Download Main points for the Final Exam—ECO 3202 Chapter 10 Main Points

Main points for the Final Exam—ECO 3202
Here are the main points that you should focus on for Chapter 9. This is intended as a guide to focus
your studying for the second exam. Try to keep in mind the big picture, and which models are used to
form the main models.
Chapter 9 Main points:
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The difference between the short run and the long run, including but not limited to the different
assumptions we make about the economy in each situation regarding firms, prices, output, and
unemployment.
Study the Aggregate demand (AD) curve and its meaning and why it slopes downward
Study the Aggregate Supply curve in the long run and the short run (LRAS and SRAS). Know why
the LRAS curve is vertical and the SRAS curve is flat or horizontal (know the economic meaning
behind the shapes)
Study the role of shocks to the system, both shocks to demand (positive and negative) and
shocks to supply (positive and negative).
Chapter 10 Main Points
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Keynesian Cross—Understand why we need the Keynesian Cross model to look at expenditures.
Learn which variables are exogenous and endogenous, and why that is. Know how the
exogenous variables shift the PE curve, and how equilibrium Y responds to this shift.
IS curve—Know how the Keynesian cross model contributes to the shape of the IS curve and
what the IS curve represents (the two variables that it shows a relationship between). Know
how the various variable shocks shift the IS curve. Study the government purchases multiplier
and the tax multiplier, why one dollar change in tax cuts or government spending equals more
than one dollar change in Y.
The Money Market (Market for real money balances in the text)—Review the assumptions and
reasoning behind the money demand L(r,Y) and the money supply (M/P)S . Understand what
assumptions or who controls the various variables in this model (such as P and M).
LM curve—Study the relationship between the money market and the LM curve. Understand
what variables the LM curve is intended to show a relationship between, and why the money
market contributes to the shape of the LM curve. Know how changes in policy and preferences
shift the LM curve.
Chapter 11 Main Points
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Short Run IS-LM: First look at the how different policy plans by the government change the ISLM model, specifically the equilibrium levels of the endogenous variables like Y, r, I, and C. Then
look at how the both sides of policy can work with or against each other (monetary vs. fiscal
policy). Also look at exogenous shocks that can affect either the IS or LM curve, and what the
government can do to counter any shock.
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IS-LM-AD: Here understand which variables change from endogenous to exogenous (and vice
versa) from the short to long run. Also know how shocks in the short run to the IS-LM curve
transition into the long run, specifically what happens initially to Y, r, C, and I and what happens
to P and the other variables in the transition.
Chapter 12 Main Points
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Mundell-Fleming—Study the Mundell-Fleming model, now with net exports NX(e). How do
changes in government policy affect the economy. Also look at the effects of trade policy on the
economy .
Risk premium—Why do small open economies face interest rates that differ from the world rate
r*. What makes a country more risky to outside investors. How does an increase in risk premium
change the costs of borrowing for a country.
Fixed vs. Floating—Understand the difference between the two exchange rate regimes, fixed or
floating. Study the pros and cons of each policy. Look at the “impossible trinity” and what this
means. Why can a country only follow two out of the three of these three policies?
Case studies—Look at the case studies presented in the lecture
AD and the Long Run—How does the Mundell-Fleming model transition into the long run and
what happens in the Mundell-Fleming when prices are flexible.
Chapter 13 Main Points
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Upward sloping SRAS—Here know the two theories that help explain when the short run
aggregate supply curve may be upward sloping. Compare the situation in the previous chapters
(9, 10, and 11) to what happens now when prices can adjust somewhat in the short run. (I.e.
how much income shifts compared to the two models.
Phillips Curve—Study the relationship that the Phillips curve captures, and it’s relation to Okun’s
law. Know the trade-off that the Phillips curve presents for policy makers, and how this relates
to the sacrifice ratio.
Expectations—Understand the two main ways that economic models assume people form
expectations; so the difference between adaptive and rational expectations. Also study the
changes to the Phillips curve when we assume one type of expectations or the other, and how
that may affect the sacrifice ratio. What role does credibility play in this scenario
Hysteresis—Know the difference between the natural rate hypothesis that has applied to all of
our modeling so far, and the idea of Hysteresis, and what Hysteresis is.
Chapter 7 Main Points
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Why growth matters and what we look for when we are studying the economics of growth.
Briefly look at the Solow model, and make sure you understand the ideas about the "steady
state" level of capital, and how this determines a country's long run growth rate.
What implications do changes in the savings rate and investment rate have on economic growth
What the golden rule is and when it is easy to get there or not
How population growth affects economic growth (through the level of capital accumulation).