Economics

What do you need to know for the exam? Note that this is NOT a comprehensive guide

Anything from exam 1: 25% to 33% or so of the exam

Focus on: Supply and Demand, PPFs / Opportunity Cost / Trade

May want to review exam 1 topic list and/or copies of exam 1

Equations you should be able to work with:

Present value: P = F / (1+r)N

Future Value: F = P x (1+r)N

Money multiplier 1/rr

Aggregate Demand : Y = C + I + G + NX

Long-Run Aggregate Supply: YN = A x F (K, L, N, H)

Short-run Aggregate Supply: Y = YN + z ( P – Pe)

Government, etc. multiplier: 1 / (1-m)

Tax multiplier 1 / (1-m) - 1

Growth rates: (new – old)/old

REAL money supply: MS/P

REAL money demand: L ( r, Y )

Multiply real * P = nominal; divide nominal by P = real (for most static totals)

Nominal interest rate = real interest rate + inflation rate

Consumption: C = C0 + m (Y – T)

Know how to calculate:

Unemployment rate: Unemployed / Labor Force (Employed + Unemployed)

How to calculate inflation (CPI)

nominal GDP and real GDP

GDP Deflator

Net Present value: Do Present Value for each payment, add all cash in, subtract all cash out

How to calculate the money supply if given reserve ratio and monetary base

How to calculate GDP and changes in GDP if given a model and initial values

Important to know:

What all the variables on the previous page, and also S, ST, SG, SP

Multiple meanings of the letter Y (GDP, total income, total spending, total production/output)

S: Savings (Total, Government, Private); T: Taxes; P: Price level (when not used in present value);

C0: Autonomous Consumption, m: Marginal Propensity to Consume; C: Consumption; I: Investment;

G: Government Spending; NX: Net Exports (Exports – Imports); A: Technology; K: Physical Capital;

L: Labor; N: Natural Resources; H: Human Capital, rr: reserve ratio, r: real interest rate,

PE: Expected price level

Types of unemployment (Cyclical, Structural, Frictional) and definitions

Expenditure, Income, value-added GDP

Calculating GDP with expenditure method / what changes affect each category and how

Exceptions for each category and how to handle them

How banks create money

Money categories: Fiat/commodity; M0, M1, M2

Three uses of money: Medium of Exchange, Store of Value, Unit of Account

Fed tools: Open market operations, discount rate, required reserve ratio, change interest rate paid on

reserves, quantitative easing. Know which direction causes MS to go up vs. down.

Chair of the Fed: What is this person’s name?

What is the Fed’s dual mandate for monetary policy? Stabilize prices and maximize employment

Graphs you should be able to work with:

PPF

Supply & Demand

Supply & Demand with gains/consumer surplus/deadweight loss/taxes/trade/etc.

Money Supply vs. Money Demand

Aggregate Supply (Long-run and Short-run) and Aggregate Demand

Note: IF we have graphing problems, then they will likely be between 1/3 and 1/2 of the exam.

You are encouraged to use multiple colors (colored pens or pencils) to make the graphs more clear.