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final exam review.pdf

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Bridget O' Shaughnessy

ECON 1BB3 – FINAL EXAM REVIEW 1. Macro definitions and data i) Measuring output (Ch. 5)  definitions of GDP, GNP  components of GDP – important to understand what is included in each component (category) and be able to handle application questions  calculation of the GDP deflator  importance of real GDP (as a measure of well-being) ii) Measuring prices and inflation (Ch. 6)  calculating the CPI  definitions: price level, inflation rate  problems with the CPI: substitution bias, new goods, unmeasured quality change  comparison of GDP deflator and CPI (application questions)  ability to compare dollar figures from different years (simple ratio problem)  indexing  nominal vs. real interest rates 2. The economy in the long run i) Economic growth (Ch. 7)  definitions: productivity, human capital, physical capital, natural resources, labor, technology  constant returns to scale – what is it AND why is it important?  diminishing marginal product – what is it AND why is it important?  catch-up effect (including diagram of production function)  use of public policy to encourage growth (pages 137-157) ii) Saving and investment (Ch. 8)  definitions: financial market, bonds, stocks, financial intermediaries, banks, mutual funds, public saving, private saving, national saving, budget surplus and budget deficit  in a closed economy in the long run saving = investment (use the national income accounting identity to show that this is true)  the supply of (saving) and demand for (investment) loanable funds  equilibrium – interest rate, saving and investment  crowding out – be able to use diagram to answer questions about the variables (r, I, S, Sp, Sg), including magnitudes (for example, which change is larger, Sp or Sg or S?) iii) Unemployment (Ch. 9)  definitions: adult population, unemployed, employed, not in the labor force, unemployment rate, employment rate, labor force participation rate, natural rate of unemployment, discouraged workers, frictional vs. structural unemployment – be able to handle application questions  the impact of the following on labor markets and unemployment: minimum wage laws, unemployment insurance, unions, efficiency wages iv) Money and inflation in the long run (Ch. 10,11)  3 functions of money – medium of exchange, unit of account, store of value  definitions: commodity money, fiat money, currency, demand deposits, central bank, reserves, fractional-reserve banking, reserve ratio, money multiplier, open market operations, bank rate, overnight rate, inflation tax, Fisher effect  the Bank of Canada – monetary policy – open market operations (buying and selling government bonds), reserve requirements, overnight rate  BoC does not CONTROL the money supply, but it does INFLUENCE it (private household decisions about currency vs. deposits and banks can hold excess reserves)  be able to use the T-account to analyze deposits/withdrawals for an individual bank (both immediately and after all adjustments have taken place)  bank runs – fractional reserve banking and deposit insurance  the quantity equation and the velocity of money (M V  PY ) – be able to answer application questions  nominal GDP vs. real GDP (again)  hyperinflation – what is it and what causes it?  costs of inflation – shoeleather costs, menu costs, relative price changes, confusion, tax distortions  unexpected inflation and redistribution of wealth  how to calculate real and nominal before- and after-tax returns (application questions)  equilibrium between money demand and money supply (long run – value of money on the vertical axis) 3. Open economy issues iinternationrlde and capital flows (Ch. 12)  definitions: exports, imports, net exports, trade balance (and deficit/surplus), net capital outflow  net capital outflow always equals net exports  use the national income accounting identity and our definitions of saving to derive the following expression: S  I  NCO ii) exchange rates (Ch. 12)  definitions: nominal exchange rate, real exchange rate, appreciation, depreciation  explain purchasing power parity  can PPP explain movemen
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