Not really in the form of a top 10 list this time, but here are some thoughts on the things you should definitely know for the third exam.
- Employment and unemployment
- Know the types of unemployment (frictional, structural, cyclical).
- Know how to calculate labor market statistics (in class exercise).
- Understand the differences between US and European labor markets that cause differences in unemployment rates.
- Inflation
- Basic definition (page 218): Inflation is the percentage increase in the price level (deflation is a decrease). Though individual prices may be rising and falling, inflation refers to the average.
- Difference between price indexes (CPI, PPI, GDP deflator)
- Hyperinflation: Extremely high inflation. No precise definition but you know it when you see it.
- Notable hyperinflations: Germany 1919-1923 (assisted Hitler's rise to power), Hungary 1945-1946 (highest monthly inflation on record), Zimbabwe 2001-2008 (most recent example and almost broke Hungary's record)
- Quantity theory: MV=PY (know what it each variable represents)
- Quantity theory is also written %change in M + %change in V = %change in P + %change in Y
- "Inflation is always and everywhere a monetary phenomenon" and "In the long run, money is neutral": Know what is meant by these statements.
- What is the relationship between inflation and real and nominal interest rates?
- What are the costs of inflation? Why is it hard to stop?
- Business cycle model and transmission mechanisms
- Understand the graph of the model (see pages 255-258 for examples)
- Solow growth curve is like a supply curve, it describes productive capacity.
- Aggregate demand curve is determined by spending and the money supply.
- Know the difference between Real Business Cycle theory and New Keynesian Theory
- Real business cycle theory does not have the short run aggregate supply curve; New Keynesian theory does.
- New Keynesian theory relies on sticky wages or sticky prices to generate a short run aggregate supply curve that is upward sloping.
- Review pages 255-258 closely to see how output and inflation respond to different shocks (i.e. changes in AD or shifts in the Solow growth curve).
- Intertemporal substitution, irreversible investment, and time bunching are examples of transmission mechanisms that can affect the business cycle.
