Principles of Macroeconomics

Midterm Exam I Study Guide

The exam will cover Ch. 1, 4, (part of) 5, 6, 10, and 11. As you prepare for the exam,
you should review the following topics. The exam material will cover, but is not limited
to, the following:
Chapter 1:
While you do not have to be able to state any of the ten principles, if given a principle,
you should be able to explain what it means. Example - Principle 9: Prices rise when
the government prints too much money. When the government prints too much money,
there is inflation and the price level increases, which makes goods more expensive.
(Example: If before a candy bar cost you $1, now it costs $2.)
Chapter 4:
Why is the demand curve downward sloping? Why is the supply curve upward sloping?
What factors shift the demand curve? What factors shift the supply curve? Given an
event that shifts either the supply curve or demand curve or both, be able to determine
how price and quantity change in the new equilibrium.
Chapter 5:
What are the factors that determine the price elasticity of demand? What are the factors
that determine the price elasticity of supply? Know what elastic vs. inelastic means
when youre graphing supply and demand diagrams.
Chapter 6:
What is a price ceiling? What is a price floor? Give examples of a price ceiling and a
price floor. Know why government policies may result in outcomes less optimal than
outcomes from free market allocations (surpluses/shortages). Know how elasticity
determines tax incidence (how burden of a tax is distributed). [Hint: Tax incidence falls
more heavily on the side of the market that is more inelastic.]
Chapter 10:
Why is GDP important conceptually? Know the four components of GDP: Y = C + I + G
+ NX and items that are included and excluded from the measurement of GDP. Real vs.
Nominal GDP: how do you calculate these? Which is more accurate in measuring how
productivity has grown over time? Know how to calculate the GDP deflator and inflation
rate. Be able to describe the shortcomings of the GDP as a measure for the standard of
living.
Chapter 11:
What is the consumer price index? How is it calculated? (Why do you fix a basket of
goods and keep the quantities fixed? How is this different from calculating the real
GDP?) Know similarities and differences between the CPI and the GDP deflator. Be
able to describe the shortcomings of the CPI as a measure for the overall level of
prices.