Download ECO 3202 Review: Exam 1 Chapter 3 Chapter 4

ECO 3202 Review: Exam 1
First and foremost you should study the intuition and theory behind the models and equations. If you
cannot remember how a formula is written, but you know what it means then you may still be
able to answer the questions on the exam.
This means studying the assumptions we make in the model, like what is exogenous and what is
endogenous, the relationship between two variables (for example, between quantity of
investment demanded and the interest rate).
Chapter 3
Production: What are the factors of production, how their “prices” are determined, and how firms
demand these factors. Also study the production function and its meaning.
Income: What determines national income and the distribution of income between the factors of
production.
Demand: Know what determines the demand in a closed economy (i.e. what make up the individual
components of C,I, and G). Meaning exactly what determines how much is spent on
consumption, investment and government spending.
Equilibrium: What variable changes (or is endogenous) in the classical model, to make sure that the
production equals the expenditures. Also know which variables we assume are exogenous here.
Study the loanable funds market, and how it works with the goods market.
Policy tools: Understand what happens to the model when the government makes policy changes, such
as tax increases/cuts or spending increases/cuts. How does this affect components of the goods
market (Y=C+I+G), national savings, public and private savings and investment.
Chapter 4
Money: What is money, and how is it used. Know how the quantity of money is controlled and why the
government might want to change this quantity. Study the quantity theory of money, and what
variable is endogenous (what changes to make sure equilibrium is achieved). Also look at what
motivates the demand for money, and how the money demand changes when those factors
change.
Interest rate, nominal=i and real =r: How is the nominal interest rate determined and the difference
between real and nominal interest. Understand the Fisher equation and the Fisher effect. What
is the classical dichotomy and what assumptions are made for this theory to hold.
Inflation, π: Using the quantity theory of money equation, know how to calculate the inflation rate.
Know some real costs of inflation. The difference between expected inflation, E π, and actual
inflation, π, and what happens when they are not equal.
Hyperinflation: What causes hyperinflation, some costs of hyperinflation and how to eliminate
hyperinflation or prevent it from happening.
Chapter 5
Net exports, NX=EX-IM: How net exports are defined. What is difference between a small open
economy and the closed economy we examined in chapter three, specifically the new
assumptions and how the main equations have changed (size of the economy, and what
variables become exogenous and endogenous). What happens when output does not equal
expenditures. Know The relationship between net capital outflow and net exports, and what
components make up net capital outflow.
Exchange rates, real=ε and nominal=e: What determines the exchange rates, nominal and real, and how
they are defined. How does the exchange rate change to bring equilibrium in the economy, with
the foreign exchange market? The relationship between the net exports function (NX=NX(ε))
and the net capital outflow function (S-I(r˟)) and how the exchange rate adjusts between them.
Look at the assumptions of PPP and how we would have to change our assumptions
Policy tools: What happens now to the small open economy (Y=C+I+G+NX) when there are policy
changes, like fiscal expansion/contraction (tax or spending changes), or in trade policies, like
tariffs, import limits or trade agreements. Also understand what happens if there are global
changes in policies (how they affect the world interest rate).
Chapter 6
Unemployment Rate: Know how the unemployment rate is determined. What is the natural rate of
unemployment and how it changes over time. What happens to the unemployment rate when it
is in the “steady state.” What it means in the labor market, from chapter 3, when we have
unemployment in the economy.
Causes of Unemployment: The difference between frictional unemployment and structural
unemployment. Know the government policies that can increase and decrease unemployment,
and why they can be both good and bad for the economy. Also know what contributes to
unemployment outside of the government, and how these theories matche with the data on
unemployment.