Preparation for Exam 2

Exam is Tueday, Nov 23 in class. Exam will start at 8am and end at 9:18. The makeup exam for exam 2 is the final.


Read: Macro paperback:  Ch 11,12,18,20, and 21. Read 18 very carefully.

Remember that exam will have similar format to first exam except:

• 6 pages long
• 2 pages of writing
• multiple choice questions on definitions and explaining models.
• 7 bonus points for those hungry to be done with the course

Definitions: 20 points You will be asked 8-12 multiple choice questions on the following concepts:

• Quantity Theory of Money
  • Be able to define
  • When is it useless for prediction
  • When does it predict
• Inflation
  • Cost-push
  • Demand-pull
  • hyperinflation
  • stagflation
  • Why is central bank frequently pressured into expanding money supply under inflationary pressures (Use IS/lM diagram)
• Exchange rates
  • floating
  • fixed
  • dirty float (various buzz words--semi fixed)
  • role of speculators in each case above
  • Move to currency unions- common currency
• . Trade Concepts
  • Absolute advantage
  • Relative advantage
  • infant industries
  • Why is free trade not always accepted by working people
• . Trade Balance
  • Principle components of trade balance
  • Why is media discussion of trade misleading
  • What is the role of exchange rates in balancing trade (broad definition)
• Discovery, Invention, and Innovation
  • Be able to define discovery, invention, and innovation
  • Be able to give an incentive system for each
  • Be able to list the various institutional innovations since 1850 promoting discovery, invention, and innovation.

2. Math and Policy 40 points

• Bank expansion and contraction problem: (10 pts) similar to quiz with 1 point belong quiz.
• IS-LM model: (20 pts) Calculations and some muliple choice questions. The calculations will be similar to quiz, but there will be a question beyong the quiz that will be worth 2 point plus 2 bonus points.
  • the relationship between k and K
  • crowding out.
  • coordinated policy.
  • Also, you will be expected to briefly discuss the LM equations and to explain how monetary and fiscal policy effect the system.
  • Why is short term stabilization policy defective in terms of long term performance ( Is investment and government spending the same in terms of stabilization policy? Are they the same in terms of growth?)
• Derive multipliers: [10 points plus 5 bonus points
  • Simple model with 4 equations
  • Difficult multiplier problem: 2 points plus 5 bonus points

3. Different schools of Macroeconomics: (20 points) Be able to discuss the complete cycle of macro policy: What do the various camps believe and what are their policy perscriptions. Why do critics take their position.

• Survival of the fittest
• Classical monetarists
• Keynesians
• Challenges by the older monetarists
• Supply siders
• Buchannan social choice theorists
• Lucas neoclassicists.

The three schools that I want you to understand clearly are the classical monetarists, Keynesians, and Supply Siders. To understand Lucas you need more math. If you go on in eocnomics you will do neocliassical macoeconomics. To understand the differences between the 3 schools you should be able to match the following with the 3 schools:

• To control inflation:
  • Expand supply of goods
  • Control the money supply relative to the supply of goods
  • Keep Y less than Y_FE.
• Use monetary policy to:
  • Control interest rates and accommodate fiscal policy
  • Control the supply of money
  • No policy
• Tax Cut
  • Spurs Y through increased C
  • Spurs Y through increased I because individuals work harder
  • Has little effect because to pay for G
    • Decrease G
    • Sell bonds and crowd out I
    • Print money and cause inflation
• Policy orientation
  • Fiscal policy to manipulate demand
  • Policies to manipulate supply
  • Monetary policy to keep money supply in balance with expansion of goods. Governemtn provides infrastructure and leaves market alone.
• You are the leader of the Council of Economic Advisors and the President needs your imput:
  • Unemployment is 20% and the economy appears stuck in the pits.
  • Y > Y_FE and inflation is 20% a year.
  • The President want to promote growth now that he has been reelected.
• Empirical issues:
  • Using Keynesian policy can you fine tune the economy.
  • If you cut taxes is the main effect going to be to stimulate consumption or investment
  • Would Keynesian policy work in a major depression
  • Under what conditions can you predict with the quantity theory or money.

You will have a subset of the above plus the following question: what is Greenspan's problem currently. What would you advise him to do from now until the election.

4. Current Events: 20 points: Summary of the presentations.

You will be required to write a page covering three of the 10 topics. You will have no choice.

Reports from contest S00, F99 and earlier.

1. International Agencies: International Monetary Fund, World Bank, and G7. What do these agencies do and do they actually help or do they make matters worse? Do they have resources to stop an international depression?

2. Military: Assume Presidents in the foreseeable future will be faced with police actions in third world countries.The military was set up to fight a land war in Europe against the Soviet Union. The Abrams tank is a great tank, but it is so large only one can be placed a a plane to be flown to a hot spot. How should the military be restructured to respond quickly to 3rd world crises? Remember it took 6 months to build up military forces for the gulf war?

3. Welfare: Welfare has been shifted to the states with the federal government setting the programs that the states must follow. What is the new welfare system. How well has Wisconsin done with its welfare program. Are all unemployed people employable? If not what should we do? What about poor children?

4.. Social Security: Why will the retirement of the baby boom create a crisis in the social security system. How difficult this crisis will be to overcome is directly related to the growth rate of GDP. Give some scenarios of the range of possibilities.

5. Medicine: What is the similarities and differences between Medicaid and Medicare? Which has political support and why? What will happen to Medicare expenses when the baby boom retires. What are states doing to reduce their Medicaid expenditures. How many Americans do not have medical insurance of any kind. What should be done about this?

6. What is Nafta. What is the purpose of the 60% content clause? How does and will Nafta affect Texas. Does Nafta have any affect on Canada?

7. What is the problem with primary and secondary education in the US. What is been done about it. What is your prognosis?

8. What is the Euro. Which country now controls monetary policy? (Careful!!!) What is the effect on Europe and the world. Who did not join and why?

9. How much do jails cost relative to primary and secondary education. Do we get our money's worth from jails. In $ value who commits the most crime blue collar or white collar. Who does the public fear the most. What is your policy? Point: in our high tech economy if you do not have a good education you are virtually unemployable except in criminal activities. It costs more to keep a prisoner one year in jail than to send him or her to Harvard. Also, going to prison is like going to grad school for criminals.