Final Exam Study GuideECON 104-B Spring 2013Final Exam Study GuideThe comprehensive final exam starts at 4:00 p.m. on Thursday, May 9th in Mahar room 108. The exam will include short answer questions and problem solving. The short answer questions will be drawn from the list provided below. The problem-solving component will follow the themes identified below. Please bring a calculator to the exam but do not bring your cell phone. Cell phone use during the exam will not be allowed. You will be expected to show picture identification when you hand in your exam.Don’t neglect the latest reading: McEachern chapters 13, 14, 15 & 16.Short Answer Topics- Production Possibilities Frontiers (contrasting various points, factors that shift) -Points along the PPF maximize all resources and are most efficient, while points inside of the line are inefficient and don't maximize all of the available resources and points outside the PPF are impossible because they require too many resources.-An outward shift would result when there is an improvement in technology that would benefit both types of goods. An increase in the workforce which would result in more factor resources being exploited. An improvement in productivity and efficiency in goods production. An inward shift would result when there is unemployed resources or when the economy uses resources inefficiently- Opportunity Cost (including constant vs increasing) -Constant Opportunity Cost: The opportunity cost remains the same no matter how many more of another resource you want.-Law of increasing opportunity cost: To produce more of one good, a successively larger amount of the other good must be sacrificed. Each additional increment of one good requires the economy to sacrifice successively larger and larger increments of the other good. - Views of International Trade (Mercantilist, Smith, Ricardo) -Mercantilists thought money is gold. The more gold you had, the more money your country had in their treasury. Countries would trade with gold and a person's wealth was based off of how much gold they had.-Adam Smith criticized the Mercantilists and believed human labor is a source ofwealth. In order for a country to become wealthy, we need to maximize production from all of our workers. Smith based his thought on the concept of Absolute Advantage (you should specialize based on you being the best at what you do, so you can sell your product or service).-David Ricardo built off of Adam Smith's perspective and emphasized Opportunity Cost, or the cost of what you have to give up for the next best option.Ricardo believed wealth was based off of Comparative Advantage (focusing on where you have the lowest opportunity cost).- Circular Flow Model - Limitations of GDP-Illegal Drugs-Underground Economy: Black Market, Getting paid "under the table"-Household Services: Childcare, doing your own laundry-Trade/Barter: Goods made overseas are not factored into GDP-Environmental and Social Costs: Costs of overfishing-Intermediate Goods: Cost of tires is not included in GDP when purchasing a new car-Quality of goods availableNew Material- Wolves, Pussycats, & Termites The National Debt crisis is believed by each group to be…-Wolves: An "Immediate Crisis"-The nearly 17 million dollar debt is way too much!-We will NEVER repay that money! The US Government will default.-High risk of Crowding Out (A situation in which a government, especially the U.S. Government,EborrowsEso muchEmoneyEthat it discouragesElendingEto private businesses).-Pussycats: "Trivial"-We owe ourselves for the massive debt!-We need to INCREASE the risk of inflation, but DECREASE the risk of crowding out.-Termites: An "Eroding quality of life"-We wasted too much money on military spending!-Debt is NOT a cyclical phenomenon-Social Security is the main source of internal debt, while military spending is the main source of external debt- The Barter Controversy - Gresham’s Law -Good money drives out the bad money- Categories of banking crises -Liquidity Crisis: Bank doesn't have enough cash reserves (Bank Run)-Can evolve into a Bank Panic (Bank Run spreads like a virus to other banks where everyone doesn't trust there bank. This causes everyone to try and withdraw all of their money from their banks, but the banks don't have all of that money at the moment, so they have to try and borrow from other banks. Other banks usually refuse to lend to them because they are competition and they want their competition to go out of business. This will destroy the bank and people will lose a lot of money.)-Solvency Crisis: If a bank's balance sheet has NEGATIVE net worth, making the bank Insolvent (unable to pay all legal debts). A solvency crisis is the inability of a company to meet its long-term financial obligations.E- Tools of Monetary Policy -Set the required reserve ratio-Establish a Discount Rate-Conduct Open Market Operations (Buying or selling bonds)- Subprime Crisis (especially contributing factors and policy responses) -Subprime Mortgage: Mortgage for a borrower with "not so good" credit-Subprime mortgages collapsed in 2007, due to rising industries. This caused many major mortgage companies to collapse over the next year (Fannie Mae, Freddy Mac, Merrill Lynch (sold to Bank of America), and Lehman Brothers was allowed to collapse)-Policy responses included a MASSIVE bailout bill passed by President Obama immediately after he took office in 2008, TARP authority in 2008 of $700 billion,and the Dodd-Frank Act in 2010,To prepare for the short answer section of the exam, focus on three aspects of each topic:1) Can you define/explain the concept including the use of appropriate graphs?2) Can you apply the concept to a specific set of circumstances?3) Can you evaluate the concept’s importance and/or its relationship to other material in the course?Problem Solving Themes- Monetary policy stimulus (explaining the steps in words and with graphs)1) The Federal Reserve employs Policy Tools2) Banks increase lending…3) The money supply increases…4) Interest rates decrease…5) Lower interest rates = more investment…6) More investment = more jobs!- Working with bank balance sheets - Working with the money multiplier-First, find the reserve ratio -Then, the money multiplier is