ECON 364 - Intermediate Macroeconomics
Study Questions for the Third 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.
NEW CLASSICAL ECONOMISTS: Remember the role of expectations!
What is the difference between how the New Classical economists and the Keynesians model the behavior of economic actors ( explain Fixed Rules of Thumb vs. Rational Behavior)?
What are the differences between Keynesians and New Classical economists with respect to consumption and investment?
How do the Keynesians the the New Classical economists differ with respect to: 1. market outcomes, 2. short run supply changes, 3. fiscal and monetary policy and control of demand in the economy?
What is the main difference between the New Classical economics and the Keynesians with respect to expectations?
How would the New Classical economists analyze (vs. Keynesians): a. temporary tax cut and b. expansionary policy by the FED?
NEW KEYNESIAN ECONOMISTS: Remember sticky prices and wages!
What is the main disagreement between the New Keynesian economists and classical economists in general?
Why are sticky wages and prices important to talk about in the Keynesian world?
What are menu costs and what do they have to do with sticky prices?
What are aggregate demand externalities? Example? Remember, these are positive externalities enjoyed by firms in the economy.
Explain why aggregate demand externalities, according to the New Keynesians, lead to sticky prices being optimal for those setting prices, but undesirable for the economy as a whole.
Explain why firms stagger price changes -- and why it leads to slower price changes.
EXPLAIN three reasons that firms might pay higher than market wages in order to increase efficiency.
Do the New Keynesians want government intervention? If so, what kind in particular to deal with the sticky wages and prices?
RATIONAL EXPECTATIONS: Remember their information assumption - what do people know in their world?
What is the relationship between expectations and outcomes, according to the rational expectations economists?
What information assumption (regarding the public) to the rational expectations economists make?
Explain why, according to the rational expectations economists, only random policies (that try to fool people) will have an effect on the economy (i.e., the "Policy ineffectiveness proposition").
According to the rational expectations economists, the stock market follows a "random walk" - explain.
Does the "policy ineffectiveness" result apply to all government policy, according to the rational expectations economists? If not, what policies does it not apply to and why?
Are the rational expectations economists basically "free market" economists? If so, why?
SUPPLY SIDE ECONOMISTS: Remember the basic idea that a cut in tax cuts can increase productivity -- thereby increasing tax revenue as well - and the emphasis on incentives to be productive (work or invest).
Why do supply side economists focus on incentives and the MARGINAL tax rates?
According to supply siders, an increase in the marginal tax rate (income tax) will adversely affect productivity for two reasons -- explain both. This is a very important question - hint.
Explain how the substitution/income effects lead to a backward bending supply curve of labor - GRAPH and. . .
What assumptions the supply siders make regarding these two effects (which one dominates in the macro economy)?
What is the tax base?
Explain and draw the Laffer Curve - GRAPH.
What is a progressive income tax system?
According to the supply siders, a marginal tax cut for someone in a higher tax bracket will have a greater incentive to earn or produce than someone who gets the same % cut in a lower tax bracket. Provide a numerical example. What does this lead to (in terms of who pays more taxes with a tax cut), according to the supply siders?
What is tax bracket creep and what happened in the 70s that provided an environment conducive to supply side tax cuts? What argument did the supply siders give with respect to their tax cuts helping control the inflation of that time?
What's the difference between a supply side tax cut and a Keynesian tax cut?
Is there supply side empirical evidence of their theories? If so, check it out.
Why is supply side economics known as "trickle down" economics?
INSTITUTIONALISTS: Remember the basic difference between the institutionalists and mainstream economists (that makes them "radical") - difference in methodology and how they view the "rational economic man" model.
What are institutions?
Why and how are they (institutions) so important in the institutionalist world (i.e., relate them to human behavior)?
Does culture matter to the institutionalists? Explain why.
The institutionalists emphasize change and evolution in the economy and in society in general. Why?
What are the progressive factors to change in society, according to Veblen? Explain and examples?
What are the restricting factors to change in society, according to Veblen? Explain and examples?
What enhances the progressive factors to change in society (what's the main engine of change to Veblen)?
What is conspicuous consumption, according to Veblen? Example? Why does it happen -- why do the "leisure class" partake? Is it a waste to Veblen? Why?
What did Veblen think about private property and why?
What did Veblen think of engineers vs. businessmen and women? Explain his reasoning for the difference he sees?
Why do instituionalists see a big role for government? What is government's role and how are those in government viewed -- who should be in government and why?
Be able to pick out a mug shot of Veblen (just kidding, maybe).
Make sure you read and bring the WSJ article posted on the web site for the exam -- no writing on it, just highlighted or underlined.
You can bring one 5 x 7 note card with writing on ONE SIDE.