CHAPTER

Review Topics for the Midterm

MACROECONOMICS SIXTH EDITION

N. GREGORY MANKIW
PowerPoint® Slides by Ron Cronovich
© 2007 Worth Publishers, all rights reserved
 Important Concepts in Chapter 1

 Real versus nominal economic variables

 Stocks versus flows
 Aspects of economic models
 Exogenous variables
 Endogenous variables
 Equilibrium
 Comparative statics

CHAPTER 1 The Science of Macroeconomics slide 2

 Demand and supply

1   Q   a 
1     P    b 
    
1
 dQ  1    da 
 dP   1     db 
     

CHAPTER 1 The Science of Macroeconomics slide 3

 Important Concepts in Chapter 2

 GDP
 Income approach
 Expenditure approach
 Product approach
 Sum of value-added at each stage
 GDP deflator
 Base-year prices
 Chain-weighted
 Consumer price index
 Base year quantities
 Chain-weighted

CHAPTER 1 The Science of Macroeconomics slide 4

 Steps for computing real GDP and
GDP deflator
 Approach using base-year prices
 Calculate nominal GDP in each year
 Calculate GDP in each year using base-year
prices and current quantities
 Divide nominal GDP by the calculation in step 2
and multiply by 100
 You can do the same approach using chain
weights, but this involves a calculation that is
more subtle for every pair of years

CHAPTER 1 The Science of Macroeconomics slide 5

 Important Concepts in Chapter 3

 The aggregate production function

 Factors of production
 Constant returns to scale
 Marginal value product and factor rewards
 Factor shares in GDP
 The simplest macro model
 Y = F(K, L)
 C = a + b (Y-T)
 I = I(r)
 G and T are exogenous
CHAPTER 1 The Science of Macroeconomics slide 6
 Comparative statics in the
simplest macro model
 For example, K changes by dK
 Then
 dY = (F/ K)dK
 dC = bdY
 dI = dY – dC = (1–b) dY
 dI = (I/ r)dr  dr = (I/ r)-1 (1-b) dY
 This is the initial effect on the real interest rate
 The long-run effect is determined by the
aggregate production function
CHAPTER 1 The Science of Macroeconomics slide 7
 Important Concepts in Chapter 4

 The three definitions of money

 Velocity and the quantity equation
 The Fisher equation
 The demand for real balances
 The classical dichotomy

CHAPTER 1 The Science of Macroeconomics slide 8

 The quantity equation, the Fisher
equation, and the demand for money

 PY = MV
 dP/P = dM/M – DY/Y since dV = 0
 The Fisher equation i = dP/P + r
 L(i,Y) = M/P
 Expected inflation can determine current prices

CHAPTER 1 The Science of Macroeconomics slide 9

 Important Concepts in Chapter 18

 Cagan’s model of expectations

 The money multiplier process
 Open market operations
 Baumol-Tobin model of money demand

CHAPTER 1 The Science of Macroeconomics slide 10

 Cagan’s model and Baumol Tobin
Model
 p(t) = [1/(1+ γ)] [m(t) + γp(t+1)]
 Solve this model using recursive substitution
 p(t) = [1/(1+ γ)] {m(t) + [γ/(1+ γ)]m(t+1) + [γ/(1+ γ)]2m(t+2)+…}

CHAPTER 1 The Science of Macroeconomics slide 11

 Baumol-Tobin continued

 The cost-minimizing value of N :

 To obtain the money demand function,
plug N* into the expression for average
money holdings:

 Money demand depends positively on Y and F,

and negatively on i.
CHAPTER 1 The Science of Macroeconomics slide 12
 Important Concepts in Chapter 5

 Net exports
 Change in net foreign assets
 Small open economy ε
 The real exchange rate
 The convention for the nominal rate is $/THB
 ε = e P/P*
 Purchasing power parity

CHAPTER 1 The Science of Macroeconomics slide 13

 The macro model in the open
economy
 Y = F(K,L)
 C = a + b(Y-T)
 I = I(r*)
 G, T given
 NX = NX(ε)

CHAPTER 1 The Science of Macroeconomics slide 14

 Expansionary domestic Fiscal
policy
 S = Y – C – G  dS = -dG
 dS – dI = dS – 0 = dNX
 dNX = -dG ε
 dNX= (NX/ε)dε  dε = -(NX/ε)-1 dG

CHAPTER 1 The Science of Macroeconomics slide 15

 Important Concepts in Chapter 6

 Labor force participation

 Unemployment rate
 Natural rate of unemployment
ε
 Frictional unemployment
 Structural unemployment

CHAPTER 1 The Science of Macroeconomics slide 16

 Flow model of unemployment

 sE = fU
 s(L-U) = fU
 U/L = s/(s+f)

CHAPTER 1 The Science of Macroeconomics slide 17