Final Exam Guide (200)

The Final Exam will be held in our regular classroom at the regular time

Bring a pencil
Bring a calculator
You are not allowed outside paper
https://www.jmu.edu/registrar/wm_library/1221_spring_exam_schedule.pdf

First, look at the midterm study guides. All that material is fair game for the exam

This is a comprehensive final exam
The exam will probably be about 40% new material, and 30% from each midterm
The grade will be about 1/3 written and 2/3 multiple choice exam

Some materials to study

Review Canvas Quizzes (CQ): Bold indicates you should take another look
Note: DO NOT submit any remaining attempts these assignments, as it will convert any grade you had previously received to a zero and thus negatively impact your grade.
- CQ1: #1, 7, 11, 13
- CQ2: #8, 10, 20, 24, 27, 28, 29, 30, 31, 32, 33, 34
- CQ3: #5, 10, 11, 15, 17
- CQ4: #8, 11, 13, 14 and closely review #4, 5, 6, 7
- CQ5: #8, #9, #11, #16, #19, #22, #25, #26, #32
- CQ6: #9, #11, #12, #15, #16
- CQ7: #6, #7, #11, #15, #16
- CQ8: #4, ,#5, #8, #9, #14, #17
- CQ9: #9 and #13, but also look at #2, #4, #8, #10
- CQ10: Look over #2, #6, #7, #11-15
- CQ12: Review - #3, #4, #5, #8, #9, #12, #14, #21
Review FlatWorld Assignments for more help
Review Midterm take home questions (updated for spring 2022)
Midterm 1 Numbers: 1, 5, 6, 7, 10, 17, 20, 21, 24, 27, 28, 29, 30
Midterm 2 Numbers: 1, 2, 6, 7, 8, 9, 15, 18, 19, 20, 23, 26, 27, 28
All short-answer questions from both midterms are fair game
Go back through readings & terms for all chapters related to lectures

New Material (Units 8-12)

Get a good grasp on the big questions. The exam is not limited to this, but this hits on the major point value questions.
- Understand marginal revenue product and the demand for labor and capital
  - How do changes in interest rates impact how much capital you might hire?
  - How do changes in wages impact how many workers you might hire?
- Production functions and diminishing marginal product of capital & labor
  - Also know how to calculate and interpret productivity functions
  - Importance of technology v. additions of capital or labor
- Savings and Investment model (discussed as part of Unit 11) helps us determine “neutral interest rates” or the “natural rate of interest”
  - This is also known as $r^*$, the interest rate where $Y=Y^*$
  - How things like optimism, increased/decreased government spending, or increased/decreased taxes will impact interest rates
  - How interest rates affect exchange rates
- Aggregate Expenditure model
  - Understand mpc and the consumption function (“what is disposable income?”)
  - Know how to sketch the Keynesian Cross diagram
  - How do you identify output gaps? Can these persist at equilibrium?
  - Know how to use $PAE = C+I^p+G+NX$ and $C=\bar{C}+mpc(Y-\bar{T})$
    - We also assume that $I^p = \bar{I}, G=\bar{G}, NX = \bar{NX}$ such that the “bar” means exogenous
    - Exogenous means determined outside of the model
  - Find the PAE equation. Typically $PAE = [\bar{C}-mpc(\bar{T})+\bar{I}+bar{G}+\bar{NX}]+mpc(Y)$
    - Use the equilibrium condition $Y=PAE$ @ $Y^e$ to solve for equilibrium
  - Understand what the fiscal/spending multiplier is, and how to find it
  - How could you use government policy (tax or spending) to eliminate any output gaps?
    - $\Delta Y = \frac{1}{1-mpc} \Delta G$
    - $\Delta Y = \frac{-mpc}{1-mpc} \Delta T$
    - How would you change interest rates to put the economy in equilibrium at potential (i.e., $Y=Y^*$)
- The Economic Fluctuations model
  - How to sketch out the AD line. What are the axes? Why does the line slope downward?
  - What is the IA line? Why will it tend to return to the value it should be at in the long-run?
  - What is the Fed’s role in pushing the economy back to this long-run inflation rate?
  - How does a change in government spending or taxation impact the AD line in the short-run, and what do we expect in the long-run?
  - How does the Fed’s stance on monetary policy impact the AD line in the short-run, and what do we expect in the long-run?

Earlier Material

Get a good grasp on the big questions. The exam is not limited to this, but these are the major point value questions.
- Opportunity cost, comparative and absolute advantage
- Cost benefit & decisionmaking
- Factors of production
- Listen to podcast related to motivation for trade
- Watch video “Planet Money Makes a T-Shirt”.
- Rate of change equation: $\%\Delta=\frac{New-Old}{Old}\times 100$
  - Same as $\%\Delta=\left(\frac{New}{Old}-1\right)\times 100$
- Compound growth (a.k.a. present value or future value) equation: $PV=\frac{FV}{(1+i)^n}$
- Rule of 70 (or 72) $\frac{70}{g\text{ in percent}} = \text{Approximate time to double}$
- Inequality within & between countries over time
- Phases of business cycle
- Fiscal v. Monetary policy
- Labor market statistics: unemployment rate (U-3 or official): $\frac{\text{unemployed}}{\text{unemployed+employed}}$
- Labor market statistics: unemployment rate (U-6): $\frac{\text{unemployed+involuntary part time+discouraged & marginally attached}}{\text{unemployed+employed+discouraged & marginally attached}}$
- Labor market statistics: labor force participation rate: $\frac{\text{unemployed+employed}}{\text{working-age population}}$
- Labor market statistics: employment to population ratio: $\frac{\text{employed}}{\text{working-age population}}$
- Types of unemployment: frictional, structural, & cyclical
- Natural rate of unemployment
- Okun’s Law: $\frac{Y-Y^*}{Y^*}=-2(u-u^*)$
- Price level, inflation, deflation, disinflation, accelerating inflation (and how to calculate given data)
- Fisher equation: $r=i-\pi$
- Money’s functions
- Assets & wealth v. income, net income, & savings: which are stocks & flows?
- Monetary aggregates: $\text{M0}=\text{Reserves}+\text{Currency & coins in circulation}$
- Monetary aggregates: $\text{M1}=\text{Currency & coins in circulation}+\text{Deposits}+\text{Travelers Checks}$
- Monetary aggregates: $\text{M2}=\text{M1}+\text{Savings (MMDA)}+\text{MMMF}+\text{Small-denominated time deposits (CDs)}$
- What happens to M1/M2 if we change Savings (MMDA) to M1?
- Balance sheets: $\text{assets}=\text{liabilities}+\text{net worth}$
- Importance of capital requirements & reserve requirements
- Leverage ratio
- Fed & its structure (who is chair?) and the FOMC structure
- Central bank tools, targets, & goals
- Review and practice problems calculating unemployment rates, inflation rates, interest rates and GDP growth rates
- New Chapter for banking please read!!!
  - Firm structure & information issues (principal-agent, asymmetric information)
- Moral hazard & adverse selection
- Gini coefficients & Lorenz curves - can you draw and solve???
- Still to be discussed in class on Tuesday, prepare for:
- Stock pricing and returns,
  - $\frac{Div_1}{i-g}$ or
  - $P=\frac{\text{Future Price}+\text{Dividends}}{(1+i)}$
- $\text{Div Yield}=100\times \frac{\text{Div}}{\text{Price}}$
- Relationship between interest rates and bond/stock prices
- Rate of change equation $\frac{\text{New}-\text{Old}}{\text{Old}} \times 100 = \frac{\text{New}}{\text{Old}}-1 \times 100 = \%\Delta$
- Bond pricing and returns
  - Really just a repeated application of compound growth equation from above
  - For an “n” period bond
    - $\frac{C_1}{(1+i)^1}+\frac{C_2}{(1+i)^2}+\ldots+\frac{C_n}{(1+i)^n}+\frac{F}{(1+i)^n}$
- Relationship between interest rates and bond/stock prices
- GDP calculation (nominal and real)
- The components of GDP, $Y=C+I+G+NX$
- Definition of net exports $NX = X-M$
- Trade deficit v. Trade surplus v. Balanced Trade
- Budget deficit v. Budget surplus v. Balanced budget
- Total savings, $(S_\text{total}=Y-C-G-NX)$
  - OR $(S_\text{total}=S_\text{public}+S_\text{private}+S_\text{foreign}=I)$
- Components of savings
  - National savings, $(S_\text{national}=Y-C-G)$
  - Foreign savings, $(S_\text{foreign}=-NX)$
  - Public savings, $(S_\text{public}=T-G-TR)$ (similar to budget situation)
  - Private savings, $(S_\text{private}=Y+TR-T-C)$
- Economic v. financial investment
- Growth rates of real GDP (finding annual averages)
- Calculating inflation with GDP deflators and CPIs, $\text{GDP Deflator}=\frac{NGDP}{RGDP}\times 100$
- Calculating CPIs
- Adjusting prices/wages to compare “real” values at various points in time (forwards and back) SEE BELOW
- Anticipated v. Unanticipated inflation
- Calculate growth of real prices/wages
- Supply and demand, understanding diagrams manipulating curves and comparative statics
- Surplus v. shortage
- Basic understanding of price floors and ceilings
- Knowing how to solve a system of two equations (supply and demand)

\[\text{Nominal wage}_\text{YR1} \times \frac{\text{CPI}_\text{YR2}}{\text{CPI}_\text{YR1}}=\text{Real wage}_\text{YR2}\]

Nominal v. Real equation and how to use it

Equations (A Summary)

$ \%\Delta=\frac{new-old}{old}\times 100 $

$ PV=\frac{FV}{(1+i)^n}$ with $ i $ in decimal form

$ \text{approx time to double}=\frac{70}{g} $

$ r=i-\pi $ where $\pi$ is the rate of inflation

$ Y=C+I+G+NX $

$ S_{public}=T-G-TR $, $S_{private}=Y+TR-T-C$, $S_{national}= S_{public}+S_{private}$

$ S_{total}=S_{public}+S_{private}+S_{foreign} $

$ S_{foreign}=-NX $

$ 1= C/Y + I/Y + G/Y + NX/Y $

$ \frac{NG}{Y^{*}}=1-\frac{G}{Y^{*}} $

$ \frac{Y-Y^{*}}{Y^{*}}=-2(u-u^{*}) $ with $ u \text{ and } u^{*} $ in decimal form OR

$ 100 \times \frac{Y-Y^{*}}{Y^{*}}=-2(u-u^{*}) $ with $ u \text{ and } u^{*} $ in percentage form

$ PAE=C+I^p+\bar{G}+\bar{NX}$

$ Y=PAE \text{ @ } Y^e$

$ \frac{1}{1-mpc} $

$\Delta Y = \frac{1}{1-mpc} \Delta G$

$\Delta Y = \frac{-mpc}{1-mpc} \Delta T$

$ Y=AK^{0.5}L^{0.5} $

$ \frac{Y}{L}=A \left(\frac{K}{L}\right)^{0.5} $

$\frac{Div_1}{i-g}$

$P=\frac{\text{Future Price}+\text{Dividends}}{(1+i)}$

$\text{Div Yield}=100\times \frac{\text{Div}}{\text{Price}}$

$\text{M0}=\text{Reserves}+\text{Currency & coins in circulation}$

$\text{M1}=\text{Currency & coins in circulation}+\text{Deposits}+\text{Travelers Checks}$

$\text{M2}=\text{M1}+\text{Savings (MMDA)}+\text{MMMF}+\text{Small-denominated time deposits (CDs)}$

$r_{\text{ffr}} = r^* + (\pi_t - \pi^T)$

$\text{assets}=\text{liabilities}+\text{net worth}$

$ \text{Employment-to-Population Ratio}: \frac{\text{employed}}{\text{working-age population}}$

$ \text{U-3 Unemployment}=100 \times\frac{\text{unemployed}}{\text{unemployed+employed}} $

$ \text{U-6 Unemployment Rate} = 100 \times \frac{\text{unemployed+involuntary part time+discouraged & marginally attached}}{\text{unemployed+employed+discouraged & marginally attached}}$

$ \text{Labor Force Participation}=100 \times\frac{\text{unemployed+employed}}{\text{population}} $

$ \text{GDP Deflator}=\frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100 $