Econ 4.3

Wednesday, February 24, 1999

Announcements: Homework Assignment #3 is posted on the webpage and is due on Wednesday. The Chapter 8 and 9 quizzes are online and will be taken off on Friday at 8 am. The exam will be Friday, February 26th. Voluntary Pre-Exam Review Session, Thursday, February 25, in 110 Wartik; 6:30 - 8:25 PM. The exam will cover chapters 6 through 9.

Lecture notes:  

Selected Concepts and Components for Exam #2

We studied both the income and expenditure methods of estimating the value of GDP. For the exam, you will not be expected to calculate GDP using the income components such as Personal Income, Disposable Personal Income, Taxes. The following is a partial list of concepts and quantitative computations that have been identified in class as likely to be on an exam, as well as being important to the understanding of economics. It is a reasonable expectation that you understand the concepts, understand how to do the calculations, and can apply what you have been learning. The list below is not intended to be all-inclusive--the exam may include other concepts and problems similar to those in the reading assignments, homework problems, and class meetings.

• GDP equation--calculate GDP or Y = C + I + G + (EX-IM)
• How accurate is the measurement of GDP as done by national income accountants in the US Department of Commerce, or are some significant items such as the "underground economy," for example, missed?
• Inflation--also who gains and who loses>
• Employment concepts--frictional unemployment, structural unemployment, cyclical unemployment, seasonal unemployment, discouraged workers, labor force participation rates, natural rate of unemployment
• Paradox of thrift
• Fiscal policy
• Monetary policy
• Consumption function and MPC
• Saving function and MPS
• Investment function--role of interest rate, profitability expectations
• Real and nominal interest rates
• Why does GDP changed by a multiple of a change in investment, government purchases, or net exports?
• Planned and unplanned investment
• Cyclical role of unplanned inventory investment

Calculate, understand, use....

• Nominal GDP
• Real GDP
• Inflation rates
• Real economic growth rate (growth in real GDP)
• Nominal economic growth rate (growth in nominal GDP)
• Real interest rate=nominal interest rate - inflation rate
• Marginal propensity to consume--MPC
• Marginal propensity to save--MPS
• Expenditure multiplier
• Labor force participation rates
• Value-added when estimating GDP

Investment Determinant

• Rising trend in real GDP
  • Falls in recession
  • Rises when we come out
• Gross Private Domestic Investment

GDP Determination

• See Figure 9.6 on page 183
• Savings have to equal investment for equilibrium to occur
• As interest rate increases, people invest less

Paradox of Thrift

• An increase in national thriftness will lead to a decrease in national savings and GDP; a decrease in thriftiness leads to an increase in national savings and GDP.

Paradox of Thrift: Critical Assumptions

1. Less than full employment
2. Independence of SI decisions
3. Injections increase as GDP increases

• See page 194 (Paradox of Thrift)

Expenditure Multiplier

• See Figure 9.9 on page 189
• K = 1 / 1 - MPC = 1 / MPS
• K = 1 / 1 - .75 = 1 / .25 = 4
• K x Change in J = 4 x (change in J) = 4 ($50) = $200