Download Old Review for Exam 2

Intermediate Macroeconomics
Dr. McGahagan
Exam 2 Study Guide.
Part I. Identification
What did each of the following contribute to macroeconomics?
Expect to compare and contrast some of those on the same line:
Keynes – Hicks
Phillips – Phelps
Samuelson – Solow – Friedman
Irving Fisher
Arthur Okun
Katz and Krueger
Lucas – Sargent – Fischer - Taylor
Part II. Guide by chapter
Chapter 5. IS/LM model
Define exogenous/endogenous and identify which variables are which in IS/LM
Interest inelastic money demand – effects on IS or LM curve and effects of monetary/fiscal
policy.
Interest inelastic investment demand – effects on IS/LM and effects of monetary/fiscal policy.
Liquidity trap and effectiveness of monetary policy
Express the effects of the policy mixes of the following presidents/Fed chairs in terms of
an IS/LM model (“loose” money = expansionary monetary policy)
Nixon / Burns – high defense spending / expansionary monetary policy starting from full
employment
Carter/ Miller – economic stimulus / expansionary monetary policy starting from recession
Reagan / Volcker – tax cuts / tight money starting from near-full employment
Clinton / Greenspan – cuts in government spending / loose money
George W. Bush / Greenspan – tax cuts / loose money
Obama / Bernanke – stimulus / loose money
What impact will a higher price level have on IS/LM equilibrium?
Problems:
Quick check: Qu. 1, b,c,d,e,f,g
Numerical example: Qu. 4
Liquidity trap: Qu. 6
Bush/Greenspan: Qu. 7
Chapter 6. Pricing and Wage Setting
Unemployment rates (U3, U6)
Household / establishment survey – which more reliable?
Size of job flows compared to size of labor force
Types of unemployment; “natural” rate definition based on this classification.
How does this differ from the “natural” rate based on the AS/AD model?
From the “natural” rate based on the Phillips curve?
Of course, know the pricing equation and the wage setting equation; know how they determine
the natural unemployment rate and the real wage level, and explain the impacts of :
–
–
–
higher markups by firms
greater power of unions
greater worker productivity
Problems: Quick check: Question 1, b, c, d, e, g, h.
Question 3, numerical example of the determination.
Chapter 7. Aggregate Supply and Aggregate Demand
Derive the aggregate supply curve from the pricing and wage setting equations. (Don't worry about the algebraic
niceties of section 7-1, but be aware of the nature of the relation and what determines the slope of the AS curve).
What will happen to the AS or AD curve if any one of the following takes place:
– less stringent antitrust enforcement
– expected higher price level
– increase in worker productivity
– expansionary monetary policy
– passage of card check legislation (easier to form union)
– cutbacks in government spending
After shifting the AS or AD curve, you should also be able to discuss the impact of any of
those changes, in the short and in the medium run, on
–
–
–
–
–
the natural and actual rates of unemployment
nominal and real wages
actual and expected price levels
interest rates and investment
GDP and unemployment
You should be able to combine your shifts of the AS curve with the IS/LM curves to analyze the dynamics of
adjustment to a change.
Problems:
Quick Check:
Qu. 1: b, c, d, e, f, g
Qu. 2: spending shocks and the medium run
Qu. 3: supply shocks and the medium run
Chapter 8. Natural Rate of Unemployment and the Phillips Curve
Derive the Phillips Curve from the Aggregate Supply curve.
What assumption did Phillips, Samuelson and Solow make about the role of expected inflation?
How did Phelps and Friedman modify the Phillips curve?
What is the NAIRU and how is it derived from the Phillips curve?
Why is or was the NAIRU lower:
– in Japan than in the US ?
– in the US than in the EU ?
– in the US in the 1990s than in the US in the 1980s ?
What is the connection between inflation and indexing (hint: it goes both ways)?
Problems:
Quick check: Problem 1: b, c, d, e
Problem 2: T/F and why.
Problem 3: Mutations of the Phillips Curve
Chapter 9. Inflation, Activity and Nominal Money Growth
Define:
labor hoarding
sacrifice ratio
quantity equation
adjusted nominal money growth
Lucas critique
Sargent, Taylor, Ball on speed of disinflation
nominal rigidites
Okun's law
Medium run equilibrium (section 9-2): My equations use asterisks rather than bars over the values:
gyt = gy* from Okun's law
inflation = gm* - gy* from the quantity equation (here used as AD)
u = u* from the Phillips curve.
Quick check: Problem 1: a, b, c, e, f, g, h
Problem 2: Okun's law
Extend to compute time for US economy to recover to 5 percent unemployment
if current unemployment is 11 percent and economic growth recovers to 4 percent.
Problem 3: problem of disinflation