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Econ 2012: Macroeconomics Review # 3 Chapter 9 Definitions: Classical economists Keynesian economists Aggregate Demand Short-run Aggregate Supply Long-run Aggregate Supply equilibrium income potential income inflationary gap recessionary gap Fiscal Policy Be Able To: 1. Explain what a classical economist would say is the correct policy if the economy is temporarily experiencing unemployment. 2. Discuss why classical economics was not favored during the depression and why Keynesian economics gained popularity. 3. Draw an Aggregate Demand Curve. Discuss what will cause the AD curve to shift. (i.e. Remember AD = C + I + G + (X - M). 4. Explain why the Short-run Aggregate Supply (SAS) curve is shaped as it is and what will cause it to shift. 5. Explain why the Long-run Aggregate Supply (LAS) curve is shaped as it is and what will cause it to shift. Chapter 10 Definitions: Autonomous Expenditures Marginal Propensity to Expend Recessionary Gap Contractionary Fiscal Policy Automatic Stabilizer Induced Expenditures Expenditure Function Spending Multiplier Inflationary Gap Expansionary Fiscal Policy Discretionary Fiscal Policy Be Able To: 1. Write out an expenditure function if looking at a graph or a table of numbers. Be able to identify what that equation would look like graphically. 2. Describe the difference between Autonomous and Induced Expenditures. 3. Explain why there is a "multiplier" process, and be able to calculate the expenditure multiplier. 4. Determine the equilibrium level of income if given an expenditure function. 5. Show equilibrium graphically using the AE model. 6. Describe situations that will cause the AE curve to shift and result in a new equilibrium. 7. Calculate equilibrium income in the Keynesian multiplier model, and, if potential output is known, identify if there is a recessionary or inflationary gap. 8. Using the multiplier calculate the appropriate fiscal policy to reach potential output. 9. Explain the effects of contractionary or expansionary fiscal policy on the government’s budget (i.e. creating a budget surplus or deficit). 10. Explain the difference between discretionary fiscal policy and automatic stabilizers. Chapter 11 Definitions: Financial Asset Financial Liability Interest rate Liquidity Money M1 M2 L Medium of Exchange Unit of Account (value) Store of Wealth Federal Reserve Bank Reserves (Actual Reserves)(AR) Reserve Ratio (r) Required reserves(RR) Excess Reserves (ER) Simple money multiplier Approximate Real-world money multiplier Financial panic Be able to: 1. Explain what money is by identifying the functions that it should perform. 2. Explain the "fractional reserve" banking system. (i.e. how do private banks create money.) 3. Explain why a fractional reserve system might lead to financial panics. What could the government do to reduce the probability of panics? 4. Look at a banks T-account sheet and identify AR, RR and ER. Explain what kind of action they might take. 5. Be able to calculate and explain the simple and approximate real world money multipliers. Chapter 12 Definitions: Monetary Policy Federal Funds Rate Open Market Operations Contractionary Monetary Policy Central Bank Prime Rate Discount Rate Reserve Requirement Expansionary Monetary Policy Be able to: 1. 2. 3. 4. 5. Explain the roles of the Federal Reserve System. Explain how the federal reserve can control the money supply using its tools. Explain how banks respond when the federal reserve uses each tool. Explain how changes in the money supply affect the economy. Refer to AS/AD graphs. Describe the problems with using monetary policy.