macro
1)Be able to identify the resources: labor, capital, natural resources, entrepreneurs
2)Know the difference between supply and demand and quantity supplied and quantity demanded. Remember that a change in quantity demanded and quantity supplied is only caused by a change in the price of the product sold, while a change in demand and supply are caused by the factors listed above.
3)Know the income and the substitution effects and how they affect demand.
Know what shifts the supply and the demand curves.
Demand Curve:
Change in consumer income.
Change in the price of other goods/services.
Change in consumer expectations.
Change in consumer tastes.
Change in number of consumers.
Supply Curve:
Changes in technology.
Changes in the prices of inputs.
Changes in the prices of alternative goods.
Changes in producer expectations.
Changes in the number of producers
4)Know how a change in supply or demand will impact equilibrium price and quantity. Know that equilibrium price and quantity are set at the price where supply and demand are equal on a table and where the supply and demand curves intersect on a graph.
5)Know what factors are included in the process of calculating GDP through the income and expenditures approaches.
a) The income of U.S. citizens abroad must be subtracted and the income of foreigners in the U.S. must be added.
b) Subsidies and indirect taxes (sales taxes etc.) must be added.
c) Depreciation must be added.
6)Know how to adjust nominal to real GDP.
Real GDP = Nominal GDP X 100
Price Index
7)Know the different types of unemployment as discussed in class and know how to calculate the unemployment rate. Frictional, structural, seasonal, cyclical.
8)Know and be able to list the non-income factors that affect consumption.
a)Net Wealth.
b)Price level.
c)Interest Rate.
d)Expectations
9)Know the non-interest- rate factors that affect investment.
a)Business Expectations.
b)Level of Economic Activity.
c)Stock of Capital in use (machines, tools, materials etc.)
d)The cost of capital goods.
e)Technology
10)Be able to calculate consumption, savings, APC, APS, MPC, and MPS.
a)Average Propensity to Consume (APC): the percentage of a person’s income that is spent. APC= Consumption/ Income
b)Average Propensity to Save (APS): the percentage of a person’s income that is saved. APS = Savings/Income
c)Marginal propensity to consume: the percentage of a change in income that is spent. MPC = Change in consumption/ Change in Income
d)Marginal propensity to save: the percentage of a change in income that is saved. MPS = Change in Savings/ Change in Income
11)Be able to determine if a firm will make an investment or not.
a)Calculate the projected revenues from the investment.
b)Calculate the rate of return of the investment: Revenues/Price=RR
c)Compare the rate of return to the interest rate.
d)If the RR is greater or equal to the interest rate, the company will invest.
12)Know the factors that cause the aggregate demand curve to be downward sloping.
a) The Interest Rate Effect is caused by the impact of a price change on the interest rate.
b) The Real Balance Effect is caused by the impact of a price change on the value of wealth and savings.
c) Foreign Purchase Effect is caused by the effect of a price change on foreign purchases of U.S. products.
13)Know how to calculate the multiplier and be able to use it to determine by how much total spending will increase if we increase consumption, government spending, investment, or exports.
Multiplier = _1
1-mpc or 1/MPS
14)Know when the Federal Reserve was created; how many banks it comprises; the number of individuals on the Federal Reserve board and how long they are in office; the number of years the chairman of the Federal Reserve is in office; and the Federal Reserve’s main functions as listed in the textbox.
a)Created in 1913
b)Board consists of 7 members, each one is in office for 14 years
c)The chair of the Fed is in office for four years
d)There are 12 Federal Reserve banks.
Six functions/goals of the fed:
a)High level of employment.
b)Economic growth
c)Price Stability
d)Interest rate stability
e)Financial market stability
f)Exchange rate stability
15) Be able to calculate and graph asset demand, transaction demand, and total money demand.
a) Transaction Demand = GDP ÷ Multiplier
b)Asset Demand is based on the interest rate
c)Total Money Demand = Transaction Demand + Asset Demand
1)Show what will happen to price and quantity when supply and/or demand changes by placing one of the following signs in the spaces provided (+) (-) (?).
Change Price Quantity
Demand Increases (+) (+)
Supply Increases (-) (+)
Demand Increases and Supply Increases (?) (+)
Demand Increases and Supply Falls (+) (?)
Demand Falls and Supply Increases (-) (?)
Demand Falls and Supply Falls (?) (–) 2)If the MPC is .75 and investment increases by $20 billion, by how much will total spending (GDP) increase?
Investment X Multiplier = change in total spending
20 billion x 4 = $80 billion
3) If the government wants to increase consumption in order to increase total spending (GDP) by $100 billion and the MPC is .8, by how much should it increase income?
Δ Consumption X Multiplier = Δ total spending
20 billion X 5 = $100 billion
Δ Income X MPC = Δ consumption
25 billion X .8 = 20 billion
4) A lawn mower costs $1,000 and will increase revenues by $250 per-year. Will the company invest in the machine if the interest rate is 10%?
Revenues = $250
Rate of Return = 250/1000 = 25%
Rate of return is greater than the interest rate, so the company will invest.
5) If the government implements a $4 billion tax cut and the MPC is .9, by how much will total spending (GDP) increase?
Tax cut X MPC = New Spending
$4 billion X .9 = $3.6 billion
New spending X Multiplier = Δ total spending
$3.6 billion X 10 = $36 billion
6) If the reserve requirement is 15% and $200 are deposited in a bank, by how much will total deposits, total new loans, and total required reserves increase.
Original deposit X (1/rr) = Total deposit creation
$200 X 6.67 = $1,334
Total New Deposits X Reserve Requirement = Total Required Reserves
$1,334 X 15% = $200.1
Total New Deposits – Total Required Reserves = Total New Loans
$1,334 – $200 = $1,134
7) If $200 worth of bonds are sold to the public and the reserve requirement is 10%, will the money supply increase or decrease and by how much?
$200 X (1/10%) = Change in money supply
$200 X 10 = $2,000 (The money supply will decrease.)
8) If the MPC is .8 and GDP is $2 trillion, what is the transaction demand for money?
Transaction demand = GDP/Multiplier
$400 billion = $2 trillion / 5
9) Be able to fill in this type of table.
IncomeConsumptionSavingsAPSAPCMPSMPC
How to get cosumption: income – savings
how to get APC: APC= C/I
how to get APS: APS=S/I
how to get mpc: subtract previous income and current income and the subtract previous consumption and current income and then divide both
how to get mps: same as mpc but instead of consumption its savings
10) Be able to fill in this type of table. (Reserve Requirement is 10%)
BankDepositsRequired ReservesLoans
for required reserve: deposit-bank
for increased loan: deposit-required reserve
deposit: number of increased loan
increased deposit: og deposit * multiplier (1/rr)
increased required reserves; rr*total new deposit
increased deposit: total new deposit-required reserves
Total ChangesDeposit X banking multiplier= $10,000 X 10 = $100,000
Reserve requirement X total checkable deposit creation = total required reserves $100,000 X 10% = $10,000
Total loans = total checkable deposits — total reserve requirement
$100,000 – $10,000 = $90,000
11) Be able to graphically and numerically demonstrate that the U.S. and England are better off through specializing and trading. Assume that both countries only produce bicycles and skates.
Bikes Skates
U.S.: 2 4
England: 3 9
a)Production ratios:
Bikes Skates
U.S: 1 2
England: 1 3
b)Trade ratio:
Bikes Skates
U.S: 1 2
England: 1 3
Trade Ratio: 1 : 2.5
c) Bikes
100
50 *50
0 200 Skates
d)If the U.S. trades 50 bikes, it will receive 125 skates. This combination will move them to the right of the production possibilities curve.