Last revision: 04/27/2009

Concepts you should know from the lectures, assigned reading and other homework:

You should also study your text, notes, homework solutions and the in-class exercises. You need to be proficient at the calculations from the Keynesian Model. You also need an understanding of the big picture; the review questions below should help you understand the ideas. Focus on understanding -- the questions on the exam will differ in the details but test the same concepts.  Bring a ruler, a calculator, a couple of pencils and a good eraser.

Chapter 9, Aggregate Expenditure Components and their determinants: the consumption function; marginal propensities to consume, save, and import; non-income determinants of consumption, investment, exports and imports; autonomous versus induced expenditure; investment demand – nominal (market) interest rates, and expected rate of return on an investment; net exports as a function of real GDP.

The formula sheet from the Hoover exercise will be provided for your use, with its list of symbols

Chapter 10, Aggregate Expenditure and Aggregate Demand: Expenditure equilibrium versus disequilibrium; multiplier process; contractionary and expansionary fiscal policies; current stimulus plan; gap between equilibrium expenditure and potential real GDP; derivation of Aggregate Demand from the Aggregate Expenditure model; multipliers – their calculation and application (including shifts in Aggregate Demand).

Chapter 11, Aggregate Supply: Sticky-wage hypothesis; Expected price level and long-term contracts; the real wage versus the money (or nominal) wage; Potential output, aka Long-run Aggregate Supply (LRAS), or full-employment output; Short-run aggregate supply (SRAS); Expansionary gap versus Contractionary gap; Changes in aggregate supply; also review Aggregate Demand and its determinants; Aggregate Supply and its determinants; determinants of economic growth; capital deepening (accumulation) versus technological progress; Changes in resource prices and how they affect SRAS; cyclical, frictional, structural and seasonal unemployment (and which of these may be present in long-run equilibrium).

Chapter 12, Fiscal Policy: Tools; discretionary versus automatic; lags; limits; the multipliers; The supply-side experiment. Also review: GDP, its components, its calculation from aggregate expenditure (Y = C + I + G + X – M); Price indices. the consumption function; marginal propensities to consume, save, and import; non-income determinants of consumption, investment, exports and imports; autonomous expenditure; investment demand – nominal (market) interest rates, and expected rate of return on an investment; net exports as a function of real GDP.

Chapter 13, Federal Budgets and Public Policy: federal budget process; sources of revenue; components of expenditure; international comparisons; deficit versus debt; automatic versus discretionary fiscal policies; fiscal policy multipliers; lags & crowding out.

Current events questions: for the fourth quarter of 2008, know the annual rate of growth of real GDP, the level of real GDP, and the level of current-dollar GDP. You may look these up at the Bureau of Economic Analysis: www.bea.gov.
Visit the Bureau of Labor Statistics, www.bls.gov, and memorize the current unemployment rate, and the approximate number of unemployed persons as reported in the Employment Situation Summary released on March 6, 2009.

Visit www.treasurydirect.gov, follow the link to “Debt to the Penny” in the lower right corner, and memorize the current magnitude of the Debt Held by the Public. What is the distinction between this stock and the Total Public Debt Outstanding?

Here are some questions based on the reading to help you prepare for the exam.

Chapter 10 practice quiz -- same as the one we used in class

Chapter 10 practice quiz -- a new quiz, as promised.

Review Questions for  Aggregate Supply and Aggregate Demand

1. What are the three factors that determine the quantity of real GDP supplied?

2. What is the relationship between potential GDP and full employment?

3. Name and distinguish between two macroeconomic time frames and two concepts of aggregate supply.

4. Distinguish between movements along the short-run and the long-run aggregate supply curves.

5. Consider the following events: 

a. Potential GDP increases 

b. The money wage rate rises 

c. The price level rises 

d. The money wage rate and the price level rise by the same percentages

 Say which of these events, if any, change: 
(1) Long-run aggregate supply but not short-run aggregate supply. 
(2) Short-run aggregate supply but not long-run aggregate supply. 
(3) Both short-run aggregate supply and long-run aggregate supply. 
Also say which of these events, if any, bring a movement along 
(4) The long-run aggregate supply curve. 
(5) The short-run aggregate supply curve. 
(6) Both the short-run and long-run aggregate supply curves.

6. Distinguish between aggregate demand and the quantity of real GDP demanded.

7. Which of the following do not affect aggregate demand? 

a. Quantity of money 

b. Interest rates 

c. Technological change 

d. Human capital

8. Define short-run macroeconomic equilibrium.

9. Distinguish between a recessionary equilibrium and full-employment equilibrium.

10. Work out the short-run and long-run effects of an increase in the quantity of money on the price level and real GDP.

11. Work out the short-run effect of an increase in the price of oil on the price level and real GDP

12. What are the main factors generating growth, inflation, and cycles in the U.S. economy?

13. Explain how demand and supply in the labor market determine the level of employment and the real wage rate.

14. What are the main changes in demand and supply in the labor market that have brought employment growth?

15. What are the main changes in demand and supply in the labor market that have brought a slowdown in the rate of increase in real wage rates and a fall in some real wage rates?

16. What are the three main explanations of unemployment?

Suggested answers (I recommend that you write down your own answers before looking.)

Review Questions for Fiscal Policy

1. What is the main influence on consumption expenditure and saving in the short term?
2. What are the consumption function and the saving function? What is the relationship between them?
3. What is the marginal propensity to consume? Why is it less than 1?
4. Explain the relationship between the marginal propensities to consume and to save.
5. What determines the slope of the consumption function?
6. What is the marginal propensity to import?
7. What are the aggregate expenditure schedule and the aggregate expenditure curve?
8. Distinguish between induced expenditure and autonomous expenditure.
9. How is equilibrium expenditure determined?
10. Explain how a recovery gets going when aggregate planned expenditure exceeds real GDP
11. Explain why an increase in autonomous expenditure shifts the aggregate expenditure curve.
12. What is the multiplier?
13. Explain the multiplier process.
14. What determines the size of the multiplier?
15. Explain the influences of the marginal propensity to consume, imports, and taxes on the size of the multiplier.
16. Describe the relationship between the aggregate expenditure curve and the aggregate demand curve.
17. Explain why the aggregate expenditure curve shifts downward when the price level increases.
18. What happens to the aggregate expenditure curve and the aggregate demand curve when the price level changes and everything else is constant?
19. Explain why an increase in autonomous expenditure increases aggregate demand.
20. Explain why the multiplier is larger when the price level is fixed than when it changes.
21. Explain why the multiplier is zero in the long run if the economy is already in a long-run equilibrium.

Suggested answers (I recommend that you write down your own answers before looking at mine.)

1. Describe the main purposes of the federal budget.
2. Describe the process that creates a federal budget.
3. List the four main sources of federal tax revenues and the three main components of federal expenditures.
4. List the main changes in taxes and government expenditures that are associated with the increase in the federal government deficit during the 1980s.
5. Compare the U.S. Net Public Debt (debt held by the public) with debts in other developed countries.
6. Explain the link between the deficit and government debt.
7. How has the federal government debt as a percentage of GDP changed since 1945?
8. Distinguish between automatic and discretionary fiscal policy.
9. Explain why an increase in government purchases has a multiplier effect on real GDP when the price level is fixed.
10. Explain why the lump-sum tax multiplier is smaller than the government purchases multiplier.
11. Explain why real GDP increases when both taxes and government purchases increase by the same amount.
12. Explain how induced taxes and entitlement spending influence the fiscal policy multipliers.
13. Explain how international trade influences the fiscal policy multipliers.
14. Explain how the deficit fluctuates over the business cycle and define the structural deficit.
15. Explain how the multiplier effect is modified in the short run when the price level begins to change.
16. Explain what happens following an increase in government purchases if real GDP equals potential GDP.

Suggested answers (I recommend that you write down your own answers before looking at mine.)

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