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Spring 2012 ECON 131 (002) Midterm Exam 2 Chapters 5 8 Major Review Topics While this is not necessarily an exhaustive list of material to be covered, majority of the questions on Midterm Exam 2 will be related to the following topics covered in lecture, supplemented by the text and tested on the homework and quizzes. What is GDP? Calculating GDP using the expenditure approach Calculating GDP using the income approach The modified circular flow model (with gov, financial system & rest of world) Equivalence in the aggregate income, expenditure and value of production What is nominal GDP? What is real GDP? Calculating nominal GDP and real GDP, given price & production data Measuring economic growth Gross national product (GNP) The working-age population Who is in the labor force and who is not in the labor force? Who is employed vs. unemployed? Calculating labor force statistics (unemployment rate, LF participation rate) Types of unemployment (definition, characteristics, comparison, causes) o Frictional, seasonal, structural and cyclical Categories of unemployed workers (job losers, job leavers, entrants, new entrants) What are marginally attached and discouraged workers? Part-time workers for economic (non-voluntary) vs. non-economic (voluntary) reasons What is the natural rate of unemployment and how is it measured? What is a price index? What is inflation and how is it measured?

The GDP deflator o Definition, what goods prices are reflected, equation, calculating the deflator & inflation rate The CPI o Definition, what goods prices are reflected, steps to calculate the CPI and the inflation rate The CPI bias: what direction is it? o Substitution, new goods, quality, outlet substitution Implication for payments that are linked to the CPI Drawbacks of using the CPI as a cost of living measure Comparing dollar values (nominal prices) over time Converting prices to the same-year dollar (which may not be baseyear dollar) Calculating real prices (i.e. converting prices to base-year dollars) The Fisher equation Determining winners and losers for loans on fixed terms based on expected inflation Main idea of Classical vs. Keynesian view of economy Potential GDP: what is it, how is it measured and why is it important? Determining potential GDP given the labor market and production function Labor market equilibrium: why is it important and what does it tell us about the economy at that point in time? The production function: what is it, what does it tell us and what properties does it exhibit? What causes the production function to shift/rotate? Diminishing returns to labor: what does this imply and how is it demonstrated? What are the unemployment rate and level of real GDP at full employment? Business cycle relationships o Positive vs. negative output gaps o Relationship between real GDP & potential GDP at each gap o Relationship between the unemployment rate & the natural rate of unemployment at each gap Phases of the business cycle What factors contribute to changes in the natural rate of unemployment over time? What is job search and what factors affect it? What is job rationing and what factors affect it? What is an efficiency wage and why do firms pay it?