Download Revised exam date: Tuesday, September 26, 2006

Macroeconomics – Test 2
Name:
Please answer the questions in order and be sure to answer all parts!
Our class provided a lot of information to help you more fully understand the attached article. Carefully read it and pay
attention to words, phrases, or sentences that relate to our class discussions.
1.
2.
a. Explain the Keynesian tradeoff., including a graph that we used in class.
b. Does the article relate to the tradeoff? If so, specifiacally where?
a. Define inflation.
b. How is the CPI constructed?
c. There was a debate over the construction of the CPI. In dollar terms that affect people’s lives, why does it
matter how it is constructed?
d. Clearly the article relates to inflation, but more specifically, does it relate to the CPI? If so, specifically where?
e. What is cost-push inflation?
f. Does the article relate to cost-push inflation? If so, specifically where?
3.
a. Define “gross domestic product.”
b. What does “GPI” stand for?
c. How do we get from the GDP to the GPI?
d. Does this article relate to GDP? If so, specifrically where?
e. Does this article relate to the GPI? If so, specifically where?
f. What is the average rate of growth in GDP since 1929?
g. Does this article relate to this rate of growth? If so, where specifically?
4.
a. What is stagflation?
b. Does this article relate to stagflatioin? If so, where specifically?
5.
Simply list the four useusal foci of macroeconomics.
Questions 6 and 7 are multiple choice.
6. When the inflation rate is falling, what is happening to the overall level of prices?
a. It is falling.
b. It is rising.
c. It could be either rising or falling.
7.
When the CPI is falling, what is happening to the overall level of prices?
a. It is falling.
b. It is rising.
c. It could be either rising or falling.
Honor code:
Reminder: Office hours on day of exam and day prior to the exam are limited to 15 minutes per student.
If you come see me, bring your notes and the work you’ve done on the answers.
Revised exam date: Tuesday, September 26, 2006
Second exam will be on November 2
These study questions are where to begin your preparations for your first Macroeconomics test. Also, notice what else
is in your notes concerning these topics. Prepare your answers in advance so that you can ask me about any holes in
my presentations! Also, I highly recommend that you write out answers to your study questions, and that you compare
your answers with those of a couple of classmates. More to follow.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
20.
21.
22.
22.
23.
Describe feudalism, including how economic coordination was achieved. Specifically, how were each of the three
questions answered? Describe the evolution of feudalism into mercantilism. (Your answer should cover the
enclosure movement, its consequences, the growth of markets, including the birth of the markets for labor and
land.)
Explain how economic coordination was achieved under mercantilism. Why did mercantilism evolve into the
market system? Explain how Adam Smith fits into this history.
What was the point of Smith’s observations in the pin factory?
What were the four Mercantilist policies that he criticized, and on what basis did he criticize them? Explain.
What are the bases for each of his three roles of government? (Read carefully what he said about national
defense and see if you can figure our how he argues that government should provide it.)
What is the invisible hand and to what does it direct people? Provide examples and counter-examples. Explain.
Explain anthropocentrism. Are you strictly anthropocentric? Explain, illustrating that you are clear on the concept.
Name two other biases that I argue are promoted by introductory economics texts. For each, provide an alternative
position that I suggest.
Explain a bias present in Mercantilist writings, and explain how their policy recommendations flowed from it.
State and represent graphically the law of demand. Why is the demand relationship an inverse relationship? Fully
distinguish between change in quantity demanded and change in demand.
State and represent graphically the law of supply. Fully distinguish between change in quantity supplied and
change in supply.
Explain the adjustment process if the market price is above the equilibrium price. Repeat for below. Graph each
scenario. Do markets ration? Explain. What three tasks do markets coordinate? For each, explain the ideal
according to market proponents.
Is it desirable for a market to be at an equilibrium? Argue yes, and no.
Briefly explain and give an example of four types of “market failure” as taught by mainstream economists.
Contrast “consumer sovereignty” with “producer sovereignty.” Discuss in the context of each of the following:
fashion industry, producers of military weapons, automobile companies, computer industry, McDonalds, higher
education. Explain.
Distinguish between microeconomics and macroeconomics. What are the four usual major foci of
macroeconomics?
How does microeconomics relate to the classical economists’ view of the economy as a whole? Include a
discussion of their view of the labor market, and its policy implication.
State and discuss Say’s Law. Include: an explanation of the relationship between the levels of output and income,
why savings and investment are equal, the expectation of how we reached the equilibrium, the policy implications,
and definitions for consumption, savings, and investment.
Why was Keynes dissatisfied with the classical theory?
What is the name of Adam Smith’s book, and what year was it published?
How does Say’s Law build on the classical view how markets work? What was the policy implication?
Keynes developed critiques of classical theory in order to explain the Great Depression. Explain Keynes’ response
to the classical theory that predicted there would be no unemployment.
Explain Keynes’s response to Say’s Law, including how the level of investment is determined. What (all) can
change the level of investment? Illustrate with a graph. How is savings determined?
Macroeconomics 2nd exam
Q&A – Monday evening, October 30
I’ll be at a conference on W & TH, November 1 & 2
Exam date: Thursday, Novermber 2





Fall 2006
These study questions are where to begin your preparations for your Macroeconomics test. Also, notice what else
is in your notes concerning these topics.
Prepare your answers in advance so that you can ask me about any holes in my presentations!
I highly recommend that you write out answers to your study questions, and that you compare your answers with
those of a couple of classmates.
When you come to my office for help, bring your notes and your best effort at answering the questions.
More to follow.
24. What are the four usual major foci of macroeconomics?
25. For Keynes, what determines the level of the nation’s output in the short run? What is the policy implication of
his theory? That is, what role (if any) should the government play in the economy?
26. Explain the tradeoff in the Keynesian model.
27. Define Gross Domestic Product. Name and explain the two methods for estimating the GDP.
28. These questions concern the expenditure approach. Why do we subtract imports? We have refined our
understanding of investment since the first exam: What are the three categories of “investment”? What
government outlays are included in and excluded from “government spending”? Why these inclusions and
exclusions? Which category of spending is largest? Which is most volatile?
29. What has been the average rate of growth in GDP in the US since 1929?
30. For McEachern, what are the limitations of GDP as a measure of a nation’s prosperity? Explain each. What do
your Affluenza authors add to that list? Explain. How do we get from the GDP to the GPI? What does GPI stand
for?
31. What two defenses did I provide for the GDP?
32. In your opinion, should we ditch the GDP? Why, or why not? Should we ditch the GPI? Why or why not?
33. Definitions: Inflation, inflation rate, price level, price index, nominal, real, current dollars, constant dollars,
purchasing power, COLA
34. Interpret Exhibit 6 (p. 166), and reconcile the information in the top panel with that in the bottom panel. What has
been the level of inflation in recent years in the US? How does this information relate to the CPI date on the
reverse of this page?
35. Consumer Price Index: What does it seek to measure? How is it constructed? How is the information obtained?
Explain three problems with the CPI. According to the economists who studied it, by how much does the CPI
overstate inflation? Why does this difference matter, and how has the BLS responded? (See McEachern, 143-4.)
36. Provide the equations for the CPI and for the GDP price index. Be able to do the math and interpret, as we did in
class.
37. What happened to the CPI-U in September? What category did the most to pull up consumer prices? What
category did the most to hold down consumer prices?
38. If a bank seeks a 2 percent real return on a loan and expects the inflation rate to be 5 percent, what nominal rate
will it charge? If the expectation proves wrong and the actual rate of inflation ended up being 6 percent, is the
bank hurt or helped? Is the borrower hurt or helped? Explain.
39. What does inflation do to the real value of savings? Explain. What does inflation do to the purchasing power of
savings? Explain.
40. What are the two sources of inflation? Which of these is consistent with Keynesian economics?
41. What is stagflation? What solution does Keynesian economics offer to stagflation?
42. McEachern: page 173, questions 9-13
43. Explain the two “costs” of unemployment. How is unemployment measured?
44. Provide definitions and, where available, examples and current measures: adult population, labor force,
unemployed, employed, unemployment rate, outside the labor force, discouraged workers, labor force
participation rates (for men and women, and why they have changed), types of unemployment.
45. The Keynesian cross is a model of output determination. What does that mean? What is the assumption
concerning the price level?
46. Distinguish between income and wealth.
47. Write the consumption function. Graph it. What is meant by autonomous consumption? Show it on the graph. What is
the equation for the consumption function?
48. Slope of the CNSP function: name, interpretation/definition, mathematical expression
49. Why do we move along the consumption function? At any given level of income, why might the nation consume more?
Illustrate with a graph. At any given level of income, why might the nation consume less? Illustrate with a graph. A
recent article described the “triple whammy” that is expected to hit consumption. Explain each and relate each to the
graph. What is the expected impact on consumption? Why is this of concern?
50. What does it mean to say that investment is autonomous? Graph our simple investment function.
51. How is the level of investment determined? Graph and fully explain the graph. Explain why investment may increase.
Why might it decrease? (This information is in your notes for the first exam.)
52. Graph our government spending function. What assumption does it reflect? How is the level of government spending
determined?
53. Graph our simplified net export function. For any given level of US income, why might net exports increase? Explain, and
illustrate with a graph. Repeat for a decrease in net exports.
54. Construct our aggregate expenditures function. What makes it shift up? What makes it shift down?
55. Construct the Keynesian cross and explain the 45 degree line. What output level will result? Explain the adjustment
process from above and below that output level, including the role that inventories play.
56. How might it be undesirable to be at the equilibrium? How does the prediction of this model differ from that of the
classical model?
57. According to Keynes, why was output so low during the 1930s? What solution did he promote? Illustrate with the
Keynesian cross.