Potential Questions For Exam 2

1. GDP is a key concept in Macroeconomics.

a. What is the definition of GDP?

b. Go to bea.gov and tell me the level of GDP for the past 4

years.

c. Go to topic called Economic Growth and look at slide 3 and

tell me if the falling trend line is a good or bad thing for the

nation and why. Please be thorough!

d. List and explain in detail, the 3 different approaches to

calculating GDP.

i. List and explain the approaches and how you would use each to

calculate GDP.

e. List and explain 4 types of transactions that would not be

included in GDP and why they should be omitted.

i. Look in the notes and find 4 types of transactions that are

excluded from the computation of GDP and write them down

along with the explanation of each and why they are not

included.

f. Thoroughly explain the 4 components of GDP and relate

those components to the Circular Flow model with

government and international trade.

g. Nominal versus real GDP.

i. Explain the difference between nominal and real

GDP.

ii. Explain in detail, how to calculate real GDP,

including the factors used in the calculation.

1. Look in the notes to find this – very straight forward.

iii. Explain in detail the CPI since it is used to make the

conversion.

iv. Explain what you can do with real GDP that you

cannot do with nominal GDP and explain why not.

h. GDP and GDP per-capita.

i. Explain the difference between GDP and Per Capita

GDP;

ii. Explain how to calculate Per Capita GDP, and how

Per Capita GDP can be used.

2. The Business Cycle and Built in stabilizers.

a. What can the business cycle tell you about the status of our

economy today and into the future (please provide detail)?

b. Given what you have learned about the U.S. Business cycle

over the past 60 years, please explain 4 ways you can use

that information to enhance your odds of achieving future

personal success. Please do not talk about your financial

portfolio or playing around with the stock market.

c. Explain in some detail the 4 phases of the business cycle,

Please don’t include Depression as one of them. including the

characteristics of each. Be thorough! You should have at

least 4 characteristics for each phase! Include in your

discussion how each phase of the business cycle might impact your life

and what you should do to minimize the damage to your future.

d. Explain in detail, 4 possible causes of change in the

direction of the business cycle. You are looking for things that are

out of the control of the government. Do not talk about fiscal or monetary

policy tools here. Don’t say inflation or recession!

3. Unemployment and Recession

a. Explain in detail, how the unemployment rate is calculated.

b. Explain in detail, how we define the employed, the

unemployed, and who is in the labor force?

i. The link BLS website should help –

http://www.bls.gov/news.release/empsit.t15.htm

c. List and explain (don’t just copy and paste) the various

unemployment rates used by the BLS, and indicate which

one of the 6 is the official unemployment rate.

i. This link to the BLS website should help –

http://www.bls.gov/news.release/empsit.t15.htm

d. There has been a historic disparity between unemployment

rates for Black, Hispanic, and White workers.

i. Please provide detailed explanations of 4 reasons

the Black and Hispanic unemployment rates are

always significantly higher than the unemployment

rate for Whites.

ii. Explain in detail, 3 things that should be done to

correct the problem. Be sure you explain how each

recommendation would actually lead to solution of

the problem. Please be very thorough with this.

e. The 3 types of unemployment.

i. List and explain the 3 types of unemployment that

we discussed. Include the characteristics of each

and the role of skills for each.

ii. Explain how each type contributes to growing

income and wealth inequality.

1. You would want to list and explain the 3 types. You will

find everything on the 2 or 3 slides plus the audio provides

additional insight.

f. List and explain thoroughly, 4 examples of significant

economic costs of unemployment and what we might do to

reduce those costs.

g. Unemployment and how to use Fiscal Policy to address

Recession.

Background for this question:

The US economy is currently experiencing recession

according to the Federal Government. You can use only

Fiscal Policy and the AD – AS model.

i. List and explain the 3 Fiscal Policy tools covered in

the slides that apply to fixing recession, and indicate

the one that you want to use to attack the recession

problem?

1. List the 3 choices and state specifically which one you will

use. Please note that transfer payments would come under

the heading of government spending! So don’t use it as

one of your 3 tools of fiscal policy.

ii. Explain why you selected this tool and not the

others. Refer to your decision criteria.

1. Consider the pros and cons of each of the 3 tools and tell

me why you picked the one you picked and why you did

not pick the other option(s).

iii. Explain how your tool would solve the recession

problem and what effects your solution would have

on at least five key economic variables. BE SPECIFIC!

I WANT TO SEE THE DETAIL. USE THE WHAT HAPPENS

NEXT APPROACH!

1. Explain how your choice of tools would work to solve the

problem of recession. Start with the implementation of

your tool and then list step by step what happens next, until

you arrive at the appropriate impact on GDP. Be sure you

provide the detailed step by step flow.

2. Using that approach allows the list the key economic

variables and how each would be affected, to pop right out.

4. Inflation

a. What is inflation and how is it calculated?

b. List and explain the two types of inflation

c. Give two examples of who might be hurt by inflation and

why.

d. Give two examples of who might be helped by inflation and

why.

e. Inflation and how to use Fiscal Policy to address the

problem of Inflation.

Background for this question:

Assume the US economy is currently experiencing high

rates of inflation according to the Federal Reserve. Use only

Fiscal Policy and the AD – AS model.

i. List and explain the 3 Fiscal Policy tools covered in

the slides and indicate which tool you will use to

attack the inflation problem?

1. List the 3 possible choices and then just tell me which of

the tools you would select. Just write it down.

ii. Explain why you selected this particular tool and

not the others. Refer to your decision criteria.

1. Consider the pros and cons of each of the 3 tools and tell

me why you picked the one you picked and why you did

not pick the other option(s).

iii. Explain how your solution would work to solve the

problem of inflation and what effects your solution

would have on at least five key economic Variables?

BE SPECIFIC! I NEED TO SEE THE DETAIL.

USE THE WHAT HAPPENS NEXT APPROACH!

1. Explain how your choice of tools would work to solve the

problem of recession. Start with the implementation of

your tool and then list step by step what happens next, until

you arrive at the appropriate impact on GDP. Be sure you

provide the detailed step by step flow.

2. Using that approach allows the list the key economic

variables and how each would be affected, to pop right out.

6. The Aggregate Demand curve shows the level of real output that

the economy will purchase at each price level.

a. List and thoroughly explain the three reasons the Aggregate

Demand curve is downward sloping.

i. In your explanation, please start with an increase in prices and

work through to a decrease in AD.

b. List and explain in detail, the components of Aggregate

Demand and explain each of their determinants

i. You studied the 4 components. List and explain them and under

each list and explain the determinants of each.

c. Explain how the Aggregate Demand – Aggregate Supply

Model differs from the Aggregate Expenditures model

i. Put the two models side by side, look for the differences and

explain them.

5. The basic macroeconomic relationships introduced a number of

key concepts.

a. Please explain the relationships between income,

consumption, savings, and GDP.

i. Define each

ii. Explain the relationship between these items.

b. Please explain the relationships between interest rates,

expected rates of return, investment, and GDP. Be specific

and be thorough.

i. All of the necessary info is provided in the slides and audio

lectures

c. Please explain the concept of the multiplier, including:

1. What information is required to calculate the

spending multiplier

a. Refer to the slides, the info is there. Look closely –

don’t miss this!

2. List and explain the 3 different multipliers that

we discussed.

a. Again, refer to the slides, it’s all there.

3. Explain in detail how the multiplier works to

impact GDP. Be specific!

a. Use the chart from the slide set as the basis of your

explanation. Start with the injection of money into

the economy and then how that affects household

income and then spending via the mpc. Go on to

discuss the rounds of spending, etc. and how the

ultimate impact on gdp is amplified by the

multiplier effect.

6. We discussed four problems that complicate the application of

fiscal policy.

a. List and thoroughly explain these 4 problems, including

how each would likely impact the overall effectiveness of

fiscal policy. Be specific! Be thorough!

i. You should list the 4 problems associated with Fiscal Policy that

were listed in the slides and explain the factors associated with

each. And as you address each problem, discuss how each would

impact the effectiveness of fiscal policy.

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