Macroeconomics – 11. The Economics of Developing Countries

  1. What are some of the most important characteristics of developing countries?
  2. Describe the Malthusian trap associated with population growth.
  3. Explain the demographic transition view of population growth.
  4. What is the so-called “brain drain?”
  5. What is the Catch-22 of capital formation for many developing countries?
  6. Illustrate the vicious circle of poverty.
  7. Regarding strategies of economic development, describe and assess three major strategic choices faced by developing countries.
  8. List nine ways for developing countries to enhance economic growth.

Macroeconomics – 10. Exchange Rates, The Balance of Payments, and Trade Deficits

  1. What is the basic trade identity equation?
  2. What are the three major components of the Current Account? Which is the biggest?
  3. Define an exchange rate.
  4. Explain the three major reasons why exchange rates change.
  5. Describe the gold standard. When and why did it collapse?
  6. Explain the gold specie flow mechanism.
  7. What was the major difference between the gold standard and the Bretton Woods system? When and why did Bretton Woods collapse?
  8. Describe the current international monetary system.
  9. What is an exchange-rate intervention?
  10. What are the three major causes of the chronic trade deficits of the United States?
  11. Illustrate the multiplier link.
  12. Suppose that America wants to reduce its trade deficit with Japan. What might the United States encourage Japan to do?
  13. Illustrate the monetary link.
  14. Explain some of the difficulties of coordinating macroeconomic policies between countries.
  15. Illustrate the benefits of global coordination.

Macroeconomics – 9. International Trade and Protectionism

  1. Explain the theory of absolute advantage.
  2. Explain the theory of comparative advantage.
  3. What is the difference between a tariff and a quota?
  4. Illustrate the deadweight loss of a tariff versus a quota.
  5. Why, from a political perspective, are quotas often preferred to tariffs?
  6. Briefly summarize the six major arguments in support of protectionism.
  7. When does dumping occur?
  8. Provide several examples of non-tariff barriers to trade.
  9. What is the GATT?
  10. What is NAFTA?
  11. Describe the European Union.

Macroeconomics – 8. Budget Deficits and the Public Debt

  1. Write the formula for a budget deficit.
  2. What is the difference between government debt and a budget deficit or surplus?
  3. Why do economists like to compare the debt to the size of the nations’ gross domestic product or GOP?
  4. What is the difference between the real and nominal budget deficit?
  5. Suppose the nominal deficit is $100 billion, inflation is 10 percent, and total debt is $5 trillion. What is the real deficit?
  6. What is the difference between the structural and the cyclical or passive deficit?
  7. Define automatic stabilizers and provide three examples.
  8. Suppose the gross domestic product is $10 trillion, the budget deficit is $100 billion, and the unemployment rate is seven percent, or one percent above the assumed full employment rate. Suppose further that the marginal tax rate is 30%. Which portion of the $100 billion deficit is structural and which portion is cyclical?
  9. What is the central idea behind rational expectations theory?
  10. What is the central policy implication of rational expectations theory?
  11. Why is it important to estimating correctly the natural rate of unemployment important?
  12. What are the three main ways of financing a budget deficit?
  13. Why does the balanced budget multiplier have a value of one?
  14. Use the Keynesian model to illustrate crowding out.
  15. What is the primary problem with the “print money” option of financing the deficit?
  16. Summarize the major arguments, pro and con in the budget deficit debate.

Macroeconomics – 7. Economic Growth and Productivity

  1. Define economic growth.
  2. What are the four supply factors of growth?
  3. What two other factors are important in economic growth?
  4. Use PPF analysis to contrast Adam Smith’s golden age of growth versus Thomas Malthus’ doomsday.
  5. Explain the basic underlying principle of the Neoclassical growth model and provide examples.
  6. Why does capital deepening not lead to a proportional increase in output?
  7. What happens to worker wages and the return on capital as a result of capital deepening?
  8. Explain why capital deepening in the absence of technological change leads to economic stagnation.
  9. Define, and provide examples of, technological change.
  10. Use the concept of the aggregate production function to illustrate the differing roles that capital deepening and technological change play in economic growth.
  11. Which factors of growth have been the most instrumental in increasing labor productivity?
  12. According to economist Edward Denison,  what has been the most important source of economic growth in the US?
  13. Explain the relationship between productivity and wages.
  14. Is more growth always good?
  15. How might the government use public policy to stimulate growth? Discuss both Demand-side and Supply-side options.

Macroeconomics – 6. The Warring Schools of Macroeconomics

  1. What are the three major questions about which the major schools of macroeconomics differ?
  2. Explain the difference between rational and adaptive expectations?
  3. What is the central policy implication of rational expectations theory?
  4. Use the Aggregate Supply-Aggregate Demand framework to contrast the adjustment process of the economy with adaptive versus rational expectations.
  5. Provide an economic and political critique of New Classical economics.
  6. Explain the Keynesian view of what causes macroeconomic instability.
  7. Explain the Classical-Monetarist view of what causes macroeconomic instability.
  8. Explain and illustrate the New Classical view of a self-correcting economy,
  9. Explain the Keynesian-based mainstream view of a self-correcting economy.
  10. Contrast the Monetarist versus New Classical views on the speed of adjustment of the economy.
  11. For the Monetarists, why does the enactment of a monetary rule make the most sense? Illustrate the Monetarists’ rationale for a monetary rule.
  12. Why do New Classical rational expectations economists also support a monetary rule?
  13. Provide the Keynesian defense of discretionary monetary policy.
  14. Provide the Keynesian defense of discretionary fiscal policy.
  15. Explain and illustrate “crowding out.”
  16. Summarize the Keynesian versus Monetarist views on the size of the crowding out effect and their policy implications.
  17. Why do Keynesian-based economists oppose a balanced budget rule?
  18. Summarize the Supply-side view of rules versus discretion.
  19. On what issues do the warring schools of macroeconomics converge?

Macroeconomics – 5. Unemployment, Inflation, and Stagflation

  1. Why is the distinction between cyclical, frictional, and structural unemployment important?
  2. Define the unemployment rate.
  3. Explain Okun’s law.
  4. Illustrate demand-pull inflation.
  5. Illustrate cost-push inflation.
  6. What is the Keynesian dilemma that arises with stagflation?
  7. What is the core or inertial rate of inflation?
  8. Why are inflationary expectations important?
  9. What are adaptive expectations?
  10. Illustrate how adaptive expectations lead to an inertial inflation rate.
  11. What relationship does the Phillips Curve purport to illustrate?
  12. What happened in the 1970s to shake economists’ faith in the Phillips Curve?
  13. What is the standard explanation of the Phillips Curve breakdown?
  14. According to the Monetarists, the disappearance of the Phillips Curve in the 1970s may best be explained through what two things?
  15. What is the natural or lowest sustainable rate of unemployment?
  16. What are the policy implications of the Monetarist’s natural rate theory, particularly with regard to Keynesian activism?
  17. Is the natural rate of unemployment constant?
  18. Illustrate an inflationary spiral from the Monetarists’ perspective.  How do the Monetarists stop an inflationary spiral?
  19. Contrast the traditional Keynesian versus Monetarist approaches to wringing inflation out of the economy. Why does neither have political appeal?
  20. Illustrate how Supply-side economics offers a very painless way to avoid both the Keynesian stagflation dilemma and the bitter Monetarist cure for an inflationary spiral.
  21. Illustrate the Laffer Curve.

Macroeconomics – 4. The Federal Reserve and Monetary Policy

  1. What is monetary policy?
  2. What are the three kinds of money?
  3. What are the three functions of money?
  4. What is the difference between M 1, M2, M3, and L?
  5. What is the price of money?
  6. Name three reasons why interests rates differ.
  7. If the nominal interest rate is 8 percent per year and the inflation rate is 3 percent per year, what is the real interest rate?
  8. Name and describe the two sources of money demand.
  9. What three characteristics of the modern banking system were also characteristics of the early goldsmiths?
  10. Suppose the reserve requirement is 20%. What is the money multiplier?
  11. How does a bank run occur?
  12. Why is the Federal Reserve considered the “lender of last resort?”
  13. What are the three instruments of monetary policy? Which is the most important?
  14. Suppose the Federal Reserve sells bonds. Is this contractionary or expansionary monetary policy?
  15. Describe the monetary transmission mechanism.
  16. Illustrate how to close a recessionary gap using monetary policy in the aggregate supply-aggregate demand framework.
  17. Which is more precise: monetary policy or fiscal policy? Why?
  18. What is the Keynesian view of monetary policy?
  19. What is the Monetarist view of monetary policy?
  20. Explain the Great Depression from a Monetarist perspective.
  21. Use the Aggregate Supply-Aggregate Demand framework to illustrate stagflation.
  22. What is the Keynesian dilemma created by stagflation?
  23. What is the Monetarist solution to stagflation?

Macroeconomics – 3. The Keynesian Model and Fiscal Policy

  1. What is the most important assumption underlying the Keynesian model?
  2. Illustrate the basic Keynesian model and a recessionary gap.
  3. What is a “leakage”? What is the most important leakage in the government sector?
  4. Define aggregate production. How is it represented in the Keynesian model?
  5. Define aggregate expenditures.
  6. What is the difference between autonomous consumption and induced consumption in the Keynesian model?
  7. Define the marginal propensity to consume and the marginal propensity to save.
  8. What is the slope of the aggregate expenditures curve?
  9. Why is the aggregate expenditures curve flatter than the 45-degree line in the Keynesian model?
  10. What are the determinants of investment?
  11. Discuss the role of transfer payments in the macroeconomy.
  12. What is a “closed economy”?
  13. Define the Keynesian expenditure multiplier. Why is it greater than 1?
  14. How is the Keynesian multiplier calculated?
  15. Suppose the United States permanently increases defense spending by $100 billion in response to a threat to the oil fields in the Middle East. What will be the effect of this increase in government spending on the gross domestic product, assuming the marginal propensity to consume is two-thirds?
  16. How much should taxes be cut to close a $100 billion recessionary gap, assuming that the marginal propensity to consume is .8?
  17. Suppose the economy is in equilibrium at $960 billion. But this is $60 billion above the full employment output of $900 billion. What do we call this situation? How would you use fiscal policy to address it, assuming a marginal propensity to consume of .75?
  18. Is it more preferable to increase government spending or cut taxes to eliminate recessionary gaps?
  19. Use the Keynesian model to explain the Great Depression.
  20. What is the paradox of thrift?
  21. What is crowding out?
  22. Illustrate the relationship between the Keynesian and the Aggregate Supply­Aggregate Demand models.