Macroeconomics 2301 Potential questions and study guide for Exam 2

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1 Macroeconomics 2301 Potential questions and study guide for Exam 2 Any 6 of these questions could be on your exam! 1. GDP is a key concept in Macroeconomics. a. What is the definition of GDP? b. List and explain in detail, the 3 different approaches to calculating GDP and explain how they are different. i. List and explain the approaches and how you would use each to calculate GDP. c. List and explain 3 types of transactions that would not be included in GDP and why they should be omitted. i. Look in the notes and find 3 types of transactions that are excluded from the computation of GDP and write them down along with the explanation of each and why they are not included. d. Thoroughly explain the components of GDP and relate those components to the Circular Flow model with government and international trade. i. List and explain the 4 components of GDP Relate each of them to the components of the complete circular flow model that you studied in part 1 of the course. e. Nominal versus real GDP. i. Explain the difference between nominal and real GDP, Explain in detail, how to calculate real GDP, including the factors used in the calculation.

2 i Explain what you can do with real GDP that you can t do with nominal GDP and explain why not. 1. Look in the notes to find this very straight forward. 2. You need to explain the CPI since it is used to make the conversion. f. GDP and GDP percapita. i. Explain the difference between GDP and Per Capita GDP; explain how to calculate Per Capita GDP, and how Per Capita GDP can be used. 1. Should be able to get this from the notes and a bit of research. 2. Economic growth. Two key sources of economic growth have been due to increases in resources and increases in productivity. a. Please discuss 5 factors that might contribute to falling U.S. GDP growth rates into the future, b. Explain in detail, what we could do to avoid each of the 5 factors causing our GDP growth rates to fall. c. Please discuss 5 factors that might contribute to rising U.S. GDP growth rates into the future, d. Explain in detail, what we could do to cause each of the 5 factors to happen and cause our GDP growth rate to increase.. i. Do a bit of research into our ability to get more resources and the cost associated with getting the hardest to recover bits of resources. What could prevent us from Engineering our way out of the problem?

3 3. The Business Cycle and Built in stabilizers. a. What can the business cycle tell you about the status of our economy today and into the future? b. Given what you have learned about the U.S. Business cycle over the past 60 years, please explain 4 things you should do to enhance your odds of achieving personal future success. c. List and explain the 4 phases of the business cycle, including the characteristics of each. Be thorough! You should have at least 4 characteristics for each phase! i. You would want to list the 4 phases of the business cycle (in the order that they typically occur) and explain the characteristics of each. Please don t include Depression as one of them. Include in your discussion how each phase of the business cycle might impact your life. d. Explain in detail, 3 possible causes of change in the direction of the business cycle. You are looking for things that are out of the control of the government. Do not use fiscal or monetary policy tools here. e. Built-in Stability 1. Explain the difference between discretionary and non-discretionary fiscal policy, 2. Explain the key relationships that supports the built-in stabilizer, 3. Explain thoroughly how it works to reduce inflation 4. Explain thoroughly how it works to reduce recession

4 5. Explain why the presence of the built-instabilizer is important to managing the macro economy. 6. Draw pictures if necessary 4. Unemployment and Recession a. Explain in detail, how the unemployment rate calculated. b. Explain in detail, how we define the employed, the unemployed, and who is in the labor force? i. The link BLS website should help - c. List and explain (don t just copy and paste) the various unemployment rates used by the BLS, and indicate which one of the 6 is the official unemployment rate. i. This link to the BLS website should help - d. There is a historic disparity between unemployment rates for Black, Hispanic, and White workers. i. Please provide detailed explanations of 3 reasons the Black and Hispanic unemployment rates are always significantly higher than the unemployment rate for Whites. Explain in detail, 3 things that should be done to correct problem. Be sure you explain how each recommendation would actually led to solution of the problem. Please be very thorough with this. 1. Some quick research should provide answers here. e. The 3 types of unemployment.

5 i. List and explain the 3 types of unemployment that we discussed. Include the characteristics of each and the role of skills for each. Discuss how each type contributes to growing income and wealth inequality. 1. You would want to list and explain the 3 types. You will find everything on the 2 or 3 slides plus the audio provides additional insight. f. List and explain thoroughly, 4 examples of significant economic costs of unemployment and what we might do to reduce those costs. i. Again, this is in the slides and audio. Feel free to do some research. g. Unemployment and how to use Fiscal Policy to address Recession. Background for this question: The US economy is currently experiencing recession according to the Federal Government. You can use only Fiscal Policy and the AD AS model. i. List and explain the 3 Fiscal Policy tools covered in the slides, and indicate the one that you want to use to attack the recession problem? 1. List the 3 choices and state specifically which one you will use. Please note that transfer payments would come under the heading of government spending! So don t use it as one of your 3 tools of fiscal policy. Explain why you selected this tool and not the others. 1. Consider the pros and cons of each of the 3 tools and tell me why you picked the one you picked and why you did not pick the other option(s).

6 i Explain how your tool would solve the recession problem and what effects your solution would have on at least five key economic variables. BE SPECIFIC! I WANT TO SEE THE DETAIL. USE THE WHAT HAPPENS NEXT APPROACH! 1. Explain how your choice of tools would work to solve the problem of recession. Start with the implementation of your tool and then list step by step what happens next, until you arrive at the appropriate impact on GDP. Be sure you provide the detailed step by step flow. 2. Using that approach allows the list the key economic variables and how each would be affected, to pop right out. 5. Inflation a. What is inflation and how is it calculated? i. See slides b. List and explain the two types of inflation i. Refer to the slides and audio c. Give two examples of who might be hurt by inflation and why. i. Refer to the slides and audio d. Give two examples of who might be helped by inflation and why. i. Refer to the slides and audio e. Inflation and how to use Fiscal Policy to address the problem of Inflation. Background for this question: Assume the US economy is currently experiencing high rates of inflation according to

7 the Federal Reserve. Use only Fiscal Policy and the AD AS model. i. List and explain the 3 Fiscal Policy tools covered in the slides and indicate which tool you will use to attack the inflation problem? 1. List the 3 possible choices and then just tell me which of the tools you would select. Just write it down. i Explain why you selected this particular tool and not the others. 1. Consider the pros and cons of each of the 3 tools and tell me why you picked the one you picked and why you did not pick the other option(s). Explain how your solution would work to solve the problem of inflation and what effects your solution would have on at least five key economic Variables? BE SPECIFIC! I NEED TO SEE THE DETAIL. USE THE WHAT HAPPENS NEXT APPROACH! 1. Explain how your choice of tools would work to solve the problem of recession. Start with the implementation of your tool and then list step by step what happens next, until you arrive at the appropriate impact on GDP. Be sure you provide the detailed step by step flow. 2. Using that approach allows the list the key economic variables and how each would be affected, to pop right out. 6. The Aggregate Demand curve shows the level of real output that the economy will purchase at each price level. a. List and thoroughly explain the three reasons the Aggregate Demand curve is downward sloping. i. In your explanation, please start with an increase in prices and work through to a decrease in AD.

8 b. List and explain in detail, the components of Aggregate Demand along with each of their determinants i. You studied the 4 components. List and briefly explain them and under each list and explain the determinants of each. c. Explain how the Aggregate Demand - Aggregate Supply Model differs from the Aggregate Expenditures model i. Put the two models side by side, look for the differences and explain them. 7. The basic macroeconomic relationships introduced a number of key concepts. a. Please explain the relationship between income, consumption, savings, and GDP. i. Define each Explain the relationship between these items. b. Please explain the relationship between interest rates, expected rates of return, investment, and GDP. Be specific and be thorough. i. Talk about the list of projects that a typical business would have and how those projects are ranked by expected return. Talk about the decision about which projects to do what info is needed to make the decision. i Discuss how investment spending results from the decision. iv. What factors will affect interest rates, what factors will affect expected rate of return, and what will be the impact on investment spending, and therefore gdp. c. Please explain the concept of the multiplier, including:

9 1. What information is required to calculate the spending multiplier a. Refer to the slides, the info is there. Look closely don t miss this! 2. List and explain the 3 different multipliers that we discussed. a. Again, refer to the slides, it s all there. 3. Explain in detail how the multiplier works to impact GDP. Be specific! a. Use the chart from the slide set as the basis of your explanation. Start with the injection of money into the economy and then how that affects household income and then spending via the mpc. Go on to discuss the rounds of spending, etc. and how the ultimate impact on gdp is amplified by the multiplier effect. 8. The Aggregate Supply curve shows the level of real output that the business sector will produce at various possible price levels. a. Explain the Long Run Aggregate Supply curve and the assumptions that support its shape at full employment. i. List the assumptions, discuss the shape of the LR AS curve and why it takes that shape. b. Explain the Short Run Aggregate Supply curve and the assumptions that support its shape. i. List the assumptions, discuss the shape of the SR AS curve and why it takes that shape. Discuss the difference in the shape of the curve at levels below full employment GDP and what you see at levels above full employment GDP.

10 9. Fiscal policy can be called on to correct conditions of recession and inflation. a. List and explain the 3 tools of Fiscal Policy that would be appropriate for addressing recession and explain in detail how each would ultimately impact aggregate demand and equilibrium GDP. Be specific! Please consider transfer payments as part of government spending. i. You would want to list and explain the 3 tools and how each (step by step) would affect AD and equilibrium gdp. b. List the 3 tools of Fiscal Policy that would be appropriate for addressing inflation and explain in detail how each would ultimately impact aggregate demand and equilibrium GDP. Be specific! i. You would want to list and explain the 3 tools and how each (step by step) would affect AD and equilibrium gdp. 10. We discussed four problems that complicate the application of fiscal policy. a. List and thoroughly explain these problems, including how each would likely impact the overall effectiveness of fiscal policy. Be specific! Be thorough! i. You should list the 4 problems associated with Fiscal Policy that were listed in the slides and explain the factors associated with each. And as you address each problem, discuss how each would impact the effectiveness of fiscal policy.