Eco202 Review, May 2015, Prof. Bill Even
I.
Chapter 4: Measuring GDP and Economic Growth
A.
B.
Definition of GDP
Measuring GDP
1.
2.
3.
4.
5.
6.
7.
8.
II.
Expenditure side
a)
C+I+G+NX
b)
Definition of each component
Income side
Gross vs net investment and capital consumption allowance
Nominal vs Real GDP
GDP deflator
Lucas wedge: GDP vs potential GDP
The business cycle (4 stages)
Limitations of GDP as measure of standard of living
Chapter 5: Monitoring Jobs and Inflation.
A.
B.
Measuring activity in labor market
Labor force measures
1.
2.
3.
4.
C.
Types of unemployment
1.
2.
3.
4.
D.
Measuring with CPI or GDP-deflator
How inflation redistributes wealth
Borrowers and lenders
Taxes
Employers and employees
CPI
1.
2.
3.
4.
G.
if GDP is below potential
a)
unemployment above natural rate
b)
downward pressure on real wages
Inflation
1.
2.
3.
4.
5.
F.
Structural
Cyclical
Frictional
Natural rate of unemployment
a)
Definition
b)
Source of changes in natural rate
Potential GDP & Output gap
1.
E.
Unemployment rate
Labor force participation rate
Employment population ratio
Factors causing changes in labor force measures
a)
Discouraged workers
b)
Labor market entry and exit
Construction of CPI
Problems with CPI
Bias in construction
Effect on government spending and tax revenue
Converting nominal variables into real variables using CPI
H.
I.
III.
Using CPI to determine value of dollar at different points
in time (e.g. $1 in 2000 has same purchasing power as $x
in 2010)
Chained CPI versus conventional CPI.
Ch.6: Economic Growth
A.
Mathematics of growth rates
1.
2.
B.
Sources of economic growth in classical model
1.
2.
3.
4.
5.
C.
Real wages, employment
Productivity
Potential GDP
Chapter 7: Savings and Investment
A.
B.
C.
Gross Investment, Net Investment and Depreciation
Wealth and Savings
Source of funds for investment
1.
D.
E.
F.
G.
H.
I = S + (T-Tr-G) + (M-X)
Loanable funds market
1.
2.
Supply of loans (Savings)
Demand for loans (Investment)
Equilibrium interest rate
Nominal vs real interest rate
Factors shifting supply or demand for loans and effect on
interest rates, saving and investment.
The role of government budget deficits/surpluses in
loanable funds market.
1.
V.
Labor market
Factors affecting labor supply
Factors affecting labor demand
Aggregate production function
Factors shifting production function
Using classical model to examine how various factors
affect
1.
2.
3.
IV.
Calculating annualized rate of growth
Rule of 70
Ricardo-Barro effects.
The Global loan market
A.
B.
C.
Link between net exports and position as net borrower or
lender.
Net exports>0  net lender
Net exports<0net borrower
VI.
Ch 8: Money, the price level, and inflation.
A.
Money
1.
2.
3.
B.
C.
Gresham’s law
Banking
1.
2.
3.
D.
G.
H.
J.
Financial markets.
Typical shape of yield curve
Role of expectations about future interest rates.
Inverted yield curve
Stocks
1.
2.
3.
M.
Bonds
Present value
Relationship between price and yield
Calculating yields
a)
One year bond
b)
Zero coupon bond
Yield curve
1.
2.
3.
L.
Fed open market purchase or sale.
Fed changes reserve ratio
Fed changes discount rate
Public holds more or less wealth as cash outside bank.
Money supply/demand and interest rates.
1.
2.
3.
4.
K.
Reserves
Monetary Base
M1, M2
Creation of money by banking system and deposit
multiplier.
Fed tools and control over money supply.
Effect of following on money supply, loans and interest
rates.
1.
2.
3.
4.
I.
Board of governors.
FOMC
Regional banks.
Components of money supply
1.
2.
3.
F.
Bank objectives
Trade-off between risk, return and liquidity
Fractional reserve banking
Structure of Federal Reserve
1.
2.
3.
E.
Definition
Types of money
Functions of money
Fundamental value.
Price-earnings ratio
Beta
Futures markets
VII.
Ch. 9: Exchange rate and balance of payments.
A.
B.
C.
D.
E.
F.
Foreign exchange market
Supply of $
Demand for $
Factors changing supply or demand for $ and impact on
value of $
Effect of appreciation or depreciation of $ on U.S. exports
and imports.
Interest rate parity
1.
Effect of exchange rate movements on net return in foreign
assets.
2.
Link between interest rate differentials and expected changes
in exchange rates.
3.
Arbitrage opportunities when interest rate parity doesn’t
exist.
G.
Purchasing power parity
1.
Opportunities for “arbitrage” when PPP doesn’t hold
2.
Link between inflation differentials and exchange rate
movements.
H.
Balance of payments accounts.
1.
Current Account & capital account.
2.
The debits and credits in each account
3.
Implications of accounts for borrower and lender status.
4.
Official settlements account.
5.
Implications for a country’s holdings of foreign currency
reserves.
I.
J.
NX=(T-Tr-G) + (S-I)
Exchange rate policies.
1.
Fixed exchange rates and intervention required to support
under- or over-valued currency.
2.
Flexible exchange rates.
3.
Crawling peg
a)
central bank intervention to affect value of currency
and implications for foreign currency reserve holdings
VIII. Ch. 10: Aggregate Supply and Demand.
A.
B.
Long Run Aggregate Supply
The classical model
1.
2.
3.
C.
Labor supply
Labor demand
roduction function
Determinants of potential GDP and LAS
1.
Short run aggregate supply
a)
Sticky wages
b)
As price level rises, movement along LAS causes
c)
Real wages to fall
2.
D.
Aggregate demand
1.
2.
3.
E.
Starting from GDP>potential GDP (inflationary gap)
Starting from GDP<potential GDP (recessionary gap)
Ch. 12: Inflation, Unemployment and Business cycles.
A.
B.
Demand pull vs. cost-push inflation.
Phillips Curve
1.
2.
3.
4.
C.
Short run
Long run
Importance of inflation expectations.
Link from AD/AS model to Phillips curve.
Business cycle theories.
1.
2.
3.
4.
X.
C + I + G + (X-M)
Why AD drops when price level rises
a)
Wealth effect
b)
Intertemporal substitution effect
c)
International Substitution effect
Factors causing changes in AD
How economy returns to long run equilibrium
1.
2.
IX.
d)
Employment to rise
e)
Real GDP to rise
Shifts in SAS
Demand side theories
Real business cycle theories
a)
Productivity shocks cause business cycle.
b)
Effect of productivity shock
real wages, employment
interest rates, investment.
Ch. 13: Fiscal Policy.
A.
B.
Federal budget process
Recent budget issues
1.
2.
C.
D.
E.
Relationship between deficit and debt
Distribution of tax burden
Supply side economics
1.
2.
3.
F.
Investment and saving
Crowding out
1.
I.
Tax rates and tax revenue
Effect of tax rates on tax avoidance.
Effect of taxes
1.
H.
Effect of taxes
Labor market
Long run aggregate supply
The Laffer Curve.
1.
2.
G.
Major sources of tax revenue
Major spending categories
Ricardo-Barro effects on crowding out
Fiscal policy
1.
2.
3.
J.
Discretionary
Automatic stabilizers.
Limitations of fiscal policy
The budget and the business cycle
1.
2.
3.
4.
Actual budget
Cyclical budget
Structural Budget
The effect of business cycle on the budget.