ECON 202 -
PRINCIPLES OF ECONOMICS:
MACROECONOMICS
Phil
Martinez
ECON
202 MACROECONOMICS STUDY GUIDE
Chapter 8: The Business
Cycle
1) Know all
of the components of the
business cycle:
-
depression, inflation, expansion,
recession, contraction, stagnation, peak,
trough, recovery, slowdown, growth rate of GDP, and the GDP gap.
2) Know the
conditions and basic causal reasoning of
the business cycle:
Recession:
Output (Q) declines
==> workers are
laid-off (N declines) ==> wages (w) drop
==> national income (Y) drops
due to loss of jobs
==>
consumer spending drops (C)
==> Aggregate Demand (AD)
drops
==>prices (P) drop
==> Investment (I)
declines ==> interest rates (r) decline
Expansion:
Output (Q) rises
==> workers are
re-hired (N rises) ==> wages (w) rise
==> national income (Y) rises
due to new jobs
==> consumer spending (C)
rises
==>
Aggregate Demand
(AD) rises
==>
prices
(P) rises
==> Investment
(I) rises ==> interest rates (r) rise
3.
Classical Theory, Say's Law, and Laissez-faire.
Be able to state
and explain Say’s Law, and Laissez-faire.
Classicals say
the business cycle is the natural self-adjustment
process of the economy and that there is no role for the government to
play in trying to stabilize the economy. All recession, depression,
inflation is temporary and natural.
4.
Know
the History of U.S. Business Cycles by decades as summarized in lecture
and as presented in text: periods of war,
deficits, depression, stagflation, periods of longest growth,
inflation, et cetera, all the up to the current period.
5. Know the conditions and general impact of the Great
Depression on both the world's economies (especially the U.S.) and on
economic theory, as presented in the text and in lecture.
J.M. Keynes &
Keynesian Economics
1)
Know the basic "formative" information about John Maynard Keynes:
- his role in and
criticisms of the Treaty of Versailles;
- "The Consequences of the
Peace";
- his influence on the
economic and reconstruction policy after WWII.
2) Know his positions and arguments regarding economic
policy during the Great Depression, i.e. regarding balanced budgets,
government intervention, government spending, Say's Law, price
adjustments, how to end the Depression, et cetera.
3) Know his position on self-adjustment of the economy.
Why might the market not self adjust? What role do “sticky
prices”, “sticky wages”, and expectations play in the economy?
4)
Know Keynes' analysis of equilibrium. Is it acheivable? How can
equilibrium be “undesirable” or
“sub-optimal”?
5)
Be able to contrast the Classical and Keynesian theories in the
following categories:
- stability versus instability
- the price adjustment process
- the importance of prices in macroeconomic
decisions of consumers and
producers.
- the nature of equilibrium (optimality versus
sub-optimality)
- demand-side analysis versus supply-side analysis
- the role of government in the economy
- problems of inflation (expansion) and unemployment
(recessions or
depressions)
6)
Explain the meaning following quote from J.M. Keynes in May 1932:
This
is the point at which, on the precedent of previous slumps,
we might
hope for the beginning of recovery. I am not confident,
however, that
on this occasion the cheap-money phase will be
sufficient by itself to
bring about an adequate recovery of new
investment. It may still be the
case that the lender, with his
confidence shattered by his experiences,
will continue to ask for
new enterprise rates of interest, which the
borrower cannot
expect to earn…
7) Be able to explain other
quotes by Keynes that are provided on the course website on J.M.
Keynes.
Chapter
8 & 9: Aggregate Demand
Assembling
the Neo-Classical AS-AD Model from Keynesian Expenditure Analysis.
Overview:
Classical
Theory (i.e. Say's Law):
Supply determines the state of
the economy, (PE,QE).
Alfred Marshall:
In L.R., Supply
determines the state of the economy, (PE,QE);
however,
In S.R., Demand
determines the state of the economy ,(PE,QE).
J.M. Keynes:
The L.R. is irrelevant.
Total spending (expenditures)
determines that state of the economy, (PE,QE).
Neo-Classical AS-AD Model (A Synthesis):
In L.R., Supply
determines the state of the economy, (PE,QE).
The AS line is vertical.
In S.R., Demand has some influence on (PE,QE),
thus the AS line is flatter or convex.
The AD line is strictly downward sloped, and incorporates all of the
Keynesian Expenditure analysis. This macroeconomic AD-AS model strives
to be consistent with the Neo-classical microeconomic S-D model.
The
Keynesian Expenditure Analysis:
Recall from Chapter 5, Output -
Income - Expenditure Accounting Identity:
GDP = Q = Y = E, and E = C + I + G + (X - IM). Together these capture
the Keynesian anaylsis of the macroeconomy: Total Expenditures
determine the output level of the economy.
Consumer Spending (C)
- Know all the factors that influence aggregate consumer
spending: income, welath, credit, expectations, preferences, et cetera.
- Know all the details of the Consumption Function:
- The equation and the meaning of
all the variables:
C = a + bYD.
a = autonomus spending; the intercept
b = the Marginal Propensity to Consume, the slope.
- Know the importance and all
the interpretations of the Marginal Propensity to Consume (MPC): slope
of consumption function; the rate of new spending out of new income; et
etera.
- Know the graphical representation of the Consumption Function and its
meaning.
Investment Spending (I)
- Know the factors that influence Investment: profit
expectations, interest rates, technological change.
- Know the importance of the volatility of I.
- Know how the Investment function (curve) is drawn and how
it affects E and AD.
Government Spending & Net
Exports
- Know how each of these components (G, X, IM) affect total
expenditures (E) and AD.
Macroeconomic Failure
Both as presented in lecture
(more detail) and as presented in the text know how Keynes explains the
possibility of the macroeconomy failing to acheive an optimal
equilibrium: instability, failure to adjust, recessionary gaps,
inflationary gaps.
Chapter 10: Self-Adjustment or Instability
The
Circular Flow: Leakages & Injections
Leakages out of the Expenditures
Flow
- Taxes
- Savings
- Imports
Injections into the Expenditures
Flow
- Government Spending
- Investment & Consumer Spending
- Exports
The Multiplier Process
Know the how the multiplier
process expands the impact of spending in the macroeconomy. Be able to
explain the multiplier process.
Know the relationship between the MPC and the
multiplier, including the mathematical
relationship:
MPC = b
The multiplier = 1/ (1 - b)
Know the meaning and full interpretation of:
YD
= [a + I + G + (X - IM)] x [1 /(1-b)]
= autonomous
spending x the multiplier
The Impact of the Expenditure
& Multiplier Analysis on AD
Know the Reasoning, or causal
impact:
Changes in C, I, G, X, IM, T, S,
r, b, expectations, ==> changes in E ==> changes in AD
Know the graphical representation
and interpretation of these relationships.
SHORT ANSWER QUESTIONS FOR EXAM 1
I.
CLASSICAL VS. KEYNESIAN ANALYSIS (CH. 8) (I'll
pick 1 to 2 questions from this section.)
1. State and
explain Say’s Law. Explain what is meant by Laissez-faire.
2)
On what grounds does Keynes reject Classical Theory, in particular
Say's Law and Laissez-faire?
3. What
are 5 objections or criticisms that Keynes makes of the
Classical analysis of the macro-economy.
4. According
to Keynesian, what role do “sticky prices”, “sticky
wages”, and expectations play in the economy?
5.
Explain two reasons why the market may not self-adjust,
according to Keynes. Give an example illustrating each reason.
6.
In the Keynesian analysis how can equilibrium be “undesirable”
or “sub-optimal”?
7.
Explain the meaning following quote from J.M. Keynes in May 1932:
This
is the point at which, on the precedent of previous slumps,
we might
hope for the beginning of recovery. I am not confident, however, that
on this occasion the cheap-money phase will be sufficient by itself to
bring about an adequate recovery of new investment. It may still be the
case that the lender, with his confidence shattered by his experiences,
will continue to ask for
new enterprise rates of interest, which the
borrower cannot
expect to earn…
II.
CH. 9 & 10 : GRAPHS
(I'll pick 1 question from this section.)
1. Draw the
Neo-Classical Aggregate Supply curve. Explain why the AS curve is
shaped the way it is. How does it relate to classical theory? How does
it relate to Keynesian Theory?
2. On the graphs provided
illustrate how an increase or a decrease in Government spending affects the level
Total Expenditures, Total Output, and Prices.
Expenditures
==> AD/AS
3. On the graphs
provided below illustrate how an increase or a decrease in interest rates affects the
level of Investment, Total Expenditures, Total Output, and Prices.
Investment
==> Expenditures
==> AD/AS
III.
CH. 9 & 10 : CONCEPTS (I'll pick 1
question from this section.)
1. What is the Marginal
Propensity to Consume? (There are at least 3 ways to define the MPC.)
2. Explain the multiplier process. What is the multiplier formula?
3. How is the MPC associated with the multiplier?
4. Be able to read and explain:
Y
= [ a + I + G + (X -
IM)] x (1 /
1 - b)
###
Phil Martinez
ECON
202 MACROECONOMICS STUDY GUIDE
|
Chapter 8: The Business Cycle 1) Know all
of the components of the
business cycle:
-
depression, inflation, expansion,
recession, contraction, stagnation, peak,
trough, recovery, slowdown, growth rate of GDP, and the GDP gap.
2) Know the
conditions and basic causal reasoning of
the business cycle:
Recession:
==> workers are
laid-off (N declines) ==> wages (w) dropOutput (Q) declines ==> national income (Y) drops due to loss of jobs ==> consumer spending drops (C) ==> Aggregate Demand (AD) drops ==>prices (P) drop ==> Investment (I) declines ==> interest rates (r) decline Expansion:Output (Q) rises
==> workers are
re-hired (N rises) ==> wages (w) rise
==> national income (Y) rises
due to new jobs
==> consumer spending (C)
rises ==>
Aggregate Demand
(AD) rises
==>
prices
(P) rises
==> Investment
(I) rises ==> interest rates (r) rise
3.
Classical Theory, Say's Law, and Laissez-faire.
Be able to state
and explain Say’s Law, and Laissez-faire.
Classicals say
the business cycle is the natural self-adjustment
process of the economy and that there is no role for the government to
play in trying to stabilize the economy. All recession, depression,
inflation is temporary and natural.
4.
Know
the History of U.S. Business Cycles by decades as summarized in lecture
and as presented in text: periods of war,
deficits, depression, stagflation, periods of longest growth,
inflation, et cetera, all the up to the current period.
5. Know the conditions and general impact of the Great Depression on both the world's economies (especially the U.S.) and on economic theory, as presented in the text and in lecture. |
J.M. Keynes &
Keynesian Economics
|
Chapter
8 & 9: Aggregate Demand
Assembling
the Neo-Classical AS-AD Model from Keynesian Expenditure Analysis.
Overview: Classical
Theory (i.e. Say's Law):
Supply determines the state of
the economy, (PE,QE).
Alfred Marshall: In L.R., Supply
determines the state of the economy, (PE,QE);
however,
In S.R., Demand
determines the state of the economy ,(PE,QE).
J.M. Keynes:
The L.R. is irrelevant.
Total spending (expenditures)
determines that state of the economy, (PE,QE).
Neo-Classical AS-AD Model (A Synthesis):
In L.R., Supply
determines the state of the economy, (PE,QE).
The AS line is vertical.
In S.R., Demand has some influence on (PE,QE), thus the AS line is flatter or convex. The AD line is strictly downward sloped, and incorporates all of the Keynesian Expenditure analysis. This macroeconomic AD-AS model strives to be consistent with the Neo-classical microeconomic S-D model. The
Keynesian Expenditure Analysis:
Recall from Chapter 5, Output -
Income - Expenditure Accounting Identity:
GDP = Q = Y = E, and E = C + I + G + (X - IM). Together these capture the Keynesian anaylsis of the macroeconomy: Total Expenditures determine the output level of the economy. Consumer Spending (C)
- The equation and the meaning of
all the variables:
C = a + bYD.
a = autonomus spending; the intercept b = the Marginal Propensity to Consume, the slope. - Know the importance and all
the interpretations of the Marginal Propensity to Consume (MPC): slope
of consumption function; the rate of new spending out of new income; et
etera.
- Know the graphical representation of the Consumption Function and its meaning. Investment Spending (I)
Government Spending & Net
Exports
Macroeconomic Failure
Both as presented in lecture
(more detail) and as presented in the text know how Keynes explains the
possibility of the macroeconomy failing to acheive an optimal
equilibrium: instability, failure to adjust, recessionary gaps,
inflationary gaps.
|
|
Chapter 10: Self-Adjustment or Instability The
Circular Flow: Leakages & Injections
Leakages out of the Expenditures
Flow
Injections into the Expenditures
Flow
The Multiplier Process
Know the how the multiplier
process expands the impact of spending in the macroeconomy. Be able to
explain the multiplier process.
Know the relationship between the MPC and the multiplier, including the mathematical relationship: MPC = b
The multiplier = 1/ (1 - b)
Know the meaning and full interpretation of: YD = [a + I + G + (X - IM)] x [1 /(1-b)] = autonomous
spending x the multiplier
The Impact of the Expenditure
& Multiplier Analysis on AD
Know the Reasoning, or causal
impact:
Changes in C, I, G, X, IM, T, S,
r, b, expectations, ==> changes in E ==> changes in AD
Know the graphical representation
and interpretation of these relationships.
|
SHORT ANSWER QUESTIONS FOR EXAM 1 I.
CLASSICAL VS. KEYNESIAN ANALYSIS (CH. 8) (I'll
pick 1 to 2 questions from this section.)
1. State and explain Say’s Law. Explain what is meant by Laissez-faire.2)
On what grounds does Keynes reject Classical Theory, in particular
Say's Law and Laissez-faire?
3. What
are 5 objections or criticisms that Keynes makes of the
Classical analysis of the macro-economy.
4. According
to Keynesian, what role do “sticky prices”, “sticky
wages”, and expectations play in the economy?
|