ECONOMICS 50463
Perspectives in Macroeconomics
Study Questions for Semester (Fall 2015)
INSTRUCTIONS: You will find below study questions designed to guide your studying. A
subset of these exact questions will appear on your exams. You are under no
obligation to complete them but there is, not surprisingly, a high correlation between
doing these and earning a high grade! Please bear the following in mind:
General issues
•
The exams are weighted such that a perfect score on all the questions from the list
below earns you at least a low B. A's are reserved for those who also answer the
"hell" questions correctly. That said, data from previous classes show that there is
a high correlation between doing well on the non-hell portion of exams and
scoring highly on the hell portions.
•
I am also happy to check over your answers to make sure they are correct. Just
send a copy to j.harvey@tcu.edu. Please see below for the dates by which I'll need
to receive your answers.
•
You are free to reword any lecture or reading question however you like.
However, always be sure to send it to me on your study question list so that you
can be sure that I agree it includes all the important information–don't wait until
the exam to find out!
•
If I check your study questions and accidentally approve an incorrect answer that
you then give on an exam, you get full credit. If I initially subtract points, just let
me know and I'll fix it. That's the John Harvey Guarantee!
•
If you are resending questions to me, please let me know which ones are new
and/or adjusted from last time so I don't have to check the entire list all over
again.
•
Studying involves taking this list and a blank piece of paper and writing out the
answers until, according to your list of answers, you don't make any mistakes.
THERE IS SIMPLY NO SUBSTITUTE FOR DOING THIS!
Reading questions
•
The place where the study questions are the most helpful is on the readings (I
write the lecture answers on the board). As a rule, I don't go over these in class
and the study question list prevents you from having to guess which parts of "The
Blessings of Free Trade" I expect you to remember for the exam. I tell you up
front!
•
Be sure to actually read the articles and not simply harvest them for the study
question answers. If you do the latter, you won't really understand the context and
you'll end up having to memorize. There's too much material to do that. Those
who use someone else's study question answers face the same problem. I don't
actually want you to just know what's on the list, I hope you learn much more than
that. However, I'm only going to test you over the list.
Using someone else's answers
•
There is no rule against this. The study questions are not an assignment.
•
If you and a friend (or enemy or bystander) worked on the questions together,
please let me know when you send the questions to me so that I can be sure you
both get the John Harvey Guarantee.
•
If you did not work together but choose to use someone else's already-corrected
study questions, please do not send them to me unedited. In other words, if I
indicated on their answers that they needed to make adjustments, make these first.
In addition, let me know which ones have been adjusted so I don't have to check
the entire list all over again. If you already know they are perfect, please don't
send them at all. Just email me saying, "I'm using Victor Boschini's study
question answers!" and then you'll get the John Harvey Guarantee based on their
answers. (FYI, he's never take this course so you should probably use someone
else's. That was just an example.)
•
If you choose to use someone else's study questions from a previous semester, all
of the above apply plus one more: please see if the questions are the same as in the
previous semester (I add and subtract whole questions and change the wording on
others). If this hasn't been done, I'll return the questions unchecked. And I will
wish terrible things on you and your family.
Study question organization
•
Questions are grouped by their source. For examples, questions based on lecture
material have Lecture before them, and then appear without spaces between them.
For questions where answers can be found in the reading, the specific link is given
and the questions are then grouped without spaces.
•
Green questions may also appear on the final exam.
Study question deadlines
•
Anyone wanting their exam one study questions checked must have submitted
them to me by midnight, Monday, September 21.
•
Anyone wanting their exam two study questions checked must have submitted
them to me by midnight, Friday, October 30.
•
Anyone wanting their final exam study questions checked must have submitted
them to me by midnight, Monday, December 14.
•
Deadlines apply whether you take that exam at the regular time or not
2
OUTPUT AND EMPLOYMENT
General Background
Lecture
1.
Distinguish between validity and cogency. [25 words]
2.
Explain Say’s Law (both pro and con). [94 words]
3.
Distinguish between freshwater and saltwater economists.
Classical Economic Theory
Lecture
4.
Show that the Classical labor demand function is actually a representation of the profit
maximizing condition (MC=MR) in N and W/P space. What assumptions must be made
to make the transformation? [18 words]
5.
Draw a labor market diagram with involuntary unemployment. Why is it that, given the
Classical assumptions, the involuntary unemployment must disappear? [graph plus 64
words]
6.
Derive the Classical aggregate supply curve from a labor market. Explain each step
carefully. [87 words plus graphs]
7.
Using the Classical aggregate supply curve, why won't firms offer more for sale when
prices rise? [113 words]
8.
Derive the Classical aggregate demand curve from the Quantity Theory of Money. [97
words plus chart and graph]
9.
In what sense is money irrelevant in the Classical model? [24 words]
10.
Explain classical interest rate theory (aka the loanable funds theory of interest). Be sure to
include the six assumptions (including who earns income and saves, who borrows and
invests, the functional determinants of saving and investment, and how the financial
sector operates) and the analysis that includes the graph. [227 plus graph]
Neoclassical Keynesian/New Keynesian
Lecture
11.
Show how unemployment can occur if there is a minimum wage on the labor market
diagram. What kind of unemployment is it? [47 words plus graph]
Monetarism
Lecture
12.
Show how unemployment can occur if workers suffer from money illusion on the labor
market diagram. What kind of unemployment is it? [graph, schematic, and 16 words]
13.
Show “over”employment due to money illusion on a labor market diagram. [graph,
schematic, and 14 words]
Reading
Milton Friedman, The Role of Monetary Policy
http://www.econ.tcu.edu/harvey/50453/mf_pres_address.pdf
14.
According to Uncle Milty, what can monetary policy not do? [13 words]
3
15.
16.
17.
18.
What processes eventually cause a rising money supply to lead to higher, rather than
lower, interest rates? [35 words]
How long is “temporary,” according to Friedman? [mention both the time period
necessary for initial effects to be reversed and that for full adjustment; 8 words]
What is it that monetary policy can do? [23 words]
What are the requirements for monetary policy to follow? [17 words]
FYI from above article, natural rate of unemployment is: the level that would be ground
out by the Walrasian system of general equilibrium equations, provided there is imbedded
in them the actual structural characteristics of the labor and commodity markets,
including market imperfections, stochastic variability in demands and supplies, the cost
of gathering information about job vacancies and labor availabilities, the costs of
mobility, and so on. (p.8)
Reading
Milton Friedman, The Optimum Quantity of Money
http://www.econ.tcu.edu/harvey/50453/mf_optimum.pdf
19.
How is new money introduced in this fictitious economy? [1 word]
20.
Friedman lists thirteen assumptions for his fictitious economy. He does not explicitly
mention full employment of resources. Is he assuming it implicitly? Explain. [14 words]
21.
Why, in his simple, hypothetical economy, should people want to hold money? [10
words]
22.
Assuming no change in the desire of people to hold cash, what is the only lasting effect of
an increase in the money supply? [couple of words–have to work it out, but not terribly
difficult; 4 words]
New Classical Economics: Policy Ineffectiveness
Lecture
23.
What is the policy ineffectiveness critique that represents one of the distinguishing
features between Monetarist and New Classical economics? [59 words]
24.
How does New Classicism’s Ricardian Equivalence argue that fiscal policy is ineffective?
[51 words]
Barro and Grossman Disequilibrium Model
Lecture
25.
Show how unemployment can occur if coordination problems occur on the labor market
diagram. What kind of unemployment is it? [73 words plus graph]
Real Business Cycle Theory
4
Reading
http://ingrimayne.com/econ/Connections/Real-Business.html
26.
What is the quick explanation of why real business cycle theorists believe that markets
must clear and, in the absence of such a possibility, how do they explain the fluctuations
in business activity that have been obvious for over two centuries and how does this
create the pattern we observe as booms and recessions? [161 words]
John Maynard Keynes/Post Keynesian
Lecture
27.
Draw a labor market diagram with involuntary unemployment. Why is it that, given
Keynes' assumptions, there exists no tendency for the involuntary unemployment to
disappear (be sure to reference your graph in the explanation)? [89 words plus graph]
28.
Why is it that Keynes argues that wage flexibility should not even be a goal in terms of
finding means to lower unemployment?
Economic Data: 1971:1 to 2009:2
See class web page for data set, use only the one labeled “Basic:”
http://personal.tcu.edu/jharvey/50463/50463stff.html
29.
What was the average rate of GDP growth (round to one decimal point)? [number]
30.
What was the average rate of unemployment (round to one decimal point)? [number]
31.
Look at how rates of GDP growth and unemployment have changed over the data set. In
particular, compare GDP growth over the first half (1971:1 to 1990:1) to that over the
second half (1990:2 to 2009:2). Which was higher? Do the same for unemployment and
tell which period had lower unemployment.
32.
Calculate the standard deviation of the rates of change of GDP each of its components
(consumption, investment, government spending, imports, and exports). Which
component appears to be the most volatile? Least volatile? [two words]
33.
What was the average rate of consumer price inflation (round to one decimal point)?
[number]
34.
What was the average federal funds interest rate (round to one decimal point)? [number]
35.
If you had to guess, when do you think the recessions were? Use the following simplified
method: 1) look for periods of negative GDP growth; 2) only worry about those with
three or more consecutive quarters (note that the real rule of thumb is two, but I wanted to
make it a little easier); 3) only bother with mentioning a single year (in reality, they are
dated by quarters or months); and 4) if the quarters cross more than one year, pick the
year that had the majority. [4 years]
******ABOUT TO HERE FOR EXAM ONE*****
John Maynard Keynes/Post Keynesian
5
Lecture
36.
Draw Keynes' aggregate supply curve (Z). Derive it, explain carefully the relationship it
represents, and tell why it is shaped as it is. Would the classicals object to the Z curve?
[72 words and a graph]
37.
Derive Keynes' aggregate demand curve from its component parts.[three graphs]
38.
Macroeconomic equilibrium occurs when firms' expectation of sales is not disappointed.
In terms of Keynes Z-D diagram, what does this mean? Explain why none of the other
points can be an equilibrium and where full employment is. [94 words and two graphs]
39.
Show a Classical Z-D diagram? What makes it Classical? [30 words plus graph]
40.
On Keynes' D curve, how do you show a change in the level of consumption. What about
a change in the level of investment. [23 words]
41.
In Keynes’ view, why is it difficult to achieve a higher and higher level of N? [66 words]
42.
What determines consumption in Keynes' model? [1 word]
Lecture
43.
Write the Post Keynesian equation showing the demand for physical capital, define each
variable, and tell the sign of the independent variables with respect to the dependent. [79
words]
44.
Draw the Post Keynesian demand and supply diagram for physical capital, showing a
period of positive net investment. Label it and be sure to identify 1) the existing stock of
capital (existing factories), 2) the short-period flow price (the going price for building
new factories), 3) the demand price for the existing stock of capital (the going price for
existing factories), 4) gross production of capital goods (total investment), 5) production
just to cover depreciation (investment just to repair the capital that is wearing out), 6) net
investment (investment above and beyond depreciation), and 7) the minimum flow supply
price (the price below which investment goods firms will cease production). Firms will
place orders for newly producible capital goods when which price exceeds which price?
[73 words plus graph]
45.
Draw the Post Keynesian demand and supply diagram for physical capital, showing a
period of negative net investment. Label it and be sure to identify 1) the existing stock of
capital (existing factories), 2) the short-period flow price (the going price for building
new factories), 3) the demand price for the existing stock of capital (the going price for
existing factories), 4) gross production of capital goods (total investment), 5) production
just to cover some of the depreciation (investment just to repair the capital that is wearing
out), 6) net investment (investment above and beyond depreciation), 7) the minimum
flow supply price (the price below which investment goods firms will cease production),
and 8) total capital stock depreciation. [59 words plus graph]
6
Harvey: “Teaching Keynes’ Business Cycle: An Extension of Paul Davidson’s Capital Market
Model”
http://www.hetecon.net/documents/ConferencePapers/2013Non-Refereed/Harvey_AHE2013.pdf
Reading
46.
Referring to Davidson’s capital market diagram, Harvey says that ps is an important
benchmark even when? [21 words]
47.
According to Harvey, which of Davidson’s prices is that which entrepreneurs would be
willing to pay for a unit of existing capital? Which is the price they must pay to have new
capital built? [3 words]
48.
Echoing Davidson, Harvey says that investment will inevitably decline because of the
continuous additions to the capital stock. Why will this not lead to a stationary state and
what happens instead? [82 words]
49.
Show the four stages of the business cycle (early, mid, and late expansion and recession)
along with the states of investment spending, investor expectations, and realized profits.
[chart]
50.
In Keynes' model, what maintains the equality of investment and saving? Illustrate with a
mathematical example. [79 words]
51.
In terms of saving, what do interest rates do and do not do in the Post Keynesian scheme?
Essentially, what are interest rates? [17 words]
52.
For all intents and purposes, the rate of interest is set by the interaction of the demand for
and supply of liquidity/cash. However, some types of demand also tend to create supply
because they lead to the extension of loans, which creates money. List and define the
four types of demand for liquidity (also called liquidity preference) and then show the
chart that tells which lead to hoarding versus loans.
53.
How is Keynes’ rejection of Classical interest rate theory important? Explain. [34 words]
Reading
Harvey: Post Keynesian Macroeconomics and the Financial Crisis (no lecture over this)
http://www.econ.tcu.edu/harvey/5133/PKMacroSummary.pdf
54.
In what sense to banks hold a critical position in the production process? [14 words]
55.
By uncertainty, Keynes meant what about bankers and entrepreneurs? [24 words]
56.
Why would any one in their right mind put down money at a game where they had no
idea of the odds and what, at any given moment, determines whether or not US
corporations are opening new facilities or laying off workers? [20 words]
57.
What is THE driver of economic activity and what is the unintended consequence of
firms deciding they don’t want to do it any more (using the car factory as an example)?
[32 words]
58.
Briefly tell why a firm cares about its stock price after the initial sale (two reasons). [22
words]
59.
Draw the schematic that shows how the stock market should affect economic growth.
Which link may be broken if agents do not do a great deal of research before buying
shares? [14 words]
60.
In the stock market, why won’t “smart” money necessarily drive out the others and what
does this mean there simply is no mechanism to do? [62 words]
7
61.
62.
63.
The domination of the stock market by psychological factors leads to what? Tell the
sports analogy used to explain the negative impact of this? [79 words]
Hyman Minsky theorized what about economic agents and what did he say everyone
would inevitably do? [64 words]
In terms of when recessions start, at some point, someone somewhere say what? How
can this evolve into a full-blown crisis and what may make us more susceptible? [44
words]
Lecture
64.
Explain Minsky’s Financial Instability Hypothesis. [104 words] CROSS THIS OFF!
Data Analysis
Reading
Harvey: Recession Handout
http://personal.tcu.edu/jharvey/50463/recessions.pdf
65.
Know the name of each recession and the order they occurred (I’ll supply a complete
chronology of years). Know, too, the summary versions of each (cause, Orthodox, and
Post Keynesian).
66.
Know the Post Keynesian, Monetarist, and Neoclassical Keynesian explanations and
evidence for the business cycle.
******ABOUT TO HERE FOR EXAM TWO*****
INFLATION
Orthodox: Common to Neoclassical Keynesians and Monetarists
Reading
Causes of Inflation: 3 Real Reasons for Rising Prices
http://useconomy.about.com/od/inflationfaq/f/Causes-Of-Inflation.htm
67.
Demand-pull inflation is simply when? [16 words]
68.
Cost-push inflation only occurs when? [21 words]
69.
How does expansion of the money supply create inflation? [33 words]
Reading
Virtual Economy Home Page
http://www.bized.co.uk/virtual/economy/policy/outcomes/inflation/inflth1.htm
70.
According to Neoclassical Keynesians and Monetarists, what are the costs of inflation
(just the first two)? [106 words]
Monetarist (although Neoclassical Keynesians accept some of this)
Reading
Thomas M. Humphrey, The Evolution and Policy Implications of Phillips Curve Analysis
http://www.richmondfed.org/publications/research/economic_review/1985/pdf/er710201.pdf
71.
What factors probably contributed to the attractiveness of the Phillips Curve? [41 words]
8
72.
73.
74.
75.
Briefly explain the pessimistic Phillips Curve and the “Cruel Dilemma.” Please illustrate
with a graph. [19 words plus graph–have to work out yourself]
What were the three innovations that led to the expectations-augmented version of the
Phillips Curve? [35 words]
What are the policy implications of the accelerationist hypotheses? [32 words]
According to rational expectations, what’s the only sort of policy that can lead to a
movement away from the long run Phillips Curve? [one word, eight letters–have to work
it out yourself]
Reading
Virtual Economy Home Page
http://www.bized.co.uk/virtual/bank/economics/mpol/inflation/causes/theories4.htm
76.
Draw an expectations-augmented Phillips Curve and show a government monetary
stimulus that eventually leads to an upward adjustment in expected inflation. [graph and
explanation] [graph]
Neoclassical Keynesian
Reading
StudyZones.com
http://www.studyzones.com/questionzone/answer/86929x1808/Stop-go-policy
77.
What is a stop-go policy and upon what concept is it based? [62 words]
Post Keynesian
Reading
Kevin Furey: A Reading on Money and Money Creation
http://www.econ.tcu.edu/harvey/50453/Reading_on_Money_Creation.pdf
78.
Explain the three types of money that have been used.[72 words]
79.
It is in what act that banks create money? [4 words]
80.
Why don’t banks like to keep reserves and how much are they required to keep?[14
words]
81.
What two entries increase by exactly the amount of the loan whenever a loan is made and
which is an asset and which a liability? [7 words]
82.
After a loan is made and the immediate adjustment to assets and liabilities is made, what
other asset entry will banks need to make sure they adjust (although by how much may
vary) and how long do they have to make that adjustment? [14 words]
83.
What are the two means shown in the article for a bank to adjust its reserves? [11 words]
84.
If the entire banking system were increasing loan volume then the fed funds market
would not be a useful source of reserves, leaving only sales of securities. Why is it likely
that the Fed would passively accommodate? [21 words]
85.
Banks are always willing to make loans to what kind of customers (meaning that they are
never constrained by a lack of saving)? [one word; HINT: 12 letters]
9
Reading
John T. Harvey, Money Growth Does Not Cause Inflation!
http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/
86.
What assumptions are made regarding M, V, P, and y in the “money growth
==>inflation” view? [123 words]
87.
Given the assumptions of the “money growth ==>inflation” view, why is it that M ==> P
is the only logical outcome? [47 words–I will help with this one in class]
88.
The Post Keynesian view argues that since V and y can and do vary in the real world,
there is no reason to believe that changes in P can necessarily be linked directly to
changes in m. However, the real nail in the coffin of the “money growth==>inflation” is
what? Explain it briefly (be sure to mention the three means by which the Fed can affect
the money supply). [99 words]
Reading
Harvey: What Actually Causes Inflation
http://www.forbes.com/sites/johntharvey/2011/05/30/what-actually-causes-inflation/
Reading
89.
What are the four factors Post Keynesians say actually do cause inflation? Explain each
very briefly, give an example, and tell to whom income is redistributed. [173 words]
Lecture
90.
Explain the process by which the inflation of the 1970s occurred and show how it is that a
rise in the money supply may accompany a rise in prices, even though the former does
not, indeed cannot, cause the latter. [95 words plus diagram]
Economic Data
Reading/Research
Economagic
http://www.economagic.com/
Observe the behavior of unemployment rates over the business cycle. Go to the main page and
select “Federal Reserve, St. Louis,” then “US Consumer Price Index Data,” then “Consumer
Price Index - All Urban Consumers; SA.” Now select “transform this series” (in the second
black menu bar) and choose “annual averages.” Then select “transform this series” again and
choose “annual percentage changes.” Now pick “gif chart” (in the menu bar near the middle of
the page). Slide below the chart and change the first cell after “Starting year/month/day” to 1955,
click on “Show recessions” and “Show grid” and slide down to the “Make Chart” button and
select it. You should see nine recessions on your chart. Please answer these questions based on
what you see:
91.
In general, what appears to be the effect of recessions on rates of inflation? During what
decade did inflation significantly increase, even taking expansions and recessions into
account? [6 words]
10
Data Analysis
Reading
Harvey: Inflation Handout
http://personal.tcu.edu/jharvey/50463/recessions.pdf
92.
Know the name of each inflationary and the order they occurred (I’ll supply a complete
chronology of years). Know, too, the overview of each.
93.
Know the Post Keynesian, Monetarist, and Neoclassical Keynesian explanations and
evidence for inflation.
Exciting Extra!
The US Business Cycle Since 1950: A Post Keynesian Explanation
http://www.econ.tcu.edu/papers/wp10-05.pdf
No questions from this reading, it’s only here as a more in-depth review of the business
cycle in the US in case you are curious!
11