William Rainey Harper College MACROECONOMICS! MACROECONOMICS IN THE GLOBAL ECONOMY Fall 2012 ~/~ Home ~/~ Syllabus ~/~ Schedule ~/~ Assignments ~/~ Lecture Outlines ~/~ Online Lectures ~/~ Blackboard ~/~ Textbook Website ~/~

Exam 3 Study Guide

Exam 3 RETAKE ADDITIONS:

• What happens to APS when incomes increase?
• MPC + MPS = 1
• determinants of investment demand
• Which has a bigger effect on AD (and therefore real GDP), a change in government spending or the same change in taxes? Which multiplier is larger, the simple multiplier (government spending multiplier)or the tax multiplier?
• what are the built in stabilizers and how do they work?
• doe an actual budget deficit indicate expansionary fiscal policy?
• What type of fiscal policy might also increase AS?

• assets and libilities of commercial banks
• what happen to bank balance sheets when a check is drawn and cleared?
• the asset demand for money, the transaction demand for money, and the total demand for money
• why is the money demand curve downward slopingwhy is the MS curve a vertical line?
• assets and liabilities of the federal reserve banks
• how the Fed's monetary policy TOOLS affect a banks balance sheet
• what is the most used TOOL of the Fed?
• what is the discount rate?

• AND EVERYTHING BELOW

Define:

• crowding out effect
• standardized budget (also called full employment budget)
• multiplier effect
• investment demand graph
• MPC
• MPS
• M1
• M2
• FOMC (Federal Open Market Committee)
• quasi-public bank
• bank assets
• bank reserves
• bank liabilities
• excess reserves
• discount rate
• recognition lag
• operational lag
• administrative lag
• cyclical assymmetry
• Fed Funds rate

 FISCAL POLICY

• legitimate concerns of a large public (government) debt
• full employment budget deficit vs. the an actual budget deficit as an indicator of fiscal policy
• effect of a lump-sum tax on the consumption schedule (see problem in yellow page quick quiz)
• MPC and the multiplier
• expansionary fiscal policy and the AD/AS graph -- when should it be used?
• calculate multipliers
  • government spending multiplier
  • tax multiplier
  • complex multiplier
• calculate MPC using a table AND a graph

• shifts in the investment demand curve (determinants of investment EXCEPT interest rates)
• why is the investment demand curve downward sloping? (expected rates of return and interest rates)

MONETARY POLICY

• functions of money
• what "backs" the money supply
• who controls the money supply
• structure of the Federal Reserve, the Board of Governors, the FOMC
• why are the Fed banks called "quasi-public" banks
• goldsmith banking and their ability to create money
• commercial bank reserves and liabilities AND the Fed bank reserves and liabilities
• what is the main purpose of the legal reserves requirement (also call required reserves)
• how banks create money (see yellow pages and online lecture (chapter 15)
  • calculate excess reserves
  • calculate the money multiplier
  • calculate the largest loan that a single bank can safely make (= excess reserves)
  • calculate the possible change in the money supply for the banking system (change in MS = excess reserves x the money multiplier)
• how the Fed controls the money supply
  • tools of the Fed
  • using balance sheets you will need to calculate
    • how much OMO (open market operations) will change the money supply
    • how much a change in the required reservces will change the money supply
• understand the 3-graph model of how monetary policy works !!!!!
• the cause-effect change of expansionary monetary policy
• time lags: fiscal policy vs. monetary policy

EXTRA CREDIT ESSAY QUESTION

• there will be a short news article that discusses a monetary policy action taken by the Fed
• you need to:
  • identify and discuss the TOOL used by the Fed (Fed Funds rate = OMO tool)
  • show the effects of the action on the 3-graph model
  • and discuss the effects of the action on unemployment (UE), inflation (IN), and economic growth (EG)