Exam 2 Study Guide

Please note that this study guide intends to guide you study, however the questions in the exam WILL NOT be exclusive of what this study guide contains. Chapter 7 Economic Growth 1) What do we use as a measure of living standards within a country? 2) Define the term compound interest and know the subsequent calculation, i.e. if $10 is deposited in a bank in 1800 at 4% interest per year, what will the value of this account be by the year 2005? 3) What is the connection between the notion of compound interest and economic growth? (or how does this relate to real GDP growth over time? 4) Know the formula for real GDP growth and know how to apply it. For example if average labor productivity is $20,000 per worker and 50% of the population is employed, what is real GDP per person? 5) What is the primary driver of economic growth (real GDP per person in this case)? 6) What are the factors that impact average labor productivity? Also be able to explain how they can impact average labor productivity. 7) Define the term diminishing returns to capital. 8) What is a production function? 9) What are the drawbacks or the costs of economic growth? Chapter 8 Savings, Investment, and Capital Formation 1) Define savings and the savings rate. 2) Define life-cycle savings, precautionary savings, and bequest savings. 3) What has happened to private savings in the last decade? 4) Define consumption, investment, and government spending. 5) Define the federal government surplus. 6) Define the federal government deficit. 7) Define the real rate of interest. 8) What is the relationship between savings and the real rate of interest? 9) What impact does an increase in the federal government budget deficit have on the savings function?

Exam 2 Study Guide

10) What is the relationship between the real rate of interest and investment? 11) What impact will a change in the real rate of interest have on the investment function? 12) What are the factors that shift the investment function? Explain the impact of a change in each of these factors on the investment function. 13) What are the factors that shift the savings function? Explain the impact of a change in each of these factors on the savings function. 14) In equilibrium, what is the relationship between investment and savings? 15) What is the impact of an increase in the federal governments budget deficit on the real rate of interest and the level of private investment? 16) What is the impact of an increase in technology on the real rate of interest and the level of private investment? 17) What is the impact of an increase in the price of capital goods on the real rate of interest and the level of private investment? 18) What is the impact of an increase in the taxation of capital goods on the real rate of interest and the level of private investment? Chapter 9 Introduction to Money and Monetary Economies 1) In general, what is money? 2) What are the three functions of money? 3) Which goods function as money in a barter economy? 4) What is a monetary economy? 5) What are the exchange costs associated with barter? 6) Explain the "double coincidence of wants." Why must the double coincidence of wants take place in a barter economy? 7) Define M1 and its components. 8) What is necessary for a given asset to be included in M2? 9) Define M2 and its components. 10) What is a bond? Know how to find its current market value 11) What is a stock? Know how to find its current market value 12) What is the relationship between the price of a bond and the current interest rate?

Exam 2 Study Guide

13) What is risk premium? 14) Explain the process of money creation 15) Who control the money supply? 16) How is the money supply calculated? 17) What is deposit- reserve ratio, total reserves, required reserve ratio 18) What is a money market operation?. Define a open market purchase and a open market sale 19) How does the Fed control the money supply 20) What is a fractional reserve banking system?