployment?
25. Provide definition for chronically unemployed and discouraged workers.
26. Explain Okun’s law.
Ch. 4, ABC
1. Provide definition for the following concepts:
a. Desired national saving
Nazarbayev University
ECON 202
b. Consumption-smoothing motive
c. Marginal propensity to consume.
2. How consumption and saving are related?
3. Explain effects on consumption and desired national saving of
a. changes in current and expected future income
b. changes in wealth
c. changes in the real interest rate (income/substitution effects)
4. What are the expected after-tax real interest rate?
5. Discuss the implications of changes in government spending on desired consumption and
desired national saving.
6. How desired consumption responds to the cut in current taxes?
7. What is Ricardian equivalence proposition?
8. List the determinants of desired national saving.
9. What is firm’s desired capital stock?
10. What is user cost of capital?
11. How desired capital stock is determined?
12. Discuss the implications of changes in the desired capital stock.
13. Discuss the implications of taxes on the desired capital stock.
14. What is the effective tax rate?
15. What is the difference between gross investment and net investment?
16. What are the determinants of desired investment?
17. Discuss investment in inventories and housing.
18. What is Tobin’s q?
19. Give two equivalent ways of describing equilibrium in the goods market? Be able to
show this on the graph.
20. Explain why the saving curve slopes upward and the investment curve slopes downward
in the S-I diagram?
21. What factors do shift investment and saving curves?
22. Be able to explain changes of different variables on consumption and saving using twoperiod consumption model
23. What is budget constraint?
24. What is PVLR and PVLC?
25. Describe changes in income, wealth, real interest rate on C and S. Use the concepts of
income and substitution effects to explain.
Chapters 3 – 5, Barro’s textbok
1. Discuss major sources of economic growth.
2. What is the growth accounting equation? Be able to derive it.
3. Explain the Solow growth model. What are the assumptions of the Solow growth model?
Be able to derive the key equation of the Solow growth model. Graphically show the
implications of Solow growth model.
Nazarbayev University
ECON 202
4. Explain the short and long-run implications of the change in the parameters mentioned
below using Solow growth model on k, y etc.:
a. Saving rate
b. Population growth rate
c. Productivity
5. What is the conditional and absolute convergence? Present the key equation for
conditional convergence and explain it using the Solow model.
6. Explain the AK model, present major assumptions and be able to present major
derivations.
7. Explain the Solow growth model with exogenous technological progress. Explain the
transition path and convergence.
8. What is the steady-state growth? Present the key equation for the steady-state growth rate
with technological progress.
Ch. 7
1.
2.
3.
4.
5.
What is money?
What are the monetary aggregates (M1 and M2)? What is included in M1 and M2?
What are the functions of money?
What is money supply, open-market purchases?
What is meant by the expectations theory of the term structure of interest rates? What
must be added to the expectations theory to form a more accurate theory?
6. What is portfolio allocation decision?
7. What determines portfolio allocation decision?
a. Expected return
b. Risk
c. Liquidity
d. Time to maturity
8. Describe types of assets and their features.
9. What is the demand for money?
10. What macroeconomic variables affect the demand for money?
11. What constitutes money demand function?
12. What is the velocity and quantity theory of money?
13. What are the fundamentals of asset market equilibrium?
14. What is the relationship between the price level and the nominal money supply?
15. What is the relationship between money growth and inflation?
16. What are the implications of the change in the expected inflation rate on the nominal
interest rate?
Ch. 8
1. Define and describe the business cycle
Nazarbayev University
2.
3.
4.
5.
6.
7.
8.
ECON 202
a. Aggregate economic activity
b. Expansions and contractions
c. Comovement
d. Recurrent but not periodic
e. Persistence
Describe the cyclical behavior of key macroeconomic variables (Summary 10 in the ABC
textbook)
a. Which variables are procyclical, countercyclical, acyclical?
b. Which variables are leading, coincident, lagging?
Provide a definition for job finding and job loss rate.
What are the coincident and leading indexes?
Using aggregate demand and aggregate supply model describe the impact on business
cycles of various shocks.
What are the two components of a theory of business cycles?
How do Keynesians and classicals differ in their beliefs about how long it takes the
economy to reach long-run equilibrium?
Discuss the implications of these beliefs on the usefulness of the antirecessionary policies
Ch. 9
1. What is full-employment (FE) line?
2. Discuss factors that shift the full-employment line.
3. What is IS curve? What relationship does it capture? Be able to derive the IS curve
graphically.
4. Discuss factors that shift the IS curve.
5. What is LM curve? What relationship does it capture? Be able to derive the LM curve
graphically.
6. Discuss factors that shift the LM curve.
7. Describe the conditions necessary for the general equilibrium using IS-LM model. If the
economy is not in general equilibrium, what economic forces act to bring the economy
back to general equilibrium?
8. Discuss the implications of a temporary adverse supply shock using IS-LM model.
9. What is the role of price adjustment in achieving general equilibrium?
10. What is monetary neutrality?
11. Describe the factors that determine and shift AD, AS and SRAS curves. Why AD is
downward sloping? Why AS is vertical? Why SRAS is horizontal?
12. How do classicals and Keynesians differ in their beliefs about the implications of
monetary policy on the economy using both AD-AS and IS-LM models both in short and
long-run?
Ch. 10.
Nazarbayev University
ECON 202
1.
2.
3.
4.
What is real business cycle theory?
What are the real and nominal shocks?
What are the two main components of the real business cycle theory?
What type of shock is the major source of business cycle fluctuations according to the
theory of RBC?
5. What is calibration?
6. Provide a brief description of the outcomes of Prescott’s calibrated model. What did he
study in his model?
7. Are productivity shocks the only source of recessions? Provide a response of the RBC
theory to this question.
8. What is the Solow residual and how does it behave over the business cycle? What factors
cause the Solow residual to change?
9. What is the utilization rate of capital, utilization rate of labor?
10. What is labor hoarding?
11. Discuss the implications of fiscal policy shocks in the classical model.
12. Should the fiscal policy be used to dampen the cycle?
13. Discuss unemployment in the classical model.
14. Provide a definition for the rate of job creation and job destruction, jobless recoveries.
15. Explain the role of money and monetary policy in the classical model.
16. What is reverse causation?
17. Describe the fundamentals of misperceptions theory.
18. Discuss the implications of unanticipated and anticipated changes in the money supply
using IS-LM model.
19. What is rational expectations hypothesis?
20. What is the propagation mechanism?
Ch. 11
1.
2.
3.
4.
What is the real-wage rigidity?
Summarize the Keynesian explanation for real-wage rigidity.
Describe the Efficiency Wage model (EWM), how wage is determined in the EWM.
Why the EWM model predict that the real wage will remain rigid even if there is an excess
supply of labor?
5. Describe how employment and unemployment is determined in the EWM?
6. Explain the difference in deriving full employment level of output and full employment level
of employment in the Keynesian and classical models. How they are affected by changes in
productivity and changes in labor supply?
7. What is price stickiness? Describe the causes and effects of price stickiness in the Keynesian
model.
a. Monopolistic competition
b. Menu costs and price setting
Nazarbayev University
ECON 202
8. Why might small menu costs lead to price stickiness in monopolistic competition framework
but not in the perfectly competitive markets?
9. What is the effective labor demand?
10. Discuss the implications of monetary and fiscal policies in the Keynesian model
11.
12.
13.
14.
15.
16.
a. Illustrate the increase in the money supply on the IS-LM diagram (or AD-AS
diagram) and on the effective labor demand curve in the short and long-run.
b. Illustrate the implications of changes in the fiscal policy (change in government
spending and taxes) on the IS-LM diagram (or AD-AS diagram) and on the effective
labor demand curve in the short and long-run
c. What is the government expenditure multiplier? Be able to show the derivation.
Explain the Keynesian business cycle theory
What are the major sources/shocks that cause the business cycle fluctuations in the
Keynesian theory?
What are the “animal spirits”?
The role of labor hoarding in the Keynesian model? How does it help explaining the
procyclicality of the labor productivity?
Describe the implications of stabilization policies in the Keynesian model and difficulties the
governments may encounter while implementing macroeconomic stabilization programs.
According to the Keynesian analysis, in what two ways does an adverse supply shock reduce
output? What problems do supply shocks create for Keynesian stabilization policies?