Final Exam: Equations you need to know

Review Sections

Hey guys,

Hope your week is going well!

I wanted to let you know that I have scheduled two review sections before the final exam:

a. Wednesday, May 16th, 7:30-9:30pm ,Science Center 113
and
b. Thursday, May 17th, 5:30-7:30pm, Science Center 216

Also, I will hold office hours on Friday, May 18th, 5:30-7:30pm at the Ec10 Office.

In the mean time, please do let me know if you have any questions as you go through your final exam reading.

I will also be sending you more details about review material next week.

Lastly, I wanted to remind you, if you could spare 5-7 minutes, to fill in the CUE evaluation form for the course, which you can access through my.harvard portal.

Thanks
y

2nd Hourly Results

Mean Score: 77.40 %
Median Score: 79.75 %
Standard Deviation: 13.91 %

A range: 84.5% and above
B range: 60.5 % and above
C range: 50% and above

Well Done guys! I will be returning the exams on Wednesday!

Last Section

Hey guys,

I just wanted to let you know, that the revised syllabus indicates, that on April 25th, we are going to have our last Ec10 section of the year! Prof Mankiw as well as a series of distinguished guest speakers will take over till the end of the semester!

I will be returning your graded 2nd hourlies on that Wednesday too!

Have a great wknd!

PS feel free to reply anonymously to this post with any comments / suggestions about what you think needs to be improved for next year in terms of section heuristics!

Review Material Solutions

Here are the solutions guys: (copy paste the following link)

www.people.hbs.edu/iioannou/ec10/answers.pdf

Review Slides

Here are the review slides from today's section

http://www.people.hbs.edu/iioannou/ec10/review.ppt

a. ** Okun's Law is INCLUDED in the hourly **

b. ** Supply Shocks are *NOT* included

Review Matetial

You can find the questions I plan to go over during Tuesdays review section here

Review Section, Tuesday, April 17th, 7:35pm Sever 310

I will post the solutions to these questions right after the review section. In the mean time, feel free to email me with questions.

2nd Hourly Review Questions

25. What exactly do we mean by “Money Demand”?
26. What are the two principal determinants of Money Demand? Explain each one.
27. What is the shape of the money demand curve?
28. When does the money demand curve shift?
29. What is the effect of monetary policy on the equilibrium in the money market?
30. Why does the Fed use the interest rates instead on the money supply directly?
31. When the Fed raises or lowers the interest rate, what exactly is it that happens?
32. Why are there so many different interest rates in the real world? Explain
33. What is the difference between the nominal and the real exchange rate?
34. When does the real exchange rate change?
35. Define an appreciation/depreciation of the currency.
36. What do exports / imports depend on?
37. Define: Net Exports
38. Be able to explain the change of NX, as each of its determinants change.
39. Define: Trade Balance, Trade Surplus, Trade Deficit, Balanced Trade
40. What is “Net Capital Outflow”?
41. What are the implications of the Purchasing Parity Theory? Its assumptions?
42. How are the real and nominal exchange rates connected? (Formula)
43. Define: Capital Account, Current Account
44. Be able to list the links between changes in real interest rates and changes in NX demand
45. Consider the market of Loanable Funds. What do the supply and demand curve represent?
46. What is the market for foreign-currency exchange? The demand? The supply?
47. Why is NX=NCO?
48. Be able to draw the equilibrium in an open economy.
49. Be able to evaluate the effect of policy changes in the 3-diagram equilib. thoroughly
50. What is a “capital flights”. Show its effect on the above equilibrium.
51. What is aggregate output in the short run according to Keynes?
52. What are the four components of aggregate expenditure?
53. What are the primary determinants of Consumption Demand? Explain the dependence.
54. Define: the marginal propensity to consume
55. Elaborate: Permanent Income Hypothesis, PIH plus Rational Expectations, Life Cycle Hypot.
56. What is Investment and why is it important?
57. What are the principal determinants of Investment demand?
58. Be able to explain how interest rate fluctuations affect borrowing/profitability of projects.
59. When does the Investment demand Curve Shift?
60. Why does the Aggregate Demand curve slope downward?
61. Be able to explain the effect of price level changes on each of AD/AE components
62. When does the AD curve shift? Why?
63. What is long run aggregate supply?
64. What is the shape of the LRAS curve?
65. What is the short run aggregate supply?
66. Draw and explain SRAS under completely fixed prices and completely flexible prices.
67. Why is the SRAS upward sloping?
68. List all the reasons why firms might have difficulty adjusting prices when AD changes.
69. Draw a Macroeconomic Equilibrium.
70. Show and explain an Inflationary and a Recessionary Gap.
71. Thoroughly explain the steps of transition from the short run to the long run after a shift of AD in the macroeconomic equilibrium diagram.

Slides 4/11/2007

Slides 4/9/2007

Slides 4/6/2007

Slides 4/4/2007

Helpful Links and Practice Problems

A Review Test on AS and AD (with answers)
http://www.sparknotes.com/economics/macro/aggregatesupply/problems_2.html
http://www.sparknotes.com/economics/macro/aggregatesupply/quiz.html

Notes on the AS&AD framework and LR Adjustment Mechanism
http://www.sparknotes.com/economics/macro/aggregatesupply/section3.rhtml

Practice Problems (VERY useful!) - with answers
http://www.sparknotes.com/economics/macro/aggregatesupply/problems1.html
http://www.sparknotes.com/economics/macro/aggregatesupply/problems3.rhtml

More on SRAS

Aggregate supply is determined by the supply side performance of the economy. It reflects the productive capacity of the economy and the costs of production in each sector.

Shifts in the SRAS curve can be caused by the following factors:

• changes in size & quality of the labour force available for production

• changes in size & quality of capital stock through investment

• technological progress and the impact of innovation

• changes in factor productivity of both labour and capital

• changes in unit wage costs (wage costs per unit of output)

• changes in producer taxes and subsidies

• changes in inflation expectations - a rise in inflation expectations is likely to boost wage levels and cause AS to shift inwards

Expected Income Theories

Hey Guys,

These are a couple of excellent websites for the theories we talked about in class. Have a look!

Life Cycle Hypothesis:
http://www.ingrimayne.com/econ/FiscalDead/LifeCycle.html

Permanent Income Hypothesis:
http://www.ingrimayne.com/econ/FiscalDead/PermIncome.html

Rational Expectations:
http://en.wikipedia.org/wiki/Rational_expectations

2nd Hourly Group Results

Mean Score 60.59%
Median Score 61.5%
Standard Deviation 13.08%

A range: 64.5% and above
B range: 41% and above
C range: 39% and above

For our section specifically, more than 35% were in the A range! Also, the best exam with a score of 97% was in our section too!

Well done guys! I will be returning the exams on Wednesday!

Section 3/19/2007

Section 3/16/2007

Why is NX equal to NCO?

Net exports (NX) and Net Capital Outflow (NCO) measure a type of imbalance in a world market. NX measures the imbalance between a country's exports and imports in world markets for goods and services. NCO measures the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners in world financial markets.

For an economy, NX should equal NCO. Every international transaction involves exchange. When a seller country transfers a good or service to a buyer country, the buyer country gives up some asset to pay for the good or service. Thus, the net value of the goods and services sold by a country (net exports) must equal the net value of the assets acquired (net capital outflow).

For example, when the US runs a trade deficit (i.e. Imports> Exports), it is bying more goods grom abroad than it is selling to foreigners. This deficit is matched by a capital account (NCO) surplus of equal size. That is, foreigners use the dollars that are not used to buy US goods and services to purchase US assets such as bonds, stocks, etc. Put another way, we can say that when we buy goods or services from foreigners (i.e. imports), we have to give to foreigners in exchange either goods and services (exports) or else assets like the ownership of US real estate or companies or IOUs such as bonds.

Are US textbooks more expensive?

Hey Class,

So today we talked about the Purchasing Power Parity Theory, and the Law of one Price. My co-authors and I wrote a paper on price discrimination across countries in the book publishing industry. It is techically an easy-to-read paper, so if you are interested more about the subject you may have a look here: http://ssrn.com/abstract=807705

Here's the abstract:
We investigate differences in book prices between the United States and other countries. We find that general audience books are similarly priced internationally, but textbooks are substantially more expensive in the United States (often more than double the price). This disparity is much more pronounced for commercial publishers than for university presses. We argue that supply-side factors like cost and market structure can not explain this phenomenon. We discuss several demand-side explanations; our preferred theory is that higher US textbook prices reflect the unique status of the textbook as a centerpiece of US college instruction.

Federal Open Market Committee

http://www.federalreserve.gov/FOMC/

The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy.

The Federal Reserve controls the three tools of monetary policy--open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.

Structure of the FOMC

The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Nonvoting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee's assessment of the economy and policy options.

The FOMC holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.

For more detail on the FOMC and monetary policy, see section 2 of the brochure on the structure of the Federal Reserve System and chapter 2 of Purposes & Functions of the Federal Reserve System.

Section 3/9/2007

1st Hourly Review Guidelines

1. What is the Definition of Gross Domestic Product?
2. What are the four components of GDP?
3. What is the difference between the nominal and real GDP?
4. What is the GDP deflator?
5. What do we mean by potential GDP?
6. What is the Consumer Price Index (CPI) in words?
7. What is the formula for calculating the CPI?
8. What is the inflation rate? How is it calculated?
9. Write down the growth rate form of the production function.
10. What does each of the components mean?
11. What is the consumption formula ? ( C = ?)
12. Write down the per capita consumption identity.
13. What is labor productivity? Why is it important?
14. How can we increase per capita consumption in the long run?
15. What are the determinants of productivity?
16. Write down the relevant formula.
17. What is Total Factor Productivity?
18. What is convergence? What is conditional convergence?
19. Why poor countries fail to converge? For what reasons?
20. Complete: Y = ___ + ___ + ___ + ___
21. What is national savings? What is private savings? (formula)
22. Draw the market for loanable funds. What determines demand & supply?
23. What is the crowding out effect? Show and explain on a diagram.
24. How do firms expand / make new investments? (4 ways)
25. What is the present discounted value? Write down the two formulas
26. What if we have a different interest rate every year?
27. What do we mean by “risk aversion”? Show on the utility diagram.
28. What is arbitrage?
29. What is the efficient market hypothesis?
30. What is the connection between the two?
31. What are bonds?
32. How do we estimate the price of a bond?
33. What happens to the price when the interest rate is above/below the coupon rate?
34. Why?
35. What is the bond yield?
36. What is a call option?
37. What is a put option?
38. When does the buyer of a call option benefit?
39. When does the seller of a call option benefit?
40. When does the buyer of a put option benefit?
41. When does the seller of a put option benefit?
42. How do we price a call/put option?
43. What is financial leverage?
44. What is the natural rate of unemployment?
45. What is cyclical unemployment?
46. How do we define the labor force?
47. How do we calculate the unemployment rate?
48. How do we calculate the labor force participation rate?
49. What is frictional unemployment?
50. What is structural unemployment?
51. Why is there structural unemployment? (3 reasons)
52. What does the theory of efficiency wages say?
53. What were the main points of Prof Campbell’s Lecture?
54. List some possible barriers to arbitrage?
55. Why is the efficient market hypothesis violated in the 3Com/Palm example?
56. What is value investing? Momentum strategy?

Section 3/5/2007

Section 3/2/2007