Exam 1 Review

Ch.1
S&D Model – be able to solve simultaneous eqn to find equilibrium
Endog v Exog variables
LR v SR – in macro sense this is mkt clearing v. sticky prices
(Neo)Classical v Keynesian Schools of Thought

Ch.2
Y = C + I + G + NX
GDP v GNP
Nominal v Real
CPI v GDP deflator

Ch.3
Closed Economy Model
S Side
RTS
Diminishing returns
Income Dist’n
D Side
C: MPC, MPS
I (r): r is opp cost of I
G and T are exog policy variables
LF mkt
S: private : Y – T – C
Public: T – G
S = Y – C – G  be able to use rates of change to find ultimate changes in savings from
policy changes

Be able to graph/explain effects of fiscal policy changes in LF mkt

Eq in LF implies Eq in Goods mkt and vice versa

Ch.4
Functions of Money
Liquidity
Fractional Reserve Banking System and money creation
rr<1  money multiplier (m>1)
Effects of changes in cr or rr on money multiplier/money supply
How changes Fed make to B through open market operations ultimately affect M

Ch.5
Quantity Theory of Money
Money growth in excess of output growth  inflation
1 to 1 relationship between inflation and money supply growth
Seigniorage – inflation tax
Fisher Equation  1 to 1 relationship between i and inflation
Classical Dichotomy/Neutrality of money
Ch.6
Small Open Economy Model
Balance of payments and capital flows (borrowing/lending)
Persistent CA deficits (what is driving I > S, high I or low S?)
LF mkt:
S ≠ I, take r* as given
Effects of domestic and foreign policy on NX

Exchange Rates
Derived Demand – high ɛ  non-competitive exports
low ɛ  competitive exports
Exchange rate mkt: ɛ adjusts to ensure NX = S – I(r*)
Policy implications of domestic and foreign policy
Classical dichotomy in terms of nom exchange rate and inflation differential
PPP

Ch.7
Natural rate of unemployment
Frictional v Structural Unemployment
Frictional – Search costs
sE = fU
U insurance
Structural – wage rigidities
Min. W, Unions, Eff. Wages