Macro1 (ECON1016)

Lecture 12

Review the Course and Exam

Preparation

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 Exam Info
What is the format?
50 Multiple Choice Questions (MCQs)
Each question is worth for 1 mark

No formula sheet given

A non-text sorting calculator and a paper-
based bilingual dictionary are allowed

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 Exam Info
What is the coverage of the exam?
Textbook chapters for Week 1 to Week 12
Lecture slides
Tutorial questions
In short, everything we discussed!

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 How should I prepare for the
exam?
Review relevant chapters of the textbook as well as
lecture slides
Attempt the tutorial questions to test your
understanding again and understand where/why you
get it wrong (tutorial answers and the brief
explanations are available in Blackboard)
Attempt the practice questions in Aplia
There will NOT be any sample exam provided.
In final exam, there will not be any short answer
questions, so concentrate on to have broad knowledge
on the course materials.
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 One page summary of Covered Material
Measuring Macroeconomic Performance
Lecture 1 (Chapter 1,2) Introduction: What is macroeconomics?
Lecture 2 (Chapter 24) Measuring a nations income
Lecture 3 (Chapter 25) Measuring the cost of living
Lecture 4 (Chapter 28) Unemployment
Long Run Macroeconomics
Lecture 5 (Chapter 26) Production and growth
Lecture 6 (Chapter 27) Saving, investment and the financial system
Lecture 7 (Chapter 29) The Monetary System
Lecture 8 (Chapter 30) Inflation
Short Run Macroeconomics
Lecture 9 (Chapter 33) Aggregate demand and aggregate supply
Lecture 10 (Chapter 34) The influence of monetary and fiscal policy
Open Macroeconomics
Lecture 11 (Chapter 31) Open Macroeconomics

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EACH CHAPTER IN DETAIL

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 Chapter 24
Measuring a nations income
In this chapter, you have:
considered why an economys total income
equals its total expenditure
learnt how gross domestic product (GDP) is
defined and calculated
seen the breakdown of GDP into its four major
components
learnt the distinction between real GDP and
nominal GDP
considered whether GDP is a good measure of
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economic wellbeing.
 SUMMARY

Because every transaction has a buyer and a

seller, the total expenditure in the economy
must equal the total income in the economy.
GDP is the market value of all final goods and
services produced within a country in a given
period of time.
GDP is divided among four components of
expenditure: consumption, investment,
government purchases and net exports.

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 SUMMARY

Nominal GDP uses current prices to value the

economys production.
Real GDP uses constant base-year prices to
value the economys production of goods and
services.
The GDP deflator calculated from the ratio
of nominal to real GDP measures the level
of prices in the economy.

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 SUMMARY

GDP is a good measure of economic

wellbeing because people prefer higher to
lower incomes.
It is not a perfect measure of wellbeing
because some things, such as leisure time
and a clean environment, arent measured by
GDP.

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 Chapter 25
Measuring the cost of living
In this chapter, you have:
learnt how the consumer price index (CPI)
is constructed
considered why the CPI is an imperfect
measure of the cost of living
compared the CPI and the GDP deflator as
measures of the overall price level
seen how to use a price index to compare
dollar figures from different times
learnt the distinction between real and
nominal interest rates.
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 SUMMARY
The consumer price index shows the cost of
a basket of goods and services relative to the
cost of the same basket in the base year.
The percentage change in the CPI measures
the inflation rate.
The consumer price index is an imperfect
measure of the cost of living for the following
three reasons: substitution bias, the
introduction of new goods and
unmeasured changes in quality.
Because of measurement problems, the CPI
overstates annual inflation.
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 SUMMARY
The GDP deflator differs from the CPI
because it includes goods and services
produced rather than goods and services
consumed.
Dollar figures from different points in time do
not represent a valid comparison of
purchasing power.
Various laws and private contracts use price
indexes to correct for the effects of inflation
(especially, wage contract)
The real interest rate equals the nominal
interest rate minus the rate of inflation.
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 Chapter 28
The natural rate of unemployment
In this chapter, you have:
learnt about the data used to measure the
amount of unemployment
considered how unemployment can result
from minimum-wage laws
seen how unemployment can arise from
union wage bargaining and efficiency wages
seen how unemployment arises from the
process of job search.

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 SUMMARY
The unemployment rate is the percentage of those
who would like to work but dont have jobs.
One reason for some unemployment is classical
unemployment.
Minimum-wage laws raise the quantity of labour
supplied and reduce the quantity demanded.
A second reason for unemployment is the market
power of unions.
A third reason for unemployment is suggested by
the theories of efficiency wages.

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 SUMMARY
Another type of unemployment is frictional
unemployment, which arises as a result of
job search.
It tends to be short term.
It is impacted by job search programs and
unemployment benefits.
Structural unemployment is a result of a
mismatch between the skills employers
demand and the skills workers have.
It tends to be longer term.

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 Chapter 26
Production and growth
In this chapter, you have:
seen how much economic growth differs
around the world
considered why productivity is the key
determinant of a countrys standard of living
analysed the factors that determine a
countrys productivity
examined how a countrys policies influence
its productivity growth.

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 Summary
Economic prosperity, as measured by real GDP
per person, varies substantially around the
world.
The average income of the worlds richest
countries is more than ten times that in the
worlds poorest countries.
The standard of living in an economy depends
on the economys ability to produce goods
and services.

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 Summary
Productivity depends on the amounts of
physical capital, human capital, natural
resources and technological knowledge
available to workers.
Government policies can influence the
economys growth rate in many different
ways.

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 Summary
The accumulation of capital is subject to
diminishing returns.
Because of diminishing returns, higher saving
leads to a higher growth for a period of time,
but growth will eventually slow down.
Also because of diminishing returns, the
return on capital is especially high in poor
countries.

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 Chapter 27
Saving, investment and the financial system
In this chapter, you have:
learnt about some of the important financial institutions
in the Australian economy
considered how the financial system is related to key
macroeconomic variables
developed the model of the supply and demand for
loanable funds in financial markets
used the loanable-funds model to analyse various
government policies
considered how government budget deficits affect the
Australian economy.

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 Summary
The financial system is made up of financial
institutions such as the bond market, the
stock market, banks, and managed funds.
All these institutions act to direct the
resources of households who want to save
some of their income into the hands of
households and firms who want to borrow.

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 Summary
National income accounting identities reveal
some important relationships among
macroeconomic variables.
In particular, in a closed economy, national
saving must equal investment.
Financial institutions attempt to match one
persons saving with another persons
investment.

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 Summary
The interest rate is determined by the supply
and demand for loanable funds.
The supply of loanable funds comes from
households who want to save some of their
income.
The demand for loanable funds comes from
households and firms who want to borrow for
investment.

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 Summary
National saving equals private saving plus
public saving.
A government budget deficit represents
negative public saving and, therefore, reduces
national saving and the supply of loanable
funds.
When a government budget deficit crowds out
investment, it reduces the growth of
productivity and GDP.
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 Chapter 29
The monetary system
In this chapter, you have:
considered what money is and what functions
money has in the economy
learnt about the role of the Reserve Bank of
Australia
examined how the banking system helps
determine the supply of money
seen what tools the Reserve Bank of Australia
uses to influence the supply of money.

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 Summary
The term money refers to assets that people regularly use to
buy goods and services.
Money serves three functions in an economy: as a medium of
exchange, as a unit of account, and as a store of value.
Commodity money is money that has intrinsic value.
Fiat money is money without intrinsic value. The Reserve
Bank of Australia has control of monetary policy in Australia.
The RBA uses open market operations to achieve a desired
cash rate outcome.

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 Summary
When banks loan out some of their deposits,
they increase the quantity of money in the
economy.
Because the RBA cannot control the amount
bankers choose to lend or the amount
households choose to deposit in banks, the
RBAs control of the money supply is
imperfect.

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 Chapter 30
Inflation: Its causes and costs
In this chapter, you have:
seen why inflation results from rapid growth in the money
supply
learnt the meaning of the classical dichotomy and
monetary neutrality
seen why some countries print so much money that they
experience hyperinflation
examined how the nominal interest rate responds to the
inflation rate
considered the various costs that inflation imposes on
society.

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 Summary
The overall level of prices in an economy
adjusts to bring money supply and money
demand into balance.
When the central bank increases the supply of
money, it causes the price level to rise.
Persistent growth in the quantity of money
supplied leads to continuing inflation.

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 Summary
The principle of money neutrality asserts that
changes in the quantity of money influence
nominal variables but not real variables.
A government can pay for some of its
spending simply by printing more money.
This can result in an 'inflation tax' and
hyperinflation.

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 Summary
According to the Fisher effect, when the
inflation rate rises, the nominal interest rate
rises by the same amount, and the real
interest rate stays the same.
Many people think that inflation makes them
poorer because it raises the cost of what they
buy.
This view is a fallacy, however, because
inflation also raises nominal incomes.
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 Summary
Economists have identified six costs of
inflation:
shoeleather costs
menu costs
increased variability of relative prices
unintended tax liability changes
confusion and inconvenience
arbitrary redistributions of wealth

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 Chapter 33
Aggregate demand and aggregate supply
In this chapter, you have:
learnt three key facts about short-run
economic fluctuations
considered how the economy in the short
run differs from the economy in the long
run
developed a short-run theory called the
model of aggregate demand and aggregate
supply
seen how shifts in either aggregate demand
or aggregate supply can cause recessions.
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 Summary
All societies experience short-run economic
fluctuations around long-run trends.
These fluctuations are irregular and largely
unpredictable.
When recessions occur, real GDP and other
measures of income, spending, and
production fall, and unemployment rises.

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 Summary
Economists analyse short-run economic
fluctuations using the aggregate demand and
aggregate supply model.
According to this model, the output of goods
and services and the overall level of prices
adjust to balance aggregate demand and
aggregate supply.

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 Summary
The aggregate-demand curve slopes
downward for three reasons: a wealth effect,
an interest rate effect, and an exchange rate
effect.
Any event or policy that changes
consumption, investment, government
purchases, or net exports at a given price level
will shift the aggregate-demand curve.

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 Summary
In the long run, the aggregate supply curve is
vertical.
The short-run, the aggregate supply curve is
upward-sloping.
The are three theories explaining the upward
slope of short-run aggregate supply: the
misperceptions theory, the sticky-wage theory
and the sticky-price theory.

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 Summary
Events that alter the economys ability to produce output
will shift the short-run aggregate-supply curve.
Also, the position of the short-run aggregate-supply curve
depends on the expected price level.
One possible cause of economic fluctuations is a shift in
aggregate demand
A second possible cause of economic fluctuations is a shift
in aggregate supply.
Stagflation is a period of falling output and rising prices.

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 Chapter 34
The influence of monetary and fiscal policy
In this chapter, you have:
analysed how fiscal policy affects interest
rates and aggregate demand
analysed how monetary policy affects
interest rates and aggregate demand
discussed the debate over whether
policymakers should try to stabilise the
economy
reconsidered how the economy behaves
differently in the short run and the long
run.
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 SUMMARY

Policymakers can influence aggregate

demand with monetary policy and fiscal
policy. For example, to increase aggregate-
demand you can:
decrease the interest rate (monetary policy)
increase government purchases or cut taxes.
The multiplier effect tends to amplify the
effects of fiscal policy on aggregate demand.

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 SUMMARY

The crowding-out effect tends to dampen the

effects of fiscal policy on aggregate demand.
The government sometimes uses these
policy instruments in an attempt to stabilise
the economy.

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 SUMMARY

Economists disagree about how active the

government should be in this effort.
Advocates say that if the government does not
respond, the result will be undesirable fluctuations
in output and employment.
Critics argue that attempts at stabilisation often
turn out to be destabilising.

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 Chapter 31
Open-economy macroeconomics concepts
In this chapter, you have:
learnt how net exports measure the international flow of
goods and services
learnt how net foreign investment measures the
international flow of capital
considered why net exports must always equal net foreign
investment
seen how saving, domestic investment and net foreign
investment are related
learnt the meaning of the nominal exchange rate and the
real exchange rate
examined purchasing-power parity as a theory of how
exchange rates are determined.
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 Summary
Net exports are the value of domestic goods
and services sold abroad minus the value of
foreign goods and services sold domestically.
Net capital outflow is the acquisition of
foreign assets by domestic residents minus
the acquisition of domestic assets by
foreigners.

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 Summary
An economys net capital outflow always
equals its net exports.
An economys saving can be used to either
finance investment at home or to buy assets
abroad.
The nominal exchange rate is the relative price
of the currency of two countries.
The real exchange rate is the relative price of
the goods and services of two countries.
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 Summary
When the nominal exchange rate changes so
that each dollar buys more foreign currency,
the dollar is said to appreciate or strengthen.
When the nominal exchange rate changes so
that each dollar buys less foreign currency, the
dollar is said to depreciate or weaken.

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 Summary
According to the theory of purchasing-power
parity, a unit of currency should buy the same
quantity of goods in all countries.
The nominal exchange rate between the
currencies of two countries should reflect the
countries price levels in those countries.

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