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.

Macroeconomics – 2. The Aggregate Supply-Aggregate Demand Model and the Classical-Keynesian Debate

  1. The Classical versus Keynesian controversy is primarily a dispute over what?
  2. State Say’s Law.
  3. What was Thomas Malthus’ critique of Say’s Law?
  4. Use the circular flow diagram to illustrate Say’s Law.
  5. Describe the quantity theory of money.
  6. Explain the two major assumptions of the quantity theory of money.
  7. Describe the Keynesian income adjustment mechanism.
  8. Illustrate equilibrium in the aggregate supply-aggregate demand model.
  9. Explain the three reasons why the .aggregate demand curve slopes downward.
  10. List at least five major reasons why the aggregate demand curve shifts.
  11. Why does the aggregate supply curve slope upward?
  12. List at least five reasons why the aggregate supply curve shifts.
  13. Draw and explain the three ranges of the economy.
  14. Draw and describe the Classical price adjustment mechanism.

Macroeconomics – 1. An Overview of Modern Macroeconomics

  1. At a personal level, what kind of questions can macroeconomics help you answer?
  2. At a business and professional level, what kind of questions can macroeconomics help you answer?
  3. Why is it important to study macroeconomics from an historical perspective?
  4. How is microeconomics distinguished from macroeconomics?
  5. How is inflation defined, and how is it typically measured? Why has inflation often been described as the cruelest tax? How is the unemployment rate measured?
  6. Describe the three kinds of unemployment.
  7. How is the rate of economic growth typically measured? Describe the two ways of measuring the gross domestic product.
  8. What is the difference between actual and potential Gross Domestic Product?
  9. What is the difference between nominal GDP and real GDP? Describe the phases of the business cycle.
  10. What is fiscal policy? What is monetary policy?
  11. Illustrate equilibrium in the aggregate supply-aggregate demand model.
  12. What is the Classical view of unemployment?
  13. John Maynard Keynes flatly rejected the Classical notion of a self-correcting economy. Why?
  14. Use the aggregate supply-aggregate demand model to illustrate demand-pull inflation.
  15. Use the aggregate supply-aggregate demand model to illustrate cost-push inflation.
  16. What was the Keynesian dilemma that arose because of stagflation?
  17. Milton Friedman’s Monetarist School argued that the problems of both inflation and recession may be traced to one thing. What is it?
  18. In the 1980 presidential election, Ronald Reagan ran on a Supply-side platform that promised to do what?
  19. New Classical economics is based on what controversial theory? What is the central policy implication of this, theory?

Microeconomics 11. Public Goods and Externalities

  1. Name five ways in which government intervenes in the free market.
  2. Contrast private versus public goods.
  3. Describe the free rider problem. Provide several examples.
  4. On what does the economic difference between public goods and private goods rest?
  5. The market demand curve for private goods is what sum? How does this differ from the market demand for a public good.
  6. Illustrate the optimal quantity of a public good.
  7. What is the benefit-cost decision rule.?
  8. The best way to make government more efficient is to always reduce government spending. Agree or disagree?
  9. What is the idea behind externalities?
  10. Provide a negative externality example. Illustrate the problem and indicate where equilibrium is in a free market. Is this optimal?
  11. Provide a positive externality example. Illustrate the problem.
  12. Explain the Coase Theorem and its implications for government intervention into the market.
  13. What is the importance of assigning property rights in the Coase Theorem?
  14. How might the Coase Theorem break down?
  15. A second approach to internalizing externalities relies upon a legal framework of liability laws. Describe this framework.
  16. Illustrate how direct controls can force new firms to incur costs associated with pollution control.
  17. Explain and illustrate how Pigouvian taxes can be used to internalize externalities.
  18. Illustrate how Pigovian subsidies can be used to internalize positive externalities.
  19. Why does the U.S. provide free vaccines to children?

Microeconomics – 10. The Capital Market, Interest, and Profits

  1. On a personal level, what kinds of questions can capital analysis help us answer?
  2. At a professional level, capital analysis can help business executives answer what kinds of questions?
  3. What are the three categories of capital goods?
  4. What do we mean by loanable funds? What is the price paid for the use of loanable funds?
  5. Suppose a company buys a used car for $10,000, rents it out for $2,500 per year and earns a net rental of $1200 each year after expenses. What is the rate of return?
  6. Define depreciation.
  7. The theory of loanable funds is based on what assumption? The upward sloping supply curve of loanable funds reflects what idea?
  8. The market interest rate serves what two functions?
  9. Suppose the Federal government significantly expands the Social Security retirement program to cover more fully the costs of hospitalization and retirement. What is this likely to do to the supply curve for loanable funds and the market rate of interest?
  10. Suppose the economy had been in a deep recession, but is moving now towards full employment. What will happen to the interest rate, and why?
  11. How do you evaluate an investment when your capital outlay occurs today but the benefits from that investment come in the form of a revenue stream over many years?
  12. How is net present value defined and measured? What lump sum of money today would make you at least as well off as the stream of rental payments that you would get over the life of the building?
  13. What is a perpetuity? Write the formula to evaluate a perpetuity.
  14. Write the general formula for calculating net present value.
  15. Suppose you have a choice between a new, energy-efficient refrigerator which costs $750 or the cheaper model at $500. If you buy the energy-efficient refrigerator, your electricity bill will be $120 a year less over the 5-year life of the refrigerator. Assuming an interest rate of 8 percent, which refrigerator should you buy?
  16. To what does the “term structure of interest rates” refer?
  17. How do risk premium, length of maturity, loan size, and taxability each affect the interest rate?
  18. Show how, by sacrificing current consumption and building capital goods today, societies can increase their consumption in the future.

Microeconomics 9. The Labor Market and Wage Determination

  1. Explain why the demand for labor and other factors of production is a derived demand.
  2. The derived nature of resource demand implies that the strength of the demand for a factor such as labor will depend on what two things?
  3. As the units of labor increase, the total product increases but the marginal product of labor decreases. What law is responsible for this?
  4. What is the marginal revenue product?
  5. State the Marginal Productivity Theory of resource demand.
  6. Define marginal resource cost.
  7. State the rule for employing factor resources.
  8. What is the MRC equal to under the assumption that the labor market is perfectly competitive?
  9. State the complete rule for profit maximization under perfect competition.
  10. Why does the MR.P schedule constitute the firm’s demand for labor?
  11. Illustrate the backward-bending curve.
  12. Explain the income effect.
  13. Explain the substitution effect.
  14. How does immigration affect wages? Why?
  15. What happens to wages at the level of employment under monopsony relative to a perfectly competitive labor market? Why?
  16. Illustrate a typical equilibrium in a unionized labor market. Are wages high or low? What about employment?
  17. What other factors may account for wage differentials among people in different occupations.
  18. What do compensating differentials measure?
  19. What does human capital refer to?
  20. Name three immobilities that are sources of wage differentials.
  21. What are non-competing groups and how do they affect wages?

Microeconomics – 8. Land and rent

  1. Name the three major factors of production.
  2. Discuss four reasons to study factor pricing.
  3. Which of the three major factors of production has the largest share and which has the smallest?
  4. What makes land different from most other factors of production?
  5. Define pure economic rent.
  6. Illustrate how rent is determined in the market.
  7. Illustrate the Corn War debate. What was David Ricardo’s explanation for rapidly rising grain prices?
  8. Explain why Henry George advocated a single tax on land.
  9. Prove that a tax on pure economic rent will result in no distortions or allocative inefficiencies.
  10. What is tax incidence analysis?
  11. What are the major criticisms of Georgist Theory?
  12. Why does an acre of farmland in Iowa cost so much more than an acre of farmland in New Mexico?
  13. Illustrate the rent differentials that might arise from differences in the quality of land and its productivity.
  14. Illustrate the concept of quasi-rents.
  15. What is rent seeking? Provide an example from public policy.