Final Exam Study Outline Exam 1 Material Chapter 1 • What is economics? • What is scarcity? • What is the difference between micro and macro? • What are the five foundations? o Incentives matter § Positive vs. negative; direct vs. indirect § Indirect incentives and unintended consequences o Life is about trade-offs o Opportunity cost o Marginal Thinking o Trade creates value • Markets • Trade and barter o Double conincidence of wants • Circular flow • Comparative advantage Chapter 2 • Scientific method o Positive vs. normative statements o Models § Endogenous vs. exogenous factors/variables o Ceteris paribus o Assumptions, and the danger of faulty ones • Production possibilities frontier (PPF) o Assumptions o Opportunity cost in the PPF model, and how it relates to slope o Law of increasing opportunity cost o How it can shift o What the different areas created by the PPF represent • Specialization o Absolute advantage o Comparative vs. absolute advantage o How to calculate comparative advantage, from a table or a PPF o How to determine the possible terms of trade o Gains from trade • Trade-off between present and future consumption o Short run vs. Long run o Consumer goods, capital goods, and investment o Capital and consumer goods on the PPFChapter 3 • Fundamentals of markets o Firms o Consumers o Exchange o What is a market? o Market economy o Invisible hand o Competitive markets o Imperfect markets o Market power o Monopoly • What determines demand? o Quantity demanded o Law of demand o Demand schedule and demand curve o Market demand o Change in quantity demanded (from change in price), vs. o Change in demand (from change in nonprice factors) § Normal vs. Inferior goods § Compliments vs. Substitutes § Change in tastes or preferences § Price expectations § Number of buyers § Taxes • What determines supply? o Quantity supplied o Law of supply o Supply schedule and supply curve o Market supply o Change in quantity supplied (from change in price), vs. o Change in supply (from change in nonprice factors) § Cost of inputs § Changes in technology § Taxes and Subsidies § Number of sellers § Price expectations o Law of supply and demand § Equilibrium price and equilibrium quantity § Shortage (price below equilibrium price) § Surplus (price above equilibrium price) § How changes in supply or demand change equilibrium price and quantityExam 2 Material Chapter 6 • Gross Domestic Product (GDP) • 3 uses of GDP data • Total GDP vs. Per Capita GDP • Business Cycles • How we measure GDP • Intermediate vs. Final Goods • The 4 types of expenditures in GDP o Consumption o Investment o Government Spending o Net Exports • Real GDP vs. Nominal GDP • Growth Rates • Shortcomings of GDP Chapter 7 • Three types of unemployment o Structural o Frictional o Cyclical • Natural Rate of Unemployment and Full Employment Output • Shortcomings of the Unemployment Rate o Discouraged workers o Underemployed workers o Duration of unemployment • Leading vs. Lagging Indicators • Labor Force Participation Rate • Unemployment and Gender/Race Chapter 8 • Inflation, and why it is problematic • Consumer Price Index (CPI) and computing it • Bureau of Labor Statistics (BLS) • Prices don’t all move together • Concerns about CPI accuracy • Chained CPI • Costs of Inflation o Menu Costs o Shoe Leather Costs o Money Illusion o Uncertainty about future price levelso Wealth Redistribution o Price Confusion o Tax Distortions • Cause of Inflation and the Velocity of Money Equation • Comparing Dollar values across time with the CPI Exam 3 Material Chapter 13 – Aggregate Demand – Aggregate Supply Model • Two paths for studying the macroeconomy: o Long-run growth o Short-run fluctuations – business cycles • Aggregate Demand – Aggregate Supply Model o Aggregate Demand (AD) – What is it? § AD = C + I + G + NX § Why does it slope downward? • Wealth effect o What is wealth? • Interest rate effect • International trade effect § Movements along AD vs shift in AD • Shifts in Consumption o Changes in real wealth o General expectations about future o Changes in taxes (i.e. disposable income) • Shifts in Investment o General expectations about future o Interest rates o Amount of money in economy • Shifts in Government Spending o Influenced by policy • Shifts in Net Exports o Changes in foreigners’ incomes o Exchange rates o Aggregate Supply – What is it? § Functions of the firm • Inputs transformed into outputs § Long-run vs Short-run • Long-run aggregate supply (LRAS) o Output does not depend on price level o Full employment output and natural rate of unemployment o Shifts: § Changes in resources – quantity and/or quality§ Changes in technology § Changes in institutions • Short-run aggregate supply (SRAS) o Positive relationship between price level and quantity § Sticky input prices § Menu costs § Money illusion o Supply shocks o Long-run equilibrium § AD = LRAS = SRAS § Adjustments to shifts: • In long-run AS o Both LRAS and SRAS shift • In short-run AS o Temporary short-run equilibrium o SRAS shifts to get us back to long-run equilibrium • In AD o Temporary short-run equilibrium o SRAS shifts to get us back to long-run equilibrium Chapter 14 – Great Depression, Recession, and Macro Debates • Recession of 2008 o Why named “Great” recession? o Analyzing Great Recession using AD – AS Model o What were the major causes of if? § Housing market § Financial markets § Decreases in wealth and expected income o Basic stats • Great Depression o Compare and contrast to Great Recession o Basic stats o Analyzing Great Depression using AD – AS Model o What were the major causes of if? § Stock market crash § Faulty macroeconomic policy • Poor Monetary policy – gov’t reduced money supply • Poor fiscal policy – gov’t reduced spending and increased taxes and tariffs § Bank runs• Macro debates – Classical vs Keynesian Economics o Classical § Prices adjust quickly and economy fixes itself § No SRAS, only LRAS § Why couldn’t this model account for Great Depression? o Keynesian § Some prices are sticky § SRAS and LRAS o Other comparisons between the two