UNIVERSITY OF VERMONT EC 11 Fall 2012

Department of Economics Prof. S. Seguino

Review Questions for Final Exam

This exam is comprehensive but will be more heavily weighted to the latter part of the course. Review from previous exams 1. 2. Pre-Keynesian economics did not focus greatly upon the problem of high levels of unemployment, recession, and depression. Why? How did Keynes explain this phenomenon? What was Keynes' solution? The average wage in the US rose from $9 an hour in 2005 to $11 an hour in 2009. The CPI rose from 112 to 140 (base year = 2000). Are workers better off in real terms in 2009? Explain why or why not and show your work. -A: -A: take growth rates of both, because inflation grew more than wayges, workers are worse off. Work in notebook What are the two conditions required for macroeconomic equilibrium? How can these equilibrium conditions be represented in an incomeexpenditure model? -A: take growth rates of both, because inflation grew more than wayges, workers are worse off. What is fiscal policy? How might fiscal policy be used to correct the macroeconomic disequilibrium of AE < Y*? Be able to do a problem of the following sort: According to the Keynesian model, if aggregate demand is $60 billion less than what would be adequate for full employment and if the marginal propensity to consume is 0.75, then how much would government have to spend to set the economy on its way to full employment? -A:mpc is .75, equation for spending multiplier is 1/1-b=1/1-.75=y change in delta G =60 change in y =60. What are the three methods of measuring GDP? What are the weaknesses of GDP as a measure of well-being? Keynes believed that as incomes rise in the aggregate over time spending would fall, creating macroeconomic problems. Explain what factors have mitigated the tendency for this to occur in the U.S. in the last several decades.

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New material covered on final Keynesian and Monetarist Monetary Policy 1. What is monetary policy? Describe the four monetary tools that are available for achieving monetary policy. If there were inflation, how would each of these tools be used to help recreate price stability? 2. Why is monetary policy less effective in a deep recession than fiscal policy? 3. What do M1 and M2 comprise? 4. Describe monetarist views on control of the money supply. How do these views differ from Keynesian perspectives on monetary policy? 5. Keynesian economic theory was undermined by inflationary pressures that arose in the 1970s and 1980s. Explain the causes behind the inflation of this period. 6. What is the quantity theory of money and its implications for monetary policy? 7. Does a trade-off between unemployment and inflation exist? If so, why? Describe and use graphs to show how an increase in the money supply might stimulate the economy. 8. Be prepared to do a problem of the following sort: Using the concept of the money multiplier, show how the Fed can change the reserve requirement to decrease the money supply. Under what macroeconomic conditions would the Fed choose to make this move? 9. What is meant by money neutrality or that money is a veil? -A: involves quantity theory of money. Both fixed in the short run (MV=PQ) increase in money supply only leads to inflation. 10. What is a liquidity trap? 11. What are open market operations? Explain how the Fed can use open market operations to change interest rates, thereby affecting the level of aggregate demand in the case of a recession. 12. Use the following data to plot a Phillips curve. Explain its implications for fiscal and monetary policy. 1980 1981 1982 1983 Supply-side Economics 1. 2. 3. 4. 5. 6. As opposed to Keynesian economics, what is meant by supply-side economics? Why was there a relative shift of attention to supplyside issues in the late 1970s? What is Reaganomics? Why was this approach called supply-side economics? Discuss some of the hypotheses for the relative productivity stagnation within the U.S. economy. What measures might promise to enhance productivity performance? Explain how classical supply-side policies differ from those of Keynesian supply-side policies. Refer in your answer to the policies of Reagan and Clinton. Explain the implications of the Laffer curve. How is it used to argue the benefits of a tax cut? Describe trends in public investment over the past 2 decades. Why might there be a relationship between these trends and productivity growth? How does the shape of the Keynesian aggregate supply curve differ from that of the classical supply curve and what is the significance of this difference? Inflation 9.8% 8.5 5.6 3.1 Unemployment 7.1% 7.6 8.7 9.6

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Identify at least three policies that would stimulate productivity growth in the U.S. Identify your choices as classical or Keynesian. Why do markets undersupply public goods? There is no agreement on what constitute public goods. In your view, what are some important goods and services that we might consider to be public goods?

Debts and Deficits 1.

2. 3. 4. 5. 6.

Explain the difference between debt and deficits. Under what conditions does a large debt pose a threat to the health of an economy? Be able to describe the historic trends of the US deficit and debt since 1940. Koechlin (The Wrong Deficit) argues that deficits are not as economically harmful as much as some would have us believe. Why is that so? What arguments have been advanced by those who argue that our federal debt is dangerously high? What is the cyclically-adjusted budget balance and how does this relate to automatic stabilizers? Explain the factors that make a debt sustainable or unsustainable. Assess in your own view whether the current US debt is unsustainable and why.

Income inequality, trade deficits, third world debt crisis 1. 2. 3. Recently some economists (as well as Robert Reich) have focused on the growth of income inequality as a source of macroeconomic problems. Explain how income inequality can lead to negative macroeconomic effects. Do this both graphically and verbally. What were the origins of persistently large trade deficits in the U.S. that began in the mid-1980s? The huge amount of indebtedness of many less developed countries has been of concern to many economists. Why? How did this debt come about? What are the proximate causes of increased income inequality in the US and what if anything should we do about this? What is the golden age of capitalism? Why was this period called the golden age? What factors have led to the deindustrialization of America since the 1970s? -A: business outsourced jobs to take advantage of business costs b/c trade was becoming more free. Realized it took fewer workers to make goods (ex. Auto industry)

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Economic Growth

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What is the rule of 70? How is economic growth measured? What are the supply-side determinants of economic growth? What are the demand-side determinants of economic growth? What are the critiques of economic growth? -A: 1) imperically, studies have not found strong corrilation between growth and wellbeing past 20,000. 2) even though GDP is growing we dont know if the increase in income is being distributed to the public. Econ growth is not neceserally related to wellbeing. What is meant by convergence? Is it realistic to believe poor countries will catch up to rich countries? Why or why not? Give some examples of countries that have done so.

Short Answer "Priming the pump" Marginal propensity to save Stagflation "Paradox of thrift" Cyclical unemployment Recessionary gap Inflationary gap Demand-pull versus cost-push inflation "Crowding out" Precautionary demand for money Speculative demand for money Open market operations "Trickle down" theory Automatic stabilizers Laws of supply and demand Production possibilities frontier Externalities Public goods Gross and net investment Marginal propensity to consume Leakages and injections Deficit government spending Liquidity trap Conflict theory of inflation Laffer curve Inflationary spiral Money multiplier Quantity theory of money Pushing on a string Monetarist experiment Monetarist rule Phillips Curve Free rider problem Externalities Federal Reserve Bank as lender of last resort Discount rate Required reserve ratio Federal Funds Rate -supply side of growth Technology, human capital, stock of physical capital , effieiency of institutions,

-demand side of growth (in notes from the 29th) level of domestic demand, cant rely on exports for growth, good literacy and education, from notes could be either: property rights, pattents/copyrights,fair legal systems,literacy/education, free trade, inequality. -variables/vocab R=reserve ratio M=money supply V=money velocity P=price level Q=quantity of output

Going to be weighted more heavily on second half of course. Look for variables and vocab on the bottom of review sheet.