Download Final Review Chapters 5-15

Final Review – Chapters 5-15 (MACRO)
Ch. 5
Price Floor in (unskilled/ entry-level) labor market: Minimum Wage. See Minimum
Wage and section and Immigrant Labor Market Project in Chapter 5 of the book.
Protectionism through quotas or tariffs/ which price control is not protectionism?
Alternative allocative mechanisms
Ch. 6
Four stages of a business cycle
Durables vs. non-durables in a recession
How NBER declares the start/end dates of a recession
Several questions on Calculating and Modifying U-Rate (e.g. like Question 1 in Report 1)
AD/AS graph, including cost-push vs. demand-pull inflation
AD=C+I+G+Xn
Winners and losers from (especially unexpected) inflation
Ch 7
Output excluded from GDP:
 Illegal
 Volunteer
 Household (chores, construction, cooking/cleaning/driving)
DI=PI-PT
Ch 8
Malthusian Prophecy, Classical theory and equilibrium at the stationary state are all
implied diminishing marginal returns
Intensive vs. Extensive sources of economic growth
Per-capita output growth rate = GDP growth rate-pop.growth rate
New Growth Theory relies on Learning by Doing, Positive Externalities, network
externalities and increasing returns to scale.
Ch. 9
Until the Depression, the dominant economic theory in developed nations was Classical
This theory held that an economy would naturally tend toward FE GDP. This is also
based on a very competitive economy. Classical economists prescribe that G=T, both are
small relative to GDP, and Laissez-Faire (non-interventionist) policy.
They held that:
Demand will bounce back from external shocks (wage price flexibility keeps RW
constant)
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Shocks to spending are neutralized by the interest rate (abstinence theory of interest)
Supply and demand will be balanced because S creates D (Say’s Law)
Thus, a shock may cause an economy to be inflationary or recessionary temporarily, but
the economy will naturally return to FE. This implies a vertical LR AS curve.
Keynesians challenge all the Classical arguments:
Say’s Law applied to 19th Century France, not modern developed economies.
Wages and revenue are delinked in modern economies
There are more direct ways to influence D than through S
Abstinence theory of interest is not correct since savers and investors have different
motivations from each other, and from the interest rate.
W/P flexibility was restricted on P side by monopoly power and on W side by Unions
While real assets may be increasing in a (deflationary) downturn, so is real debt
Keynesian conclusion:
Monetary and Fiscal Policies should be built in or otherwise triggered to stabile the
economy at full-employment and with moderate inflation.
Ch 10
Know how to use the expenditure multiplier equation, backwards and forwards.
Initial change in AE * M = Change in GDP
Expenditure multiplier = 1/ 1-MPC
MPS + MPC = 1
Impact of just a change in taxes: inverse to C and I - for example:
change in C= -(increase in $’s paid to a tax)*MPC
So if you have 200B more in taxes, and MPC = .8
Change in C= -(200B*.8) = -160B
That would be the initial expenditure change. Just as if G, I or NX declined by 160
Billion, in this case C declined 160 B.
The multiplier equation in this case would be: -160 * (1/(1-MPC)) = -800
As always, initial impact to AE (in this case, Change in C)*M= Change in Y
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So the total impact on GDP is expected to be – 800B, a contraction in annual output of
$.800B ….This is contractionary fiscal policy – economic contraction induced by the
Gov’t decreasing G or increasing T…..When would they want to carry out contractionary
fiscal policy? When GDP exceeds GDP*, an inflationary gap exists.
So if current GDP was 7.8 Trillion Dollars (T) and GDP* is 7T, then the 200 Billion
dollar tax increase that began this process is a means of cooling the economy down
(preventing inflation).
Bal. Budget multiplier = 1
Chapter 11
Four Functions of Money.
M1 is currency coins and checking accounts
M2 is M1+ savings and small value time deposits
Money Creation Eqn:
Initial injection*(DM) = new money created
Reserves must be kept in vault cash or accounts with the Fed
TR=RR+ER
DM = 1/r and r= RRR Understand what is r (RRR) itself as opposed to DM which is
1/r
Leakages E and C Leakage-Adjusted DM - 1/(r+e+c)
Ch. 12
Specific Fed Powers as opposed to…
General Fed Powers:
(Control of the flow of credit aka the ir)
Open Mkt Ops – alters FFR rate banks loan excess reserves to each other
DR for a direct Fed-to-bank loan
RRR
What can vary on a bond, and what is fixed?
Understand the impact (and causes) of D or S shifting in the T-Bill market (see MS-MD
worksheet.
Chapter 13
Eqn of exchange: MV=PQ
V= 5 to 6 in recent years
For Quantity Theorists of Money (aka Monetarists), the Eqn of Exchange MV=PQ is
viewed as left to right, increases in M causes inflation (an increase in P)
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V and Q are fixed ( in the case of Q, viewed as exogenous)
This implies a rule based non-discretionary (or highly infrequently discretionary) Fed
actions. Monetarists are Inflation hawks and hold that the economy is very competitive.
Institutional Theorists favor and incomes policy that uses the leverage of the government
to pressure low increases in P and W, largely based on an insider-outsider model that says
factor markets in particular are not as competitive as they could be due to social, legal,
organizational, and indirect exclusion that occurs. They view increases in P causing
increases in M, or a right-to left reading of MV=PQ.
They argue that if the lack of perfect competition could be reduced, so would inflation.
Managed inflation
Employment is #1 priority
-Obstacles to the Fed actions.
-Phillips Curve is confirmed with AD shifts, not with SAS shifts.
-Central Bank Independence/ closely overlaps with Central Bank Credibility
Chapter 15
Most important, be able to use Ch. 15 equations:
Find passive deficit using a tax rate t:
Passive deficit=t*(Y*-Current Y)
Passive deficit + Structural deficit= Actual deficit
Real def = Nominal def – Inflation*Debt
Note, if any of these deficits, passive, structural, or actual is negative, remove (–) sign
and call it a (passive, structural, or actual) surplus
SS (currently and in recent decades) overstates surpluses and reduces the reported deficit
The Nat’l debt (total of each year’s deficit minus any surpluses) is very large, interest rates are high and rising, and
deficit timing is often questionable when the economy is close to Y* (potential output) on its own.
Public Spending crowding out private spending is also a concern
Understand the basics of all these Proposals for reducing debt:
1. Line-Item Veto
2. Privatization
Asset selling
Contracting Out Gov’t services
3. Capital Acct- Current Acct Budgeting: changes in budgetary procedures so only
Capital Investment (Infrastructure, roads, dams) will have debt as a financing option
4. BB Amendment (Straightjackets Congress/ arguably dooms economy)
5. Two-Wage Economy (part of wage tied to profits of each firm – can cause fellowworker problem)
Also understand proposals to address the deficit in the article called “The
Vigilante” on the Macro site. Note – not all of these strategies actually reduce the deficit.
Some just delay or help relieve the problem.
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