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. The final exam is cumulative. It will put relatively more emphasis on the last few chapters (20, 28 and 27), but everything is included. Chapter Study 3 Make sure you are familiar with Supply / Demand: how do you find equili-brium? What is the difference between a movement along the curve and a shift of the curve? Intro Learn the definitions of the Key Terms on the web page. 16 Learn very well the expenditure method of measuring GDP What is the difference between Nominal and Real GDP? Learn the definitions of the Key Terms at the end of the chapter. 17 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. 18 What is unemployment? Is a full-time student unemployed? (Ans.: no) What are the three kinds of unemployment? Learn the definitions of the Key Terms at the end of the chapter. 19 1. What is GDP per capita? Why do we care about GDP per capita and not (so much) about GDP per worker? 2. What is the largest source of increased GDP per capita? (Answer: increased labor productivity, but higher labor participation helps). 3. Why is average labor productivity so important? What are the determi-nants of average labor productivity? Make sure you understand the role of each one. 4. What are diminishing returns to capital? Explain Table 19.3, the similar ta-ble 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. 5. Explain this sentence: “economists would agree that new technologies are the single most important source of productivity improvement, and hence economic growth in general. 6. What policies increase economic growth? What is the specific role of gov-ernment in economic growth? (Besides broader policies, how does the spe-cific function of government contribute to economic growth? In this, the ca-2veat is also clear: a government that does too little, or too much, or badly, will hurt economic growth.) 20 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 interest rate. 4. Measurement of national saving. Private and public saving; compo-nents. Define National Saving, Private Saving, and Public Saving. Sup-pose private saving stays constant: what happens to National Saving if the government deficit increases? 5. Define Investment and Capital. Determinants of investment: interest rates, VMP, etc. An exercise (like in the slides or in the homework) deal-ing with the effects of changes in interest rates, productivity, price of the good produced, etc. Calculation is likely. 6. Draw the relation between investment and the real interest rate. 7. How is the real interest rate determined (using Figure 20.7)? 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 econo-my 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 microeconomic changes in in-vestment. There will be graphing questions on this topic for sure. 21 Use the three functions of money to define what money is. What kind of policy does a Central Bank carry out? Answer: monetary policy. 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 chapter. 22 Learn the definitions of the Key Terms at the end of the chapter. 23 Very important chapter. 1. The main differences between Classical economics and Keynesian eco-nomics. 2. What are the components of aggregate expenditure? 3. What is the Marginal Propensity to Consume? 4. What is the PAE function? How is it distinct from the Consumption3function? What shifts the PAE function? (Answer: a change in auto-nomous expenditure). Suppose income rises by ∆Y: what happens to PAE? (Answer: induced expenditure rise by the MPC x ∆Y) a. PLEASE NOTICE the consumption function and the PAE func-tion are different: the PAE function includes the C function, but it adds I, G, and NX. 5. How is short-run equilibrium output determined? By setting two equa-tions equal: Y=PAE (the equilibrium condition) and the expenditure function    󰇛 󰇜      . We find equilibrium by solving equation, 26A.1 for Y. The result is equation 23A.2. 6. Understand Tables 23.1 and 23.2 very well. 7. What is the difference between potential output and actual output? Are there any forces in the short run model that make sure actual=potential? (Answer: “no”). 8. Fiscal policy: define it. What happens to PAE if G increases? What happens in T increases? 9. How can fiscal policy bring an economy back to full employment? (from either a recessionary gap —excess unemployment— or from an expansionary gap —over-employment) Learn the definitions of the Key Terms at the end of the chapter. 24 1. Which components of spending are affected by the real interest rate? What will happen to them if the CB raises interest rates? Explain, with words, in a graph, and with algebra, how and why this happens. 2. What will the CB do to interest rates if there’s a recessionary gap? What if there’s an expansionary gap? 3. Draw the money demand curve. What causes a movement along the money demand curve? What