Econ 222: Midterm 2 Review(You may bring only a non graphical calculator to the exam)In this review sheet I have tried to include the main concepts that we have discussed in class and that you need to know for the exam. However, keep in mind that the exam can consist of any material covered in class, regardless of whether it appears on this sheet, so read and understand the material covered during the lectures. Review all your homework questions, quizzes and the review sheet for midterm 1. Definitions and conceptsPrice Indices: Chapter 7 Page 136 – 138, Chapter 6 Page 122 – 123, Chapter 7 Pages 138 – 1391) Price Index2) Cost of Living3) Indexation4) Fixed weight Procedure5) Consumer Price Index. What is it? What does it measure?6) How is CPI constructed? Who reports the CPI?7) Computing the cost of a basket. Calculating the CPI8) Computing Inflation Rate using CPI.9) Biases in the CPI –Define the substitution bias, new good and quality bias.10) GDP Deflator. What is it? And what does it measure?11) Differences between the GDP Deflator and the CPI.12) Purchasing power, what does it measure? Impact of inflation on purchasing power.13) Nominal interest Rate14) Real interest Rate15) How does inflation impact the real interest rate?16) Difference between anticipated and unanticipated inflation. Impact of unanticipated inflation on purchasing power (real interest rate).Unemployment: Chapter 7 Pages 129 – 130, Pages 132 – 1351) Who reports the unemployment rate?2) Labor force3) Who are the unemployed? Employed? Discouraged workers.4) Not in the labor force5) Working age adult population6) Unemployment rate7) Labor force participation rate. 8) Natural rate of unemployment9) Sources of unemployment: Job Leavers, New Entrants, Re-entrants, Job Losers10) Frictional unemployment11) Structural unemployment12) Cyclical unemployment13) Is some unemployment inevitable in an economy? Why?Aggregate Expenditure and Equilibrium Output: Chapter 8 Pages 147 – 159, 1611) Keynesian theory of Consumption2) Factors that impact consumption: Income, wealth, interest rate, expectations aboutfuture.3) Consumption function.4) Autonomous consumption5) Marginal propensity to consume. Be able to define in words. How is it calculated?6) Marginal propensity to save7) Saving function8) Define breakeven point. How do we identify the breakeven point?9) Along which portion of the consumption function are individuals borrowing? Along which portion of the consumption function are individuals saving?10) Planned investment11) Difference between actual and planned investment12) Unplanned inventories. 13) Under which scenario is unplanned inventory is positive, negative and zero?14) What does an economy with positive unplanned investment imply in terms of the relationship between Y and AE?15) What is planned aggregate expenditure AE?16) Equilibrium. What does the equilibrium imply about the state of the economy?17) How an economy that is out of equilibrium does (has positive or negative inventories) converge to equilibrium (through which mechanism)?18) S = I in equilibrium19) Exogenous variable20) Multiplier. Explain in words. Be able to compute21) Show graphically the impact of an increase in investment on the level of real GDP.22) How does investment multiplier work through the economy? Why is the multiplier finite? Which variable determines the impact of the multiplier on the level of the real GDP?Government and Fiscal Policy: Chapter 9 Pages 165 – 180, Chapter 5 Pages 98 – 991) Discretionary fiscal policy2) Fiscal Policy3) Lump sum taxes4) Net taxes5) Disposable income6) Consumption as function of disposable income7) Difference between long run growth and short run fluctuations.8) Potential GDP9) Expansion 10) Recession 11) Natural rate of unemployment along the potential GDP12) Y=C+S+T 13) AE=C+G+I14) Y=AE in equilibrium15) S+T=I+G in equilibrium16) Government purchase multiplier. What is it? How is it computed?17) Be able to show graphically a change in G and its impact on equilibrium.18) Tax Multiplier. What is it? How is it computed?19) Be able to show graphically a change in taxes and its impact on equilibrium.20) Explain the difference between Government spending multiplier and tax multiplier.21) Which one of the two (G multiplier or Tax multiplier) is smaller? Why?22) Balanced Budget multiplier23) What is the impact on real GDP when the government follows a policy of using the balanced budget multiplier?24) Budget surplus25) Budget deficit26) Difference between budget deficit and federal debt.27) Automatic stabilizers28) Induced taxes29) What are two channels through which the automatic stabilizers work in an economy?30) Difference between discretionary and automatic fiscal policy. Money Supply: Chapter 10 Page 189 – 1991) Monetary policy2) What is money?3) Barter4) Double coincidence of wants5) Kinds of money: Commodity money and fiat money.6) Shortcoming of commodity money7) Role of government in promoting fiat money. 8) Legal Tender9) Currency Debasement10) Functions of money: Medium of exchange, Unit of account, store of value. Be able to explain these functions.11) What is meant by liquidity?12) How is money supply measured?13) M1. How is M1 measured?14) M2. How is M2 measured?15) Banks as financial intermediaries. What are financial intermediaries?16) Assets and Liabilities of a bank17) Assets: Reserves and Loans. Be able to explain what is meant by reserves?18) Liabilities of a bank: Deposits19) 100% reserve banking system20) Inability of banks to create money with 100% reserve banking.21) Fractional Reserve Banking22) Required Reserves Ratio23) Excess Reserves24) How do banks create money and Increase money supply? Explain in words the mechanism.25) Be able to write down the balance sheet of a bank with its assets and liabilities.26) Bank Runs27) Money Multiplier. What is it and how is it computed?28) Federal Reserve Bank’s structure: Board of governors, FOMC and the 12 district