1Study Guide for Final, ECO 201: Principles of Macroeconomics Bring a SIMPLE calculator. The exam, as usual, will be based on the homework, with some short-answer ques-tions and some longer problems. There will be some calculation and a lot of graphs. Just over half of the questions and the points of the exam come from chapters 22, 24, and 30. Chapter Study 3 Make sure you are familiar with Supply / Demand: how do you find equi-librium? What is the difference between a movement along the curve and a shift of the curve? 17 Learn the definitions of the Key Terms at the end of the chapter. 18 Learn very well the expenditure method of measuring GDP What is the difference between Nominal and Real GDP? What is unemployment? Is a full-time student unemployed? (Ans.: no) Learn the definitions of the Key Terms at the end of the chapter. 19 Difference between inflation and the price level. Difference between nominal and real interest rates. Learn the definitions of the Key Terms at the end of the chapter. 20 1. What has happened to living standards in recent history? What is the best economic measure of standards of living? 2. What is GDP per capita? Why do we care about GDP per capita and not (so much) about GDP per worker? 3. Suppose a government enacts a policy that causes the long-run growth rate of average labor productivity to increase by 0.2 percentage points. Why would such a small improvement matter? 4. What is the largest source of increased GDP per capita? (Answer: in-creased labor productivity, but higher labor participation helps). 5. Why is average labor productivity so important? What are the deter-minants of average labor productivity? Make sure you understand the role of each one. a. Define human capital. If you were the Minister of Education of a small, poor country, what would you do to improve the human capital of the average citizen of your country? i. Suppose the Minister of the Treasury says, “that’s a waste of time. Farm workers don’t really need to know algebra.” What would you answer? b. Define physical capital (your definition, maybe drawn from chapter 18, p. 450, should make clear why more physical cap-2ital leads to economic growth). i. In a free-market economy, who accumulates physical capital? (Answer: private businesses). What kinds of policies can a government enact that will encourage private firms to accumulate capital? ii. Remember that there’s no free lunch: more factories mean giving up current consumption of pizzas. So you’ve got to be sure that the extra investment is worthwhile. c. What are diminishing returns to capital? Explain Table 20.2, the similar table in the slides, Question 4, and Problem 6. Think up two other examples of a situation where adding more of just one factor of production leads to more output, but at a decreasing rate. d. What is the role of land and natural resources? i. Can a country grow without them? ii. Even though individual countries can import natural resources, the whole world can’t. So the environment needs to be protected, even on economic grounds. e. Explain this sentence: “economists would agree that new technol-ogies are the single most important source of productivity im-provement, and hence economic growth in general. i. When we say “productivity” we really mean the same as “average labor productivity.” ii. What kinds of policies encourage technological devel-opment, research, etc.? iii. What is the role of population in technological devel-opment? f. What is the role of entrepreneurship and management in economic growth? Why is social capital important? All of Output Amount of Capital3these are essential to a free-market economy (and not neces-sary for a communistic one). g. What policies increase economic growth? h. What is the specific role of government in economic growth? (Besides broader policies, how does the specific function of government contribute to economic growth? In this, the ca-veat is also clear: a government that does too little, or too much, or badly, will hurt economic growth.) 21 Suppose the productivity of workers improves. How does the demand for labor change? What happens to wages? What are the three kinds of unemployment? Learn the definitions of the Key Terms at the end of the chapter. 22 Learn the definitions of the Key Terms at the end of the chapter. 1. Definitions: saving, saving rate, wealth, assets, liabilities, stocks, flows, capital gains and losses. Relationship between saving and wealth, etc. 2. Difference between stocks and flows 3. Relationship between saving and the interest rate: why does saving rise when r rises? Draw the relation between saving and the real in-terest rate. 4. Measurement of national saving. Private and public saving; com-ponents. Define National Saving, Private Saving, and Public Sav-ing. Suppose private saving stays constant: what happens to Na-tional Saving if the government deficit increases? 5. Define Investment and Capital. Determinants of investment: inter-est rates, VMP, etc. An exercise (like in the slides or in the home-work) dealing with the effects of changes in interest rates, produc-tivity, price of the good produced, etc. Calculation is likely. 6. Draw the relation between investment and the real interest rate. 7. In Figure 22.7, how is the real interest rate determined? What does an increase in the budget deficit do to the real interest rate? 8. Financial markets: determination of the interest rate in a closed economy and the equilibrium quantity of saving/investment. 9. Shocks to financial markets: effects of changes in the determinants of saving and investing. Exercise 9 is a good example. Try many other “shocks” by changing the determinants: this will help you learn about the reasons for saving, the effects of government deficits on national saving, and the macroeconomic effects of microeconom-ic changes in investment. There will be graphing questions on this topic for sure. 23 Use the three functions of money to define what money is. What kind of policy does a Central Bank carry out? Answer: monetary4policy. What are open market operations? What does an open market sale/purchase do to the money supply? Assuming velocity is constant and output is equal to potential output, what is the long-run impact of an increase in the money supply on output? Learn the definitions of the Key Terms at the end of the