ECON 232/300 Review Topics
Chapter 14 Money and Banking
1. List and explain the three functions of money.
2. Define the monetary base MB.
3. Define the money supply: M1, M2, M3, and MZM.
4. State three reasons why currency and checkable deposits are money and why they have value.
5. Explain the relationship between the purchasing power of money and the amount of money in circulation.
6. Describe the structure of the U.S. banking system.
7. Explain why Federal Reserve Banks are central, quasi‑public, and bankers’ banks.
8. Describe seven functions of the Federal Reserve System and point out which role is the most important.
9. Summarize and evaluate the arguments for and against the Federal Reserve System remaining an independent institution.
10. Describe the conditions that have caused the loss of market share of banks and thrifts to pension funds, insurance companies, mutual funds, and securities-related firms.
11. Identify three major changes continuing to occur in the financial services industry.
12. Describe and explain the significance of electronic payments.
13. Define and identify terms and concepts listed at the end of the chapter.
Chapter 15 Money Creation
1. Recount the story of how fractional reserves began with goldsmiths.
2. Explain the effects of a currency deposit in a checking account on the composition and size of the money supply.
3. Explain the effects of a bank loan on the composition and size of the money supply.
4. Understand and interpret the regression theorem explaining how fiat money evolved from commodity monies.
5. Explain how the emergence of money in a barter economy is an example of spontaneous order.
6. Compute a bank’s required and excess reserves when you are given its balance‑sheet figures.
7. Explain why a commercial bank is required to maintain a reserve and why it isn’t sufficient to cover deposits.
8. Describe what happens to the money supply when a commercial bank makes a loan or buys securities.
9. Describe what happens to the money supply when a loan is repaid or a bank sells its securities.
10. Explain what happens to a commercial bank’s reserves and checkable deposits after it has made a loan.
11. Describe how a check drawn on one commercial bank and deposited in another will affect the reserves and excess reserves in each bank after the check clears.
12. Describe what would happen to a single bank’s reserves if it made loans that exceeded its excess reserves.
13. Explain how it is possible for the banking system to create an amount of money that is a multiple of its excess reserves when no single bank ever creates money greater than its excess reserves.
14. Compute the size of the money multiplier and the money‑creating potential of the banking system when provided with appropriate data.
15. Explain that the money multiplier process can also lead to multiple destruction of money.
16. Distinguish among and interpret the simple money multiplier (deposit expansion multiplier) and the M1, M2, M3, and MZM multipliers.
17. Define and identify the terms and concepts at the end of the chapter
(Test 1: 30 multiple choice + 2 extra credit)
Chapter 16 Interest Rates & Monetary Policy
1. Identify the goals of monetary policy.
2. Identify the two types of demand for money and the main determinant of each.
3. Describe the relationship between GDP and the interest rate and each type of money demand.
4. Explain what is meant by equilibrium in the money market and the equilibrium rate of interest.
5. Explain the relationship between bond prices and the money market
6. List the principal assets and liabilities of the Federal Reserve Banks.
7. Explain how each of the three tools of monetary policy may be used by the Fed to expand and to contract the money supply.
8. Explain the relative importance of the monetary policy tools, and why the U.S. is unique in how it can conduct monetary policy.
9. Describe how the Fed targets the Federal funds rate as part of its monetary policy actions.
10. Describe expansionary and restrictive monetary policies, and explain why and how they are used.
11. Explain the Taylor rule and describe how it relates to current Fed policy.
12. Explain the cause‑effect chain between monetary policy and changes in equilibrium GDP.
13. Demonstrate graphically the money market and how a change in the money supply will affect the interest rate.
14. Show the effects of interest rate changes on investment spending.
15. Describe the impact of changes in investment on aggregate demand and equilibrium GDP.
16. Contrast the effects of an expansionary monetary policy with the effects of a restrictive monetary policy.
17. List two strengths and three shortcomings of monetary policy.
18. Describe the arguments for and against “inflation targeting” versus a more discretionary “artful management” approach to monetary policy.
19. Summarize the connections between AD-AS, the price level, real output, and stabilization (fiscal and monetary) policy.
20. Define and identify terms and concepts at the end of the chapter.
Chapter 7 National Income Accounting
1. State the purposes of national income accounting.
2. List the components of GDP in the output (expenditures) approach and in the income approach.
3. Compute GDP using either the expenditure or income approach when given national income data.
4. Differentiate between gross and net investment.
5. Explain why changes in inventories are investments.
6. Discuss the relationship between net investment and economic growth.
7. Compute NDP, NI, PI, and DI when given relevant data.
8. Describe the system represented by the circular flow in this chapter when given a copy of the diagram.
9. Calculate a GDP price index using simple hypothetical data.
10. Find real GDP by adjusting nominal GDP with use of a price index.
11. List seven shortcomings of GDP as an index of social welfare.
12. Explain what is meant by the underground economy and state its approximate size in the U.S. and how that compares to other nations.
13. Define and identify terms and concepts listed at the end of the chapter.
(Test 2: 30 multiple choice + 2 extra credit)
Chapter 8 Introduction to Economic Growth and Instability
1. Define two measures of economic growth.
2. Explain why growth is a desirable goal.
3. Identify two main sources of growth.
4. Explain and apply the “rule of 70.”
5. Give average long-term growth rates for U.S. and qualifications of raw data.
6. Explain what is meant by a business cycle.
7. Describe the four phases of an idealized business cycle.
8. Identify two types of non-cyclical fluctuations in business activity.
9. Describe how innovation and/or random events might cause business cycles.
10. Explain why business cycles affect capital and consumer durable goods industries more than non-durable goods and service industries.
11. Describe how the Bureau of Labor Statistics (BLS) measures unemployment.
12. Evaluate strengths and limitations of BLS unemployment statistics.
13. State causes of frictional, cyclical, and structural unemployment.
14. Identify the full employment or natural rate of unemployment.
15. Identify the economic costs of unemployment and the groups that bear unusually heavy unemployment burdens.
16. Define inflation and list two types of inflation.
17. List three groups who are hurt and two groups who may benefit from unanticipated inflation.
18. Present three possible effects of inflation on output and employment.
19. Compare U.S. inflation and unemployment rates to one or more industrialized nations.
20. Define and identify terms and concepts at the end of the chapter.
Chapter 10 Basic Macroeconomic Relationships
1. Describe the income-consumption and income-saving relationships.
2. Recognize, construct, and explain the consumption and saving schedules.
3. Identify the determinants of the location of the consumption and saving schedules.
4. Calculate and differentiate between the average and marginal propensities to consume (and save).
5. Draw and interpret the geometric representation of a consumption function and the corresponding saving function.
6. Explain and interpret the relationships between the algebraic representation of a consumption function and the corresponding saving function.
7. Given the algebraic representation of a consumption or saving function, write the algebraic representation of the other.
8. Given the consumption or saving schedule in tabular form, graph the consumption and saving function (the geometric representation) and write the algebraic representations.
9. Describe the relationship between the interest rate, expected rate of return, and investment.
10. Identify the determinants of investment and construct an investment demand curve.
11. Draw and interpret an investment demand curve.
12. Identify the factors that may cause a shift in the investment demand curve.
13. Describe the reasons for the instability in investment spending.
14. Provide an intuitive explanation of the multiplier effect.
15. Calculate the multiplier and changes in real GDP given information about changes in spending and the marginal propensities.
16. Given any one of the following: the MPC, the MPS, and the multipler, calculate and interpret the remaining two.
17. Given any two of the following: the multiplier, the change in aggregate expenditures, and the change in equilibrium GDP, calculate and interpret the remaining one.
18. Discuss why the actual multiplier may differ from the theoretical examples.
19. Define and identify terms and concepts at the end of the chapter.
(Test 3: 30 multiple choice + 2 extra credit)
Chapter 11 The Aggregate Expenditures Model
1. Identify the simplifying assumptions of the Aggregate Expenditures (AE) model.
2. Explain the relationship between the investment demand curve and the investment schedule.
3. Use the consumption and investment schedules to determine the equilibrium level of GDP.
4. Explain verbally and graphically the equilibrium level of GDP.
5. Explain why above-equilibrium or below-equilibrium GDP levels will not persist.
6. Explain the basics of the classical view that the economy would generally provide full employment levels of output.
7. Trace the changes in GDP that will occur when there is a discrepancy between saving and planned investment.
8. Use the multiplier to find changes in GDP resulting from changes in spending.
9. Define the net export schedule.
10. Explain the impact of positive (or negative) net exports on aggregate expenditures and the equilibrium level of real GDP.
11. Explain the effect of increases (or decreases) in exports on real GDP.
12. Explain the effect of increases (or decreases) in imports on real GDP.
13. Describe how government purchases affect equilibrium GDP.
14. Describe how personal taxes affect equilibrium GDP.
15. Explain why an equal amount of government purchases and taxes will have a differential impact on GDP.
16. Identify a recessionary expenditure gap and explain how it relates to the U.S. recession of 2001, and perhaps also to the recession of 2008.
17. Explain how the U.S. managed full-employment output in 2005 while experiencing large negative net exports.
18. Identify an inflationary gap and explain how it relates to the inflationary experience of the late 1970s.
19. List five limitations of the aggregate expenditures model.
20. Explain how the aggregate expenditures model emerged as a critique of classical economics and in response to the Great Depression.
21. Define and identify terms and concepts listed at the end of the chapter.
Chapter 12 Aggregate Demand and Aggregate Supply
1. Define aggregate demand and aggregate supply.
2. Give three reasons why the aggregate demand curve slopes downward.
3. Explain how the international trade effect and interest rate effect can be considered substitution effects, even though there is no substitute for GDP.
4. State the determinants of the aggregate demand curve’s location, and explain how the curve will shift when one of these determinants changes.
5. Distinguish between an initial shift in aggregate demand and the full shift after multiplier effects have been incorporated.
6. Explain the shape of the long-run aggregate supply curve.
7. Explain the shape of the short-run aggregate supply curve.
8. Indicate the determinants of the aggregate supply curve’s location, and explain how the curve will shift when one of those determinants changes.
9. Find an economy’s equilibrium price level and real domestic output using AD-AS.
10. Explain how the multiplier effect is weakened when there is demand-pull inflation.
11. Demonstrate and explain how a decrease in aggregate demand can cause a recession without a drop in the price level.
12. Demonstrate and explain the effects of shifts in aggregates supply on the equilibrium price level and real domestic output of an economy.
13. Explain how an economy can maintain full employment and stable prices under conditions of rising aggregate demand.
14. Explain how the impact of oil price fluctuations has changed for the U.S. economy over the past two decades.
15. Define and identify terms and concepts at the end of the chapter and in the appendix.
(Test 4: 30 multiple choice + 2 extra credit)
Chapter 13 Fiscal Policy, Deficits, and Debt
1. Define and explain the role of the CEA.
2. Distinguish between discretionary and nondiscretionary fiscal policy.
3. Differentiate between expansionary and contractionary fiscal policy.
4. Recognize the conditions for recommending an expansionary or contractionary fiscal policy.
5. Explain expansionary fiscal policy and its effects on the economy and Federal budget.
6. Explain contractionary fiscal policy and its effects on the economy and Federal budget.
7. Give two examples of how built‑in stabilizers help eliminate (or just minimize) recession or inflation.
8. Explain the differential impacts of progressive, proportional, and regressive taxes in terms of stabilization policy.
9. Explain the significance of the “standardized budget” concept.
10. Describe recent U.S. fiscal policy actions and the motivation behind them.
11. List three timing problems encountered with fiscal policy.
12. State political problems that limit effective fiscal policy.
13. Identify actions by households, and by state and local governments that can frustrate fiscal policy.
14. Differentiate between government deficits and the public debt.
15. State the relative size of the debt as a percentage of U.S. GDP and describe how that has changed in recent years.
16. Describe the annual interest charges on the debt, who holds the debt, and the impact of inflation on the debt.
17. Explain why the debt can also be considered public credit.
18. Identify and discuss two widely held myths about the public debt.
19. Explain the real or potential effect of the debt on income distribution, economic incentives, fiscal policy, and private investment
20. Explain and recognize graphically how crowding out is a concern caused by a large public debt.
21. Explain the purpose and structure of the Leading Economic Indicators.
22. Define and identify terms and concepts at the end of the chapter.
(Test 5: 30 multiple choice + 5 extra credit & Final Exam 60 multiple choice + 10 extra credit)