Need to Know Econ 311, Exam 3 Fall, 2016

Jones Short-Run Model (The IS/MP Model)

The Phillips Curve (Jones version)
Jones version of Okuns Law
Be able to explain the IS equation, show it graphically and explain
movements along the function and shifts in the function
No need to remember the derivation.
a c + a g + a x a m + a i1=a

o What do the individual as represent?

o be able to explain what

~
Be able to explain Y .

a c =

C
Y

, and so on.

is for the long-run and the short-run.

Understand the traditional multiplier

o Dont derive, but understand the basic principles.
o Understand the debate over the size of the multiplier and the
effectiveness of fiscal policy.

Be able to explain the MP function

Be able to explain how sticky inflation allows the central bank to affect
the real interest rate and why that is an important element in our
understanding of monetary policy -- sticky inflation allows the central
bank to move the MP function.

Jones Phillips Curve,

~
t =v Y + o

Be able to show graphically and combine with the IS/MP diagram.

Demand Pull versus Cost Push Inflation
Adaptive Expectations and the inclusion of an inflationary
expectations term in the Phillips Curve Assumption:
et = t1 ; =1

Be able to use the IS/MP model and the Phillips curve to show
Expansionary fiscal policy in response to a negative spending shock.
Tight and Easy Monetary Policy
Be able to show and discuss the effect of these changes on the Phillips
Curve.
Show the effect of a rising risk premium that overwhelms a central
bank policy of reducing the real interest rate.

Aggregate Demand/Aggregate Supply Model

Be able to state and explain the Monetary Policy Rule:

Rt r =m( t )

Be able to use the Fisher Equation to show the relationship between

the nominal interest rate, which is what the Fed directly controls, and
the real interest.

Given the Aggregate Demand equation

Be able to explain the slope of the Aggregate Demand function and
movements along it.
Be able to explain shifts in the Aggregate Demand function.
How and why would a change in either the parameter m or the
parameter b affect the aggregate demand function?
Jones bases the Aggregate Supply function on his Phillips curve. Given the
Aggregate Supply equation, be able to explain the Aggregate Supply function
in terms of its slope and shifts.
Be able to explain how and why the slope of the Aggregate Supply
Function changes when the parameter v changes.
a c + a g + a x a m + a i1=a

; be able to explain what this means for the long-run

and the short-run.

I will give you any aggregate demand or aggregate supply equations you
might need to answer the questions.
Be able to use the Aggregate Demand/Aggregate Supply model to explain
the short-run and long-run effects of:

A Price Shock

A Change in the Monetary Policy Rule (change in the target inflation

rate)

An Aggregate Demand Shock

o How does the movement to long-run equilibrium translate into
the cycle pattern we see in actual real GDP?

Be able to draw and explain the aggregate supply function shifts to

move the economy toward long-run equilibrium.