Econ 3, Winter 2022
Questions to help you review the course
Chapter 17
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What is the definition of GDP?
Why do we count only final goods or value added when measuring GDP?
What is value added and how does it relate to GDP?
Which types of firm costs are subtracted from revenue to get value added and which
types of costs are not subtracted from revenue to get value added?
5. Is value added the same as profits?
6. Is a capital good an intermediate good or a final good?
7. What is the equation that measures GDP using expenditures?
8. What role does inventory investment play in making expenditures add up to production?
9. Is it possible for a good produced last year to affect GDP expenditures this year?
10. Excluding broker and real estate commissions, is the sale of an existing share of stock or
an existing house included in GDP?
11. How are GDP, aggregate (i.e. total) expenditures, and aggregate income related?
12. What are the two major categories of income?
13. What is the purpose of calculating real GDP and not just nominal GDP?
14. What is the equation linking nominal GDP, real GDP, and the GDP deflator?
15. What things affect well-being but aren’t directly counted in GDP per capita?
16. What is the meaning of “base year” in calculations of real GDP?
17. What is the official definition of the unemployment rate?
18. What does the financial press (such as the Wall Street Journal) call the unemployment
rate?
19. What is the definition of the labor force participation rate?
20. What is the current unemployment rate (i.e. last month’s unemployment rate)?
21. Is the current U.S. labor market tight or slack?
22. Are there people who aren’t officially counted as unemployed but who might be
considered unemployed in a broader sense? Give examples.
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Chapter 18 plus supplement
1. What is the Consumer Price Index (CPI)? What is it intended to measure?
2. If I gave you quantities purchased in two years and prices paid in two years, and told you
which year was the base year for the index and the consumer basket year, how would you
compute the CPI?
3. How is the inflation rate related to the CPI?
4. How does core CPI inflation differ from CPI inflation?
5. What is the situation called when the inflation rate is negative?
6. How do you adjust for inflation?
7. How do you convert a nominal amount from a past year to current year dollars when
neither the past year nor the current year are base years?
8. What are the biases in the CPI for measuring inflation?
9. What is hyperinflation? Name a country that is currently experiencing hyperinflation.
10. What is the relationship between nominal and real interest rates?
11. What interest rate (nominal or real) is the interest rate we read in the Wall Street Journal?
12. What is the Fisher Effect?
13. What is the formula for calculating the average annual rate of growth over T years?
14. If a variable is the product of other variables or the ratio of other variables, how does its
growth rate relate to the growth rates of the other variables?
Chapter 19 Economic Growth
1. Why do we often talk about real GDP per capita (i.e. divided by the population) rather
than just nominal GDP?
2. Did real GDP per capita grow in a sustained way before the 1800s?
3. Following the Hans Rosling video, if you plot life expectancy on the vertical axis and real
GDP per capita on the horizontal axis, and indicate each country with a ball, describe the
movement of most of the balls since 1810.
4. What did Malthus predict and why did his prediction turn out to be wrong?
5. Use a production function graph (with output on the vertical axis and # of workers on the
horizontal axis) to show diminishing marginal production of labor (MPL).
6. Use a production function graph to show average labor product (ALP) at two points.
7. Use a production function graph to show the effects of technological progress.
8. Why do small differences in growth rates matter in the long run?
9. What is a simple formula for approximating how many years it will take for a
geometrically growth variable to double?
10. In which country has real GDP per capita doubled every 10 years on average since 1980?
11. What is the equation that relates output per capita to average labor productivity?
12. What is an approximate equation that relates growth in output per capita to the growth in
average labor productivity?
13. What are the key determinants of average labor productivity?
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14. In the long-run, which countries tend to grow faster, capitalist countries that use markets
and allow private ownership of businesses or socialist countries in which the government
owns all of the means of production? Give two examples of countries that were split with
one going capitalist and the other going communist.
15. Give examples where the key technological progress was invention of new goods, not
just reducing the cost of existing goods.
16. What government policies help raise the average product of labor?
17. Describe how the growth rate of average labor productivity during recent decades in the
U.S. compares to the growth rate from 1920 to 1970.
Chapter 21 Saving and Capital Formation
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What is the definition of saving at the household level?
How is a household’s wealth related to the assets and liabilities on its balance sheet?
If a household pays off some debt, does its net worth rise or fall?
If I use $500 of my income to pay off my credit card debt, is that saving or consumption?
Are capital gains counted as income or saving?
What factors can change a household’s wealth?
What factors determine how much wealth a household can accumulate for their
retirement?
8. Define national saving. How is it related to private and public saving?
9. What equation shows how the government budget deficit relates to public saving?
10. Currently the government is running a budget deficit. What does that imply about public
saving?
11. What are the three main motives for household saving?
12. What are the main assumptions of the Permanent Income/Life Cycle Model?
13. If a person hears that their income will rise permanently next year, what will happen to (i)
their consumption and (ii) saving this year?
14. Should consumption and saving respond the same to a temporary increase in income as to
a permanent increase in income?
15. Is it unwise for economics majors to borrow to finance their education?
16. If an increase in home prices raises households’ wealth, what is the predicted effect on
household consumption and saving rates?
17. How do income and substitution effects impact the relationship between household
saving and real interest rates?
18. Why does the saving supply curve slope up?
19. Does the effect of the real interest rate on national saving come through its effect on
private saving or public saving?
20. What is the user cost of capital? What factors affect it?
21. What is the benefit side of buying capital?
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22. List the key factors that affect the benefits to buying capital.
23. Can government policy, such as corporate tax rates, influence investment?
24. How does the real interest rate affect investment?
25. What is the rule of thumb for deciding whether to represent a change as a movement
along a curve or a shift in the curve?
26. In the model of investment and saving equilibrium, what variable is on the vertical axis
and what variable is on the horizontal axis?
27. Which curve represents the demand for saving?
28. What price adjusts to make desired investment equal to desired saving?
29. What factors shift the investment curve?
30. What factors shift the saving supply curve?
31. How do government budget deficits caused by rises in G affect real interest rates and
investment?
Chapter 22 Money, Prices, and the Federal Reserve
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What are the three principal uses of money?
What is barter?
What are some advantages and disadvantages to storing one’s wealth in currency?
What was the Indian “demonetization?” Why was it enacted?
What does Kenneth Rogoff mean by “The Curse of Cash?”
Define the two leading measures of money in the U.S.
What is the reserve-deposit ratio?
Explain how fractional reserve accounting leads to a money multiplier.
Considering reserves, deposits, and loans, which are assets and which are liabilities of
banks?
10. Is cash in a bank vault considered to be currency or reserves?
11. Suppose that the Fed buys $1 million of bonds from the public. Does the public’s
decision of how much to hold in currency versus in checking accounts influence the
change in the money supply (M1)?
12. What is the relationship between money, currency, reserves, and the reserve-deposit
ratio?
13. What is the Federal Reserve? When was it established?
14. What are the main roles of the Federal Reserve (“Fed”)?
15. What is the dual mandate?
16. Who is the current chair of the Federal Reserve?
17. How does the Fed typically raise the money supply? How does it typically lower the
money supply?
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18. What institutional feature makes banking panics more likely? How does deposit
insurance help prevent banking panics?
19. What is velocity?
20. What is the quantity equation?
21. How are money growth and inflation related in the long-run?
22. What happened to prices when a tornado hit Scrooge McDuck’s money bin? What
economic theory predicts this?
Ch. 23 Financial Markets and International Capital Flows
1. What are financial intermediaries?
2. How do banks help allocate saving to productive uses?
3. What are the key terms that describe a bond?
4. Why does a fall in market interest rates raise current bond prices?
5. What does the financial press call the rate of return on bonds?
6. How is the yield on bonds different from the coupon rate?
7. What is the equation relating bond prices and interest rates?
8. Why do most bonds have higher interest rates than U.S. government bonds?
9. How does a stock differ from a bond?
10. What is the equation relating stock prices to interest rates?
11. What is the impact of an increase in expected profits and dividends on current stock
prices?
12. Explain how diversification can lower risk without lowering expected return.
13. In the U.S., the investment rate is higher than the saving rate. What makes this possible?
14. What is the situation called when imports exceed exports?
15. Purchases of U.S. assets by foreigners is called what?
16. What is international borrowing and lending?
17. What is the equation relating net exports and capital inflows?
(You are not responsible for the material on pages 619 – 621 that add net capital inflows KI
to the saving and investment graphs.)
Chapter 24
1. What are the phases of business cycles?
2. Do recessions affect only a few sectors of the economy or most sectors?
3. In graphs showing macroeconomic variables over time, what do the shaded areas
represent?
4. Which sectors are affected most by recessions?
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5. What happens to the unemployment rate during a recession?
6. What is potential output?
7. What is the natural rate of unemployment?
8. What is Okun’s law?
9. When was the Great Depression?
10. When did the COVID recession begin?
Chapter 25
1. In the Keynesian model, stickiness of what leads to output gaps?
2. In the Keynesian model, is short-run equilibrium output determined by potential output or
by spending?
3. When spending rises, how do firms respond in the short run, by raising prices or raising
output?
4. What is the difference between planned aggregate expenditure and actual expenditure?
5. What types of investment are included in planned investment?
6. How are expected and actual sales related to unplanned inventory investment?
7. What is the equation for planned aggregate expenditure (PAE)?
8. What is the equation for the Keynesian consumption function?
9. What is the economic meaning of the marginal propensity to consume (mpc)?
10. If disposable income rises by $100, by how much does consumption rise?
11. What factors shift autonomous consumption (𝐶𝐶̅ )?
12. What factors shift autonomous investment (𝐼𝐼 ̅ )?
13. What determines the slope of the PAE line?
14. What factors appear in the intercept of the PAE line?
15. Why do we say that short-run equilibrium output occurs at the intersection of the PAE
line and the 45 degree line?
16. If spending is greater than current production, how do firms respond? What effect does
that response have on household disposable income?
17. What is the Keynesian multiplier?
18. How does consumer and business optimism lead to a self-fulfilling prophecy in the
Keynesian model?
19. If government spending rises by $10, by how much does output rise?
20. A recession occurs when the intersection of PAE and the 45 degree line is at a point that
is below or above potential output?
21. Which raises output more: an increase in government spending of $1, a decrease in taxes
of $1, or a rise in transfers of $1?
22. Suppose the government fights a recession by raising government spending, holding
taxes and transfers constant. What happens to the government budget deficit?
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23. How do the predictions about the effects of a temporary tax rebate on output differ
according to whether one believes the simple Keynesian consumption function versus the
Permanent Income – Life Cycle Hypothesis?
24. When the Bush administration gave a tax rebate in 2008, did consumers mostly consume
it or save it? With which theory of consumption is this most consistent?
Ch. 26
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What does the “demand for money” mean?
What macroeconomic factors affect the demand for money?
Who determines the money supply?
When we graph money demand and money supply, which interest rate (nominal or real)
is on the vertical axis? Why?
5. Give an example of the Fed providing “an elastic currency,” meaning that when money
demand rises the Fed raises money supply.
6. What is the federal funds rate? Is it a nominal interest rate or a real interest rate?
7. Does the Fed have any control of the real interest rate? Why?
8. What prevented the Fed from lowering the federal funds rate more during the Great
Recession?
9. What new tools did the Fed start using during the Great Recession?
10. Which components of planned aggregate expenditure are affected by the real interest
rate?
11. Does allowing for real interest rate effects on PAE change its slope?
12. How does a rise in the real interest rate affect the PAE line?
13. How does a rise in the real interest rate affect short-run equilibrium output?
14. Does the multiplier also affect how real interest rates affect short-run equilibrium output?
15. How does the Fed fight a recession?
16. Describe an episode in the U.S. when the Fed fought a recession.
17. What are the main factors that make firms change their prices?
18. What are the mechanisms by which low unemployment rates lead to inflation?
19. How does inflation respond to the output gap?
20. In addition to wages, what other factors affect inflation?
21. How does the Fed fight inflation?
22. Describe an episode in the U.S. when the Fed fought inflation.
23. Why does news of inflation hurt the stock market?
24. What is the Taylor Rule?
25. What are some of the factors that led to the financial crisis in 2008? (See the video on
“The Crisis of Credit Visualized.”)
26. What is the current state of the U.S. economy? (Most recent unemployment rate, recent
inflation rate, whether the labor market is tight, where output is relative to potential.)
27. Has COVID affected only PAE or both PAE and potential output?
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