Principles of Macroeconomics

De Anza Community College

Monika Thomas
Spring 2012

Study Guide for Final Exam

The following concepts are the most essential topics for the final exam. Please look for
comprehensive explanations in your notes and the corresponding chapter in your
textbook. For each concept: know the definition, what it represents and be able to model
it with a graph (where indicated)
Different Market structures: free market economy, centrally planned economy, modern
mixed economy
Methods of economics: normative and positive
Circular flow diagram (Graph)
Factors of production (also called: factor inputs)
Principle of opportunity cost: definition
Production Possibilities Frontier:
linear, with constant opportunity cost (Graph) (perfect substitutability of
resources), or with bowed out curve, with increasing opportunity cost (Graph)
(due to specialized resources)
PPF models the principle of scarcity and opportunity cost, productive efficiency.
Supply-side model
Comparative Advantage: the basis of trade
Absolute advantage
Graphs and know how to calculate the opportunity cost (slope of the linear
production possibilities frontier) in order to determine which country has
the comparative advantage
Model of Supply and Demand:
Effects of price controls: price ceiling and price floor (graphs)
Business cycle (graph)
Measuring GDP:
What counts into GDP
Equation (expenditures approach, income approach)
Compute nominal and real GDP
GDP deflator

Unemployment:
different types (structural, frictional, cyclical, seasonal)
Calculate unemployment rate, labor participation rate, labor force
Role of unions
Inflation:
CPI and how to calculate it
Real interest rate and nominal interest rate (equation)
Market failures: negative and positive externalities (graphs), role of government
AD-AS model: classical model (and why it was not sufficient): Graph
Modern Keynesian model: Graph
Shifts: AD-curve (change in C, I, G, NX will shift the AD curve)
Shifts: SRAS-curve (cost of production factors)
Demand-pull and cost-push inflation
Recessionary gap and expansionary gap
Fiscal Policy
Automatic stabilizers
Autonomous fiscal spending
Discretionary fiscal policy (Keynesian approach)
Government purchases multiplier, tax multiplier
Crowding-out effect
Effects on the economy when Government conducts fiscal policy (graph: AD-AS
model, short run equilibrium and long run equilibrium)
Economic growth:
rule of 70
Determinants for economic growth: labor productivity, technological change
Production function: graph
New growth theory
Catch-up effect
Financial system in the US:
Market for savings (model of loanable funds: graph)
Effect of increase in household savings on equilibrium interest rate
Effect of budget deficit on equilibrium interest rate
Money: Functions of money, types of money, how to measure the money supply
(M1, M2)
Money multiplier and RR (reserve requirement)
Fractional reserve banking

Federal Reserve Bank:

Goals of monetary policy
Policy tools: OMOs, set federal funds rate, discount rate, RR
Effects on interest rates when FED conducts monetary policy (OMOs): money
market model
Effects on the overall economy when FED conducts monetary policy (OMOs): graph
(AD-AS model)
What were the monetary and fiscal policy measures taken since the Great Recession
in 2008? Evaluate and explain the reasons why monetary and fiscal policy actions
are currently relatively ineffective to expand the economy.