ECON 102 1st EditionExam # 3 Study Guide Lectures: 11-15, 17-24Final Exam Content: Chapters 9, 10, 13, 14, 15 & The Inside Job videoChapter 9: Aggregate Demand and Aggregate SupplyLecture 11 (October 15)What are the three reasons for a downward sloping Aggregate Demand curve?What happens to a person’s expected wage when they graduate from col-lege? Are there any exceptions to this?Chapter 10: Fiscal PolicyLecture 12 (October 20)What are the two groups of Fiscal Policy?What caused the Social Security fund accumulate so much money? What is the problem being caused by this now?What and how does mandating auto and health insurance effect its price?Lecture 13 (October 22)What is meant by “progressive income tax?” Why does the United States use this?What are “inside lags” and “outside lags”?Lecture 14 (October 27)Why is putting “money in a mason jar” an ineffective way of saving money?What is the real expected return from lending?Lecture 15 (October 29)Explain Financial Intermediaries:Define Liquidity:What must happen to the interest rate of an investment if it is deemed “risky” for the investor?*NEW MATERIAL FOR EXAM III*Chapter 13: Money and BankingLecture 17 (November 10)How does money increase economic efficiency? What is a balance sheet and what information is on it?What is a Central Bank?Lecture 18 (November 12)What are the responsibilities of the Board of Governors?What is the FOMC and what does it do?Chapter 14Lecture 19 (November 17)What are the 3 reasons for Money demand?What is the discount rate and how does it change during a recession?Lecture 20 (November 19)How can the US get the dollar’s exchange rate to rise?The Inside Job Movie Parts I, II, IIILecture 21 (November 24)How did Investment banks contribute to the Great Recession?What is a credit default swap? (will be on final)Lecture 22 (December 1)What is a derivative in Finance?How is the risk in the Housing market controlled?Chapter 15:Lecture 23 (December 3)What will happen if the economy is operating above full employment?What is a liquidity trap?Lecture 24 (December 8)What is Say’s Law and who argues for it?What is one way our government debt could be relieved?ANSWERS*******************************************Lecture 11 (October 15)What are the three reasons for a downward sloping Aggregate Demand curve?1. Real Wealth Effect: holding nominal wage constant lowers Price allowing you to buy more things, consumption increases.2. International Trade Effect: holding foreign prices constant if US prices decrease, our Net Exports will increase.3. Interest Rate Effect: If the cost of borrowing decreases as Price de-creases (details on this are only for the final, not second the exam!)What happens to a person’s expected wage when they graduate from col-lege? Are there any exceptions to this?“Big Jump” Up the income distribution when you graduate from college, the more education you have the better. HOWEVER, it matters what you major in a lot more than you think! Currently, engineering majors make the most and “of the arts” majors make the least. “Of the Arts” degrees sometimes do not impact future wages any more than a high school degree.Lecture 12 (October 20)What are the two groups of Fiscal Policy?1. Discretional Spending: stuff the government can change at a moments noticeEx: road construction, pull troops out of war2. Non-discretional Spending: things the government has contractual com-mitments to. To get out of this spending the government must renegotiate the contracts.Ex: entitlement programs, if people have been promised something they are entitled to it. What caused the Social Security fund accumulate so much money? What is the problem being caused by this now?The baby boomers. More babies were born than the average for 14 years, all of them were working and paying social security, huge amount ofmoney!!Now, they are all getting ready to retire and money is being taken out fasterthan it is being put in by the current generation’s workers. Within a decade the Social Security system will either default on its obligation or will have toincrease taxes (But it is a solvable problem).What and how does mandating auto and health insurance effect its price?The government requiring everyone to have insurance brings the cost down for everyone by diversifying the pool of the insured. EX: if auto insurance was not required, only bad drivers would purchase it. Therefore, insurance companies would have to shell out a lot of money in claims to cover the crashes. Once GOOD drivers are brought into the insurance pool, they are less likely to crash and need coverage. This allows the insurance companies to have more more money coming in than they are being hit with for claims,and thus charge less overall.Lecture 13 (October 22)What is meant by “progressive income tax?” Why does the United States use this?The richer you are the more you are taxed. The first $50,000 you earn you pay one tax rate, the next $25,000 you are taxed a higher rate. This is used because lower income people/families are paying for their basic needs (food, water, shelter) and cannot be taxed very much without having to forgo these. Half of americans do not pay taxes because they would not have enough money to maintain a healthy caloric intake/ have a safe place to live.What are “inside lags” and “outside lags”?inside lag: the time it takes for a policy to be formedoutside lag: the time it takes for a policy to be implemented and actually workLecture 14 (October 27)Why is putting “money in a mason jar” an ineffective way of saving money?As money sits in a mason jar is losing purchasing power because of infla-tion. It is better to invest the money (in diverse areas of risk) and earn inter-est on it.What is the real expected return from lending?Real expected return from lending = {the nominal interest rate} - {the ex-pected inflation rate} - expected risk - transaction costs and taxesLecture 15 (October 29)Explain Financial Intermediaries:Financial intermediaries link households to financial markets, where they al-locate savings to other households, to firms, and to governments. EX: Banks,Bonds, Stock Market. They are the “intermediates” by being between the savers and the borrowers.Define Liquidity:Liquid: how quickly/easily something can be converted to cash. An asset is illiquid if the investor must wait a specific length of time before receiving payment because it cannot be converted to cash
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