Econ 1103 002 & 013 – Winter 2024
Final Exam Review
Final Exam Tentative Format
· Multiple choice questions: 20-30 questions from chapters 5-11, 14 – Only one attempt!
· Short answers: 2-3 short questions or concepts based on chapters 5-11 and 14
· Long answers: 1-2 long, multi-part questions from chapters 8, 9, 10, 11, 14
Chapter 5 and 6 Measuring Income and The Cost of Living
· GDP Definition - why GDP measures total output, total expenditure and total income
· GDP as spending components
o Consumption
o Investment
o Government expenditure
o Net exports
· Nominal vs Real GDP
· GDP deflator as measure of the economy’s price level
· Consumer Price Index as measure of the economy’s price level
· Inflation calculation using either GDP deflator or CPI
· Converting dollar figures from the past into current figure
· Nominal versus real interest rate
The Economy in the Long Run
Chapter 7- Production and Growth
· Why the growth rate matters
· The rule of 72
· The importance of productivity
· The production function Y = A*F(L,K,H,N)
· The determinants of productivity:
o K/L = capital stock per worker
o H/L = human capital per worker
o N/L = natural resources per worker
o A= technological knowledge
· The importance of Saving and Investment to increase capital stock
· Diminishing returns and the catch-up effect
· Other factors that increase productivity and growth: foreign investment, education, health and nutrition, stability, free trade, research and development
· The effect of population on the standard of living
Chapter 8- Saving, Investment and the Financial System
· Financial system, financial markets, financial intermediaries
· Saving and Investment in a closed economy
o why they must be equal when the markets are in equilibrium
o Private Saving vs Public Saving vs National Savings- what they are, calculation
o The effect of budget deficits/surpluses on public saving, national saving
· The market for loanable funds
· Saving and the supply for loanable funds
· Investment and the demand for loanable funds
· The equilibrium interest rate
· Policies that may shift the supply or demand for loanable funds and their effects (saving incentives, investment incentives, budget deficits, budget surpluses)
o Which curve shifts and how
o How the equilibrium interest rate changes
o How the equilibrium value of saving and investment changes
Chapter 9- Unemployment and Its Natural Rate
· Labour Force Survey
· Employed vs. Unemployed vs. Not in the labour force
· Unemployment statistics: adult population vs. labour force, unemployment rate, labour force participation rate
· Discouraged workers vs. unemployed
· Long-run vs. short-run unemployment or natural rate of unemployment vs. cyclical unemployment
· Reasons for long-run unemployment - why the natural rate of unemployment is not zero)
o Frictional unemployment: there are enough jobs for everybody, but it takes time for workers and jobs to match
o Structural unemployment: fewer jobs than people looking for jobs, because wages are too high:
§ Minimum wage laws
§ Unions and bargaining
§ Efficiency wages
Chapter 10- The Monetary System
· Money: meaning, measurement
· The Bank of Canada and the control of money supply
· Commercial banks and the money supply: the process of money creation in a fractional reserve system
· The reserve ratio and the money multiplier
· Money supply calculations
· Tools of monetary control:
o open-market operations; foreign-exchange market operations; sterilization
o changes in reserve requirement,
o changes in the overnight rate; overnight rate versus bank rate
Chapter 11- Money Growth and Inflation
· inflation vs deflation vs hyperinflation
· Price level versus the Value of money
· Money demand, money supply, and the equilibrium price level
· Classical dichotomy and the monetary neutrality
· Velocity and the quantity theory of money:
MV = PY
· In growth rates: %ΔM + %ΔV = %ΔP + %ΔY
· Nominal vs real interest rate, inflation rate and the Fisher effect
· The costs of inflation: shoeleather costs; menu costs; misallocation of resources; tax distortions; arbitrary redistribution of wealth
The Economy in the Short Run – Understanding Economic Fluctuations around the Long Run Trends
Chapter 14- Short-run fluctuations and the AD-AS model
Important:
· The updated slides for chapter 14 include a brief summary of fiscal and monetary policy tools, which the textbook covers in chapters 15 and 16. You don’t need to read chapters 15 and 16 from the textbook. All you need to know about fiscal and monetary policy is included in the slides for chapter 14 posted on D2L.
· From the updated set of slides for chapter 14, only slides 1-49 are required material for the final exam. The remaining slides are included for your own interest and to conclude the topics, but are not required.
What you should know:
· The meaning of business cycles
· Classical (long-run) economics:
o price flexibility and the vertical LR AS curve
o natural rate of output
o reasons why the LRAS curve may shift
· The reality of SR economic fluctuations and why we need a new theory
· AD curve: AD = C + I + G + NX
o Reasons why the AD curve slopes downward: the wealth effect, the interest-rate effect and the real-exchange rate effect
o Movements along the AD curve (when price level changes) vs. shifts of the AD curve (when C, I, G, or NX increase or decrease)
· The upward sloping SRAS curve:
o Based on the assumption that prices are sticky in the short run
o Three reasons for price stickiness (the sticky-wage theory, the sticky-price theory and misperception theory); you should be able to explain at least one;
o Why the SRAS curve may shift
Explaining fluctuations with The AD-AS model:
· Long-run (LR) equilibrium: where AD, LRAS and SRAS intersect
· Short run (SR) equilibrium: where AD and SRAS intersect after an event that shifts either AD or SRAS (SR equilibrium is always to the left or to the right of LRAS)
· Recessions: usually the result of a sudden decrease in AD (AD contraction)
· Booms: usually the result of a sudden increase in AD (AD expansion)
· A different reason for recessions is a sudden and significant increase in production costs that shifts the SRAS curve to the left (like the oil price shocks)
For each of these situations (AD expansion, AD contractions, SRAS contraction) you should be able to:
· Draw the corresponding diagram
· explain which curve shifts, why and how
· identify the new SR equilibrium
· explain what happens to output, price level, inflation rate and unemployment rate as the economy moves from the original LR equilibrium to the new SR equilibrium
Adjustment to Long-Run Equilibrium
Once the economy is in a recession or boom, you should be able to explain how the economy will transition from this short-run equilibrium to a new long-run equilibrium (how the economy returns to the LRAS), under two scenarios
1. Self-adjustment-the economy adjusts by itself from the short-run equilibrium back to a long run equilibrium
o Which curve shifts and why
o what happens to Y, P, inflation rate and unemployment rate as the economy returns to a new LR equilibrium
2. Policy intervention - government and/or central bank interfere in the economy to speed up the return to long-run equilibrium
o Fiscal policy - how government can use changes in taxes, government spending or transfers to influence the AD
o Monetary policy - how the central bank can use changes in money supply to influence the AD
· How the economy achieves a new long-run equilibrium with the help of policy intervention
· How this equilibrium differs from the one the economy would achieve if let to adjust by itself
· Fiscal and/or monetary policy can be used to reduce the impact of business cycles in the short run. But they also have long run impacts which were discussed in previous chapters that you should be able to discuss:
o Increasing government spending or transfers, or decreasing taxes, will create or increase the budget deficit; the effect of budget deficit on saving and investment in the long run was discussed in ch. 8.
o Increasing the money supply will affect the price level and inflation rate in the long run (ch. 11)