Econ 204 Study Guide

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EXAM 2 STUDY GUIDE – CHAPTERS 7 - 10 (partial)

ECON 204 SPRING 2013

Chapter 7 Inflation Deflation Effects of Inflation 1. Price effects a. Real vs. nominal income 2. Income effects 3. Wealth effects Money illusion Measuring inflation • Consumer Price Index (CPI) • Market basket Construction of a Price Index 1. Calculate cost of basket in each year 2. Create Price Index using chosen base year = ∗ 100

• Say’s Law Keynesian Theory • Inherently unstable economy • Government intervention Modeling the macroeconomy • Aggregate demand(AD) • Why downward-sloping? o Real-balances effect o Foreign-trade effect o Interest-rate effect • Aggregate Supply(AS) • Upward-sloping & shape? o Profit effect 1. Sticky wages o Cost effect o Cost effect dominates in the long run & at higher levels of output • Macro equilibrium o 2 potential problems 1. Undesirability 2. Instability • AS shifts o Almost anything that changes costs of production in a wide range of US industries • AD shifts o Changes in consumer behavior, firms’ willingness to invest, changes in gov’t spending • Multiple shifts o Business cycles result from recurrent shifts in AD & AS Competing Theories of SR Instability • Demand-side theories o Keynesian

3. Calculate inflation rates
= − ∗ 100

The core rate • Excludes volatile food & energy prices. Price stability • Full employment and Balanced Growth Act of 1978 – target inflation of around 3% Quality changes • CPI can overstate inflation if quality changes are not accounted for Chapter 8 Classical Theory • Self-adjustment • Flexible prices & wages


EXAM 2 STUDY GUIDE – CHAPTERS 7 - 10 (partial)

ECON 204 SPRING 2013

Deficiency in spending would tend to depress the economy. Leaves goods unsold and production capacity unused. Claimed gov’t should increase spending o Monetary If credit isn’t available or interest rates are too high consumers won’t be able to buy as many cars, homes, etc. May limit business investment...
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