ECON 364 - Intermediate Macroeconomics

Study Questions for the Second Exam

These questions are not designed to take the place of studying your notes and the reading assignments.  Do not e-mail me and ask me to answer all or some of these questions for you.  If you have missed class, it is your responsibility to get the notes from another student.  Once you have answered these questions yourself, if you are unsure of any of your answers, let me know and I will tell you if you are correct or not.  Don't be afraid to ask me questions, I just want you to try to answer the questions yourself first.

1. What is the labor theory of value?
2. How does the labor theory of value relate to exploitation in the Marxian world?
3. Why does capitalism eventually self destruct - according to Marx.  Make sure you talk about competition, falling prices and profits, and exploitation in your answer.
4. What book did John Maynard Keynes publish in 1936?
5. Although there are many interpretations of Keynes, what do most economists agree he was trying to say in the General Theory -- that is, his main message?
6. What do national income and employment depend upon in the Keynesian model?
7. What is involuntary unemployment? 
8. What are the two components of aggregate planned expenditures in the Keynesian model?
9. What determines investment in the Keynesian model and why?  What role does uncertainty play?  Expectations?  What is the marginal efficiency of capital?
10. The rate of interest does not link S and I in the Keynesian model (as it does in the classical model).  Why not?
11. What was Keynes's explanation of the business cycle?
12. What does consumption depend upon in the classical model?
13. What is the marginal propensity to consume?
14. What is the investment multiplier?  Explain why the multiplier effect exists?

15. As the MPC gets larger, what happens to the multiplier and why?

16. Graph the aggregate expenditures curve and the 45 degree curve (Keynsian 45 degree or cross model).  The next five questions pertain to this model.  Graph.

17. Graphically and in words show what will happen when there is an increase in government spending in this model.

18. Graphically and in words show what will happen when there is a decrease in taxes in this model.

19. Explain why an increase in G will have a greater impact on Y than a decrease in T.

20. What does the balanced budget multiplier equal?

21. Be able to play Keynesian planner - knowing the MPC and the income level (Y) that gives full employment and where the economy is now, by how much should government spending increase (holding taxes constant - deficit spending) in order to reach full employment Y.

22. What information must the Keynesian planners know?

23. What did Keynes mean by "liquidity preference?"
24. What are the three reasons people will demand money in the Keynesian model?
25. What is the "liquidity trap" and why does that situation lead to monetary policy being ineffective in the Keynesian model?
26. Why does Keynes then reject the neutrality of money theory (MV = PQ)?
27. Why do rigid wages cause involuntary unemployment?
28. With a higher real wage (as per the last question), how can the real wage be reduced?
29. Why did Keynes favor changing the price level over having nominal wages fall?
30. What is the overall policy recommendations of Keynes?
31. Who is the major name associated with Monetarism?
32. What basic ideas did the Monetarists bring back from the Classical school?
33. The major focus of Keynesian economists is unemployment.  What is the major focus of the Monetarists?
34. What is Friedman's interpretation of the Depression?  How does it differ for the Keynesian interpretation?
35. Be able to explain the three effects that bring AD back up in the Monetarist model (the real balance effect, the interest rate effect, and the exchange rate effect).
36. Be able to explain how a change in the money supply changes the price level -- both graphically and in words.  Graph.
37. Does an increase in the money supply ALWAYS cause inflation?  Why or why not?
38. How does a change in the supply of one currency impact it's exchange rate with another currency (ceteris paribus)?  Graph.
39. What are adaptive expectations?
40. Explain both the short run (Keynesian) and long run Phillips curve.  Use adaptive expectations theory in the long run explanation.  Graph.
41. Why are Monetarists critical of Keynesian discretionary policy and prefer fixed rule policy instead?

42. What three "groups" can impact the money supply and HOW?

43. Who invented money?

44. What is commodity money and why does it emerge spontaneously?

45. What is fiat money?  What gives non-backed fiat money exchange value?

46. What is a 100% reserve banking system?  What is a fractional reserve banking system (FRBS)?

47. In a FRBS how does a single bank increase the money supply?

48. In a FRBS how does the entire system increase the money supply?

49. Given an initial deposit in a FRBS, how would you determine the potential increase in the money supply (i.e. using the money multiplier)?  What two assumptions are being made?

50. What are required reserves?  What are excess reserves?

51. What is the FED?

52. What are open market operations?  Know how open market operations changes the money supply (i.e., if the Fed buys bonds, what happens, etc.).  What interest rate does the FED target with open market operations?

53. What is the discount rate and how might it be used to change the money supply?

54. What is the required reserve ratio and how might it be used to change the money supply?

55. If the federal funds rate a market rate?  Explain.

56. Why does the Fed keep the discount rate above the federal funds rate?

57. What is the currency/deposit ratio and who determines it?

    If the currency/deposit ratio changes, how would that change the potential increase in the money supply?

58. What is the reserve/deposit ratio and who determines it?

    If the reserve/deposit ratio changes, how would that change the potential increase in the money supply?

59. Why is language so important when the Fed Chairman speaks? 

60. What are the Feds most frequently used intermediate targets?

Make sure you study the homework and in class exercise questions and the WSJ articles.