Objectives

A LIST OF OBJECTIVES

You have not successfully completed a section of the text until you have mastered the objectives listed for that section.

So how do I go about mastering the basics in a manner that I can demonstrate on an exam?

The simple answer is practice, practice, practice … but that practice must be done effectively.

So how do I practice effectively?

As if you are preparing for a piano recital.

It begins by ensuring that you are hitting all the right notes, or in this case by ensuring that you understand the correct response to the objectives. (e.g., Before you practice the objective “Define opportunity cost”, you must be sure that your definition of opportunity cost is correct.).

Once you’re sure you know the correct “performance”, practice it as you will perform it – which in the case of this course is on paper with no books or notes. In other words, practice each objective by reading the objective and then writing out your response on a piece of paper without any assistance from books or notes or others. Once you’ve done this for a set of objectives, go back and identify those you did correctly and those you didn’t. Review the latter. Get help if you need it!

Repeat the process later. Continue this process until you can successfully do all of the objectives in the performance (exam) format. Then when you walk into the exam, you’ll know that you have mastered the material. The exam is your performance … like a piano recital: You’ve practiced it many times and it feels good to show your audience how well you’ve mastered the material.

1.0 INTRODUCTION

1.1 GENERAL INTRODUCTION TO OUR STORY

  1. Explain how an econosystem resembles an ecosystem.
  2. Expand on the following assertion: Economics is one tool in a social science tool kit. Identify the other tools and describe how one hones one’s skills with these tools.
  3. Comment on the following statement: Economics is Truth.

1.2 THE SUBJECT OF ECONOMICS

  1. Identify the fact of the human condition from which the study of economic life begins. Explain.
  2. Define opportunity cost. Give an example.
  3. Identify the one resource that is inevitably scarce for all individuals. Illustrate how its scarcity confronts each individual with a quandary of choice by giving an example.
  4. Critique the following assertion: Money is the great escape from scarcity.
  5. Contrast the challenge of choice faced by individuals and that faced by society as a whole.
  6. Explain the relationship between scarcity and opportunity cost.

 1.3 A PREVIEW OF THE STORY

  1. Describe the subject of microeconomics. Identify root word on which the term microeconomics is built.
  2. Describe the subject of macroeconomics. Identify root word on which the term macroeconomics is built.
  3. Contrast the subject of microeconomics and macroeconomics.
  4. Identify what markets do well under the right conditions.

 1.4 OUR METHOD FOR TELLING THIS STORY

  1. Define vision – according to Schumpeter.
  2. Identify the steps in the process of model building. Describe and explain the importance of each.
  3. Identify two sources of problems in a model. Explain each case.
  4. Identify the point at which ideology enters the scientific process. Explain the effect of ideology on model building. Respond to the following statement: Ideologically biased theories are useless, so we must only put our trust in theories that are not ideologically tainted.
  5. Explain why theories with malleable definitions or assumptions are difficult to refute. Explain why such malleability is a theoretical flaw.
  6. Define assumption. Explain why scientists adopt assumptions. Review the benefits and costs of this technique.
  7. Explain the distinction between strong and weak assumptions. Describe the relationship among strong assumptions, weak assumptions, and relaxed assumptions. Give an example of relaxing an assumption.
  8. Explain the value of starting analysis with strong assumptions and then relaxing them.
  9. Identify what the ceteris paribus assumption holds constant. Demonstrate how the ceteris paribus assumption is used with an example.
  10. Explain why maintained assumptions are so significant in a model.

2.0 MODELING INDIVIDUAL CHOICE

 2.1 MODELING INDIVIDUAL CHOICE-INTRODUCTION

  1. Identify the motive that we assume drives the choices of all individuals all the time.
  2. Define utility, rational economic behavior, consume, and goods and services. Specify the arrangement of these terms as they are used in the model.
  3. Define preference ordering. Specify the assumption our model makes about an individual’s preference ordering.

2.2 DIMINISHING MARGINAL UTILITY

  1. Define margin. Give an example of a margin.
  2. Define marginal utility. State the assumption of diminishing marginal utility. Explain this assumption using an example.
  3. Explain why we assume perfect divisibility of units.
  4. Explain why our theory is often referred to as marginal analysis.
  5. Given a schedule showing units of a good or service consumed and the marginal utility derived from each successive unit, calculate the total utility achieved with each successive unit. Given a schedule showing units of a good or service consumed and the total utility achieved with each successive unit, calculate the marginal utility derived from each unit.
  6. Given a graph representing the marginal utility derived from consuming a good or service, interpret the pattern represented in that graph. Compare and contrast the patterns in several such graphs that have the same axes.

2.3 CONSTRUCTING A DECISION RULE

  1. If there is no scarcity and there are “n” different things to consume where “n” is some large number, identify the decision rule an individual will follow in consuming all “n” things. Explain the rule.
  2. Define satiate.
  3. Describe a bliss point.
  4. Explain the purpose of starting out with such an unrealistic decision rule. Describe how the process will unfold from that point.

2.4 RELAXING OUR “NO SCARCITY” ASSUMPTION

  1. Define optimize. Explain the concept: optimal allocation.
  2. Describe how the utility maximizing decision rule changes as we relax the no scarcity assumption. Explain why this new rule is, given our assumptions, the only way one can maximize utility.
  3. Explain the concept of a constrained optimization problem.

2.5 RELAXING OUR “NO PRODUCTION NECESSARY” ASSUMPTION

  1. Describe society’s endowment. Explain the relationship between society’s endowment and scarcity.
  2. Illustrate the following assertion: a society’s endowment is finite, but it is not fixed.
  3. Define marginal product. State the assumption of diminishing marginal product. Explain this assumption using an example.
  4. Define value from the marginal product – V. Describe the information that is combined in the concept.

2.6 RELAXING OUR “NO FUTURE” ASSUMPTION

  1. Describe intertemporal choice. Give an example.
  2. Describe the challenge of intertemporal choice.
  3. Explain the concept of discounting the future. Give an example. Identify economists’ assumption about our attitude toward satisfaction that will be realized in the future.
  4. Define discount rate. Describe what the discount rate measures. Comment on the following assertion: The “right” discount rate is 10%.
  5. If I promised (and assume I’m trustworthy) two people the same deal, either $100 at 5pm tomorrow or $100 exactly one year from 5pm tomorrow, and only one of them accepted, ceteris paribus, identify the person with the higher discount rate.
  6. If I went to two people and asked to borrow $100 to be paid back a year from now (assume they both know I’m totally trustworthy) and one asked for more interest on that loan, ceteris paribus, identify the person with the higher discount rate.
  7. Describe how a changing discount rate can affect one’s choices. Give an example.
  8. Describe how socialization can affect an individual’s discount rate.
  9. Define present value. Explain how we use this concept in our choice process.
  10. Define saving and investing. Identify, ceteris paribus, who you would expect to do more saving and investing: Someone with a high discount rate or someone with a low discount rate.
  11. Explain the concept of time horizon and describe its relationship to sustainability.

2.7 RELAXING OUR “NO RISK AND UNCERTAINTY” ASSUMPTION

  1. Define risk. Explain the impact of risk on decision (choice) making.
  2. Describe the process of assigning a probability to a risk. Comment on the following statement: Risk assessment is the same for everyone.
  3. Explain the concept of expected present value.
  4. Define uncertainty. Distinguish between risk and uncertainty. Explain the impact of uncertainty on your decision (choice) making.
  5. Explain why the word “perceived” is so important in the discussion of risk.
  6. Identify the sources of our perceptions. Give examples.
  7. Illustrate the way different perceptions lead to different choices among individuals with an example.
  8. Using our model, explain the process of choice between two options like going to college and getting a job. Describe how our model explains the demographics of undergraduate students.
  9. Using our model, explain how mind-altering drugs can affect one’s choices.
  10. Describe how perception management can be used as a tool of government policy. Give examples.
  11. Describe how perception management can be used as a tool of private enterprise policy. Give examples.
  12. Explain how our model applies to advertising.
  13. Illustrate with an example how socially developed perceptions of gender roles affect behavior according to our model.
  14. Give and explain an example of how our model applies to a public or private use of media.
  15. Explain why policy is complicated. Demonstrate, with an example, how complicated policy based on our model can be.
  16. Comment on the following assertion: Since our model doesn’t give answers, it’s really not very useful.

2.8 CONCLUDING OUR ANALYSIS OF INDEPENDENT INDIVIDUAL CHOICE

  1. Explain the statement: When an isolated individual decides to produce, it is automatically a decision to consume, and when he decides to invest, it is automatically a decision to save.
  2. Identify where an isolated individual’s choice coordination system is located. Describe the quality of that coordination system. Critique the following statement: Because he does not have to coordinate his choices with anyone else, an isolated individual’s decisions always work out perfectly.
  3. Identify the issue that really distinguishes the simple, isolated world of an isolated individual from the complex world of interdependence in which we actually live. Explain the distinction.

3.0 INTERDEPENDENT CHOICE AND MARKET COORDINATION

3.1 FACTORS THAT GIVE RISE TO COMPLEXITY, INCLUDING THE DIVISION OF LABOR AND THE GAINS FROM TRADE

  1. Identify and explain several reasons why we give up the security of total independence for the vulnerability of interdependence.
  2. Explain the connection between social complexity and social productivity.
  3. Explain the concept: division of labor.
  4. Identify and explain the three reasons Adam Smith cites for the increased productivity from the division of labor.
  5. Identify a potential problem that the division of labor can generate. Explain with an example.
  6. As Adam Smith does, choose an article of clothes you are wearing and make a list of all of the hands that went into producing that article. Be thorough, be imaginative, and be logical in your ordering
  7. Define surplus. Explain why the division of labor gives rise to individuals holding surpluses.
  8. Explain why the division of labor gives rise to exchange.
  9. Identify the role of a coordination mechanism in a complex society in which there is a division of labor.
  10. Define: gains from trade.
  11. Demonstrate the benefits of division of labor and exchange with an example of the gains from trade when labor is divided.
  12. Explain the concept: absolute advantage.
  13. Explain the concept: comparative advantage.
  14. Identify the condition that limits the division of labor. Explain with an example.
  15. Describe how the development of “highways” of trade contributes to a society’s productive capacity.
  16. Describe the coordination system in a traditional society. Identify the strengths and weaknesses of such a system.
  17. Describe the coordination system in a command economy. Identify the strengths and weaknesses of such a system.
  18. Identify the role of markets in a “liberal” society.
  19. Explain the concept of commutative justice, and describe the relationship between commutative justice and sustainability in a liberal, free market society.
  20. Identify the features of a liberal society under ideal conditions that make it such an attractive system.
  21. Describe the morality of markets with respect to distributive justice.
  22. Describe the relationship between a free market system and justice. Explain.
  23. Explain the concept: distributive justice. Describe John Stuart Mill’s conception of what this concept means in a liberal society.
  24. Explain the concept: commutative justice.

3.2 THE ROLE OF MONEY IN MARKETS

  1. Describe the role of financial capital in a market system.
  2. Define barter. Explain the problem with a barter system by using examples.
  3. Define general equivalent. Explain why barter gives way to the use of a general equivalent as trade expands and becomes more complex. Identify the good that has been accepted most widely and for the longest time as a general equivalent.
  4. Identify three roles of money. Explain each.
  5. Identify four characteristics of a general equivalent that would make it a good candidate for money. Explain each.
  6. Define commodity money and fiat money. Contrast these two kinds of money. Give examples of each.

3.3 HOW A MARKET WORKS

  1. Name the famous book that Adam Smith wrote about economics, and give the year it was first published.
  2. Draw a fully labeled generic market picture.
  3. Identify what the supply line in a market picture represents.
  4. Identify what the demand line in a market picture represents.
  5. Describe what functional form represents. Give an example.
  6. Explain what demand, D, represents. Distinguish between demand and quantity demanded. Critique the following statement: Along a given demand line, demand changes.
  7. Given an initial condition of demand on a market picture, show by drawing a new demand line what would happen to the demand line if demanders’ attitudes changed and they desired more of this item.
  8. Identify what the vertical line within a functional form stands for.
  9. Explain what supply, S, represents. Distinguish between supply and quantity supplied. Critique the following statement: Along a given supply line, supply changes.
  10. Given an initial condition of supply on a market picture, show by drawing a new supply line what would happen to the supply line if suppliers’ attitudes changed.
  11. Draw a market picture that represents an excess supply condition. Show graphically and explain how, under perfectly competitive conditions, the market price will respond to this excess supply condition.
  12. Draw a market picture that represents an excess demand condition. Show graphically and explain how, under perfectly competitive conditions, the market price will respond to this excess demand condition.
  13. Identify the term used to describe the market condition when there is either an excess supply or an excess demand in the market.
  14. Explain why a disequilibrium is not a stable condition in a perfectly competitive market.
  15. Given a scenario about a shift in supply or demand, show graphically and explain how the market will adjust after this shift.
  16. Identify the signal on which the entire market system depends.
  17. Explain the following statement: The market system is a price signaling based system.
  18. Describe an administered price system. Give an example. Explain the problem with such a system.
  19. Illustrate the concept of rationing by time. Contrast this process with how a market rations items.

3.4 THE GENERAL MARKET SYSTEM

  1. Contrast the vulnerabilities of Robinson Crusoe with those of someone living in a market system.
  2. Identify the two primary sets of players in our basic model of a complex society. Specify the role of each. Specify the objective of each. Using a circular flow diagram describe and explain the interaction between the two sets of players (show where they interact, what each brings to the interaction, etc.).
  3. Describe the role of firms in the market system.
  4. Identify the two basic kinds of markets. Distinguish these two kinds of markets by describing and contrasting how the market players participate in each.
  5. Describe the circular flow of real things.
  6. Describe the circular flow of money.
  7. Explain the relationship between the circular flow of real things and the circular flow of money.
  8. Explain the relationship between General Equilibria and a General Competitive Equilibrium.
  9. Describe the relationship between our nice assumptions and General Competitive Equilibrium.
  10. Explain why we call the nice assumptions “nice.”
  11. Identify our two nice assumptions. Explain each, specifying the elements of each.
  12. Clarify what equal access to information does and does not mean.
  13. Demonstrate that information is not costless, by citing and explaining an example.
  14. Identify and explain a violation of the equal access to information assumption.
  15. Identify and explain a violation of the equal access to the market assumption.
  16. Describe how market power affects the character of the competition. Illustrate with an example.
  17. Illustrate market failure with an example.
  18. Identify the efficiency and equity consequences of market power and market failure.
  19. Explain the concept: Pareto optimality. Identify the person it is named after. Specify the standard for Pareto optimality and explain that standard.

4.0 THE PRODUCT MARKET DEMAND UNDER PERFECT COMPETITION

 4.1 INTRODUCTION

No objectives for this section

 4.2 PRODUCT DEMAND

  1. Using a simple version of our decision rule as a point of departure, demonstrate why a product demand line slopes down.
  2. Identify what own price elasticity of demand measures.
  3. Define: elastic demand. Define: inelastic demand.
  4. Contrast elastic and inelastic demand.
  5. Give examples of elastic and inelastic demand. Explain.
  6. Given two product demand graphs drawn on identical axes, identify which is the more elastic demand.
  7. Explain why own price elasticity is such a big deal in the world of policy.
  8. Identify and explain a private policy case representing how a firm (other than the McDonalds case cited) might use own price elasticity information.
  9. Identify and explain a public policy case (other than the cases cited) representing how a government agency might use own price elasticity information.
  10. Show graphically and describe the case of perfectly elastic demand.
  11. Show graphically and describe the case of perfectly inelastic demand.
  12. Identify which case, perfectly elastic or perfectly inelastic demand, you would wish for if you were going to sell a product – assume ceteris paribus. Explain.
  13. Ceteris paribus, identify which kind of good would exhibit a more inelastic: a necessity or a luxury. Explain. Give and explain an example.
  14. Interpret the expression “price is no object” in economic terms.
  15. Explain how the number and quality of substitutes affects own price elasticity. Give and explain an example.
  16. Explain how the time frame affects own price elasticity. Give and explain an example.
  17. Explain how the price of the good relative to a person’s wealth and income affects own price elasticity. Given and explain an example.
  18. Identify four factors that determine the own price elasticity of a good or service. Explain each.
  19. Write out and explain the equation economists use to represent the measure of own price elasticity.
  20. Explain why an absolute value sign is used in the own price elasticity equation.
  21. Explain why the equation uses percentage change rather than absolute change. Give an example.
  22. Given one of these cases, e >1 or e <1 or e =1, identify and explain the case.
  23. Describe the relationship between own price elasticity and total revenue as price changes.
  24. Critique the following logic: If you charge more you make more revenue.
  25. Describe the relationship between own price elasticity of demand and advertising.
  26. Identify the own price elasticity of demand that suppliers in a perfectly competitive market face.
  27. The supply of drugs in the city has been reduced significantly by a government crackdown, but drug-related crime is up. Explain how that is possible. Does this mean that interdicting drugs is a bad idea? Explain.
  28. Critique the following assertion: Interdicting supply is the solution to the nation’s drug problem.
  29. Identify and explain a case in which simple minded thinking that does not consider own price elasticity Issues can lead to an unintended result.
  30. Respond to the following statement: This is one hell of a model. It’s loaded with great answers to policy puzzles.
  31. Explain the concepts: tax incidence/tax burden.
  32. Describe with an example how the own price elasticity of demand can affect the impact of a tax with respect to:
  • a.        Revenue generation.
  • b.       Changing market behavior

4.3 EXPANDING THE DEMAND RELATIONSHIP – IDENTIFYING THE SHIFT VARIABLES

  1. Write out the full product demand relationship in functional form including the shift variables.
  2. Identify the shift variables in the product demand relationship.
  3. Give an example of tastes as a shift variable. Demonstrate graphically how the market will respond in your example.
  4. Define: cross price elasticity of demand.
  5. Give the equation that measures the cross price elasticity of demand.
  6. Define: complements.
  7. Describe the relationship between two goods that have a negative cross price elasticity, Give an example.
  8. Define: substitutes.
  9. Describe the relationship between two goods that have a positive cross price elasticity. Give an example.
  10. Describe the connection between cross price elasticity and the concept of a market system as a web of connections.
  11. Develop a case (different from the one covered) that demonstrates the importance of cross price elasticity to private policy making. Include internal and external cross price effects.
  12. Develop a case (different from the one covered) that demonstrates the importance of cross price elasticity to public policy making. Your case should be designed to highlight the complexity of policy.
  13. With cross price elasticity as a reference point, comment on the assertion that when it comes to policy, be it public or private, anyone who says it’s simple is either simple minded or thinks you are.
  14. Draw and label market graphs for three related goods. Specify the relationships. Show how a change in supply conditions for one of the goods will affect the equilibrium price and quantity exchanged in all three markets. Note: assume that the second and third goods are independent of one another, i.e., set e2×3 = 0. Explain why this assumption simplifies the analysis.
  15. Define: normal good.
  16. Define: inferior good.
  17. Give the equation for income elasticity.
  18. Identify the sign of the income elasticity equation when a good is normal, when a good is inferior.
  19. Give and explain a personal example of a normal good.
  20. Give and explain a personal example of an inferior good.
  21. Describe the relationship between individuals’ demands for a given good or service and the market demand for that good or service.
  22. Given several individual demand lines, construct the market demand line.
  23. Comment on the following statement: Market demand movements depend on the net effect of all the individual changes. Identify the sources of such changes. Note whether these are the only determinants of the market level of demand. If not, identify another source of market demand shifts.
  24. Describe and show graphically cases of entry and exit on the demand side of the product market.
  25. Describe how shifting demographics can cause entry and exit and strongly affect product market demand.
  26. Give examples of how public or private policy is affected by demographic changes.

5.0 PRODUCT MARKET SUPPLY

 5.1 PRODUCT SUPPLY

  1. Describe the relationship between Marshall’s analysis, and those of Ricardo and of Jevons/Menger/Walras.
  2. Explain the point Marshall is making when he writes: “We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility [(demand)] or cost of production [(supply)].”
  3. Draw a generic marginal product curve.
  4. Assuming a constant input cost, explain how the marginal cost curve is derived from the marginal product curve.
  5. Identify the level of productivity an input has achieved when the marginal cost of the product it is making is at its lowest level.
  6. Identify the level of cost a production process has achieved when the marginal productivity of the variable input is at its highest level.
  7. Demonstrate that the upward sloping section of the firm’s marginal cost curve is its supply line.
  8. Describe the costs that go into the cost structure represented by the marginal cost line.
  9. Define: normal return. Describe and explain with an example.
  10. Describe the condition of a firm that is just covering the costs embodied in the marginal cost curve.
  11. Identify the variables that go into a firms cost structure. Explain the relationship between these variables and the shift variables of the firm’s supply line.
  12. Write out the functional form of a firm’s supply relationship. Identify each variable.
  13. Cite a case of a change in input costs for a firm and describe how the firm’s cost structure and supply line would change as a consequence.
  14. Cite a case of a change in technology for a firm and describe how the firm’s cost structure and supply line would change as a consequence.
  15. Cite a case of a change in environment of production for a firm and describe how the firm’s cost structure and supply line would change as a consequence.
  16. Describe the relationship between the firms’ supplies for a given good or service and the market supply for that good or service.
  17. Given several firms’ supply lines, construct the market supply line.
  18. Comment on the following statement: Market supply movements depend on the net effect of all the firms’ changes. Identify the sources of such changes. Note whether these are the only determinants of the market level of supply. If not, identify another source of market supply shifts.
  19. Describe and show graphically cases of entry and exit on the supply side of the product market.
  20. Represent the relationship of firms and individuals to the market under our nice assumptions, the price takers relationship, graphically.
  21. Describe the elasticity of demand faced by a firm in a perfectly competitive market. Explain why it is as you describe.

6.0 REPESENTING THE POWER OF THE INVISIBLE HAND IN THE PRODUCT MARKET

6.1 THE MAGIC OF MARKETS – PRODUCT MARKET EFFICIENCY UNDER OUR NICE ASSUMPTIONS

  1. Describe what the marginal cost and the average cost each represent.
  2. Describe the relationship between the margin and the average. Use an example.
  3. Explain, with an example, the following relationship: When the margin is above the average it pulls the average up. When the margin is below the average it pulls the average down.
  4. Comment on the following assertion: When the margin is going up it pulls the average up. When the margin is going down it pulls the average down.
  5. Describe and explain the relationship between the marginal cost curve and the average cost curve. Given a MC curve, draw an appropriate AC curve. (Note: With no numbers on the axes, there’s one crucial element in consistency.) Given an AC curve, draw an appropriate MC curve. (Note: With no numbers on the axes, there’s one crucial element in consistency.)
  6. Identify the point along the AC curve at which the MC intersects the AC. Explain the special significance of that point in terms of the cost structure of the firm.
  7. Define: total revenue, total cost. Describe, in terms of total revenue and total cost, the condition of a firm when it is: making a profit, suffering a loss, breaking even.
  8. Given a generic firm/market picture showing a current market condition and given either the AC or the MC of the generic firm’s cost structure, complete the firm’s cost structure and:
  • a.       Identify the demand line of the firm.
  • b.       Identify the supply line of the firm.
  • c.        Identify the quantity the firm will produce.
  • d.       Identify the average cost of production for the quantity the firm will produce.
  • e.        Identify the total revenue of the firm.
  • f.         Identify the total cost of the firm.
  • g.       Identify whether the firm is making a profit, suffering a loss, or breaking even.
  • h.       Identify the size of any profit or loss of the firm.
  1. Given a generic firm/market picture showing the cost structure of the firm and either the supply or demand line in the market, complete the market picture such that the firm is:
  • a.       enjoying a profit
  • b.       suffering a loss
  • c.         breaking even
  1. Explain the following statement: Profit is gravy. All firms want a profit, but no firm needs a profit.
  2. Describe how profit functions as a signal under the nice assumptions that give perfect competition.
  3. Given a generic firm/market picture in which the initial market conditions and the generic firm’s cost structure are given, and in which the firm is initially making a profit, show how the market will respond. Identify the place where the market response will end. (Note: This point must be determined in reference to the generic firms cost structure.) Do the same in the case of an initial loss condition.
  4. Explain the following statement: Profit is a powerful yet ephemeral signal.
  5. Using appropriate graphs explain how, given our nice assumptions, the market dynamic drives production to the most efficient method.
  6. Using appropriate graphs, explain the following assertion: In the dynamic of a perfectly competitive market system success and even simple survival are only possible for the quick and the agile.

6.2 MARKETS, PERFECT COMPETITION, CREATIVITY, AND MATERIAL PROGRESS

  1. Describe how the perfectly competitive market encourages creativity. Give examples.
  2. Describe the role of an entrepreneur in the market system.
  3. Describe two ways an entrepreneur can use creativity to “get ahead.”
  4. Describe the constant challenge facing an entrepreneur in a perfectly competitive market.
  5. Explain how a perfectly competitive market system encourages people to constantly be thinking of new products, better versions of old products, or ever more efficient ways of producing products.
  6. Describe the power of the “invisible hand.”
  7. Explain what the market system can and cannot do with respect to efficiency and equity.

7.0 THE FACTOR MARKET

 7.1 THE FACTOR MARKET – INTRODUCTION

  1. Contrast the roles of individuals and firms in the factor market and in the product market. Give an example of each of these kinds of markets.
  2. Describe the relationship between factor markets and individuals’ incomes.
  3. Define natural resources and labor. Give examples of each.
  4. Define capital. Distinguish between physical and human capital. Give an example of each. Distinguish between production and financial capital.
  5. Define process of production.
  6. Explain the concept: allocation of a factor.
  7. Define technique and technology. Describe the relationship between these concepts.
  8. Compare labor intensive and capital intensive techniques. Explain how a choice is made among techniques when technology offers an array of more labor or more capital intensive techniques.
  9. Specify the arrangement of these terms as they are used in our model: factors, allocated, process of production, techniques, technology, goods and services.
  10. Describe what an excess supply in a labor market would look like in real human terms.
  11. Using an appropriate graph, explain how, given our nice assumptions, a labor market will adjust from an initial excess supply condition.
  12. Using an appropriate graph, explain how, given our nice assumptions, a labor market will adjust from an initial excess demand condition.

7.2 FACTOR MARKET SUPPLY

  1. Explain why the supply curve for a factor would slope upward.
  2. Write the factor supply relationship in functional form. Identify the shift variables in the factor supply relationship.
  3. Identify the sources of market labor supply shifts.
  4. Explain the following statement: If nurses’ pay did not include an interest as well as a wage component, there would eventually be no nurses.
  5. Explain the concept: sunk costs.
  6. Describe the role of sunk costs in decision making. Give an example.
  7. Describe how labor mobility creates a web of connections among the factor markets.
  8. Identify the level of return all participants in the factor markets can expect under our nice assumptions.

7.3 FACTOR MARKET DEMAND

  1. Identify the reason firms buy factors.
  2. Explain the concept: derived demand. Give an example.
  3. Describe the value of the marginal product (VMP) – what it is and how it is calculated.
  4. Explain why the demand line for a factor slopes down.
  5. Write the factor demand relationship in functional form. Identify the shift variables in the factor demand relationship.
  6. Explain how, ceteris paribus, an increase in product demand will affect the derived factor demand. Give an example.
  7. Explain how derived demand reflects the concept of a web of connections.
  8. Define: input substitution, labor intensive technique, and capital intensive technique. Explain why a firm would switch from a labor intensive technique to a capital intensive technique or vice versa.
  9. Explain the concept: elasticity of input substitution. Describe cases of high and low elasticity of input substitution.
  10. Describe how factor markets will adjust to changing relative prices of labor and capital. Give examples.

8.0 GENERAL COMPETITIVE EQUILIBRIUM (GCE)

8.1 GENERAL EQUILIBRIUM THEORY

  1. Explain the concept: general equilibrium theory.
  2. Explain the concept: simultaneous system.
  3. Identify and describe four treads that weave markets into the web of a general system.
  4. Identify the givens in general equilibrium theory.
  5. Explain why general equilibrium theory is essential for representing economists vision of the market system.
  6. Define: partial equilibrium analysis. Contrast the role of partial equilibrium analysis with general equilibrium theory in modern economics.

8.2 GENERAL COMPETITIVE EQUILIBRIUM (GCE)

  1. Describe the efficiency of a general competitive equilibrium. Explain.
  2. Describe the equity or justice of a general competitive equilibrium. Explain.
  3. Explain the statement: If any individual market is still adjusting toward equilibrium, then all markets must still be adjusting. Or, so long as anything is changing, everything is changing.
  4. Given that our nice assumptions hold, describe the relationship between the distributive outcome of the market process and the distribution of society’s endowments among individuals.
  5. Identify and explain the standard by which economists measure the efficiency of any general equilibrium.
  6. Explain the concept of equity. Explain why there is no scientific basis for setting a standard of an optimal equity condition. Comment on the following: Equity is/is not an economic issue, but economics can inform the discussion on equity.
  7. Explain Kenneth Arrow’s statement that “even under assumptions most favorable to decentralization of decision making, there is an irreducible need for a social or collective choice on distribution.” Identify the nature of this social choice.
  8. Identify and explain the role of commutative justice in a market system.

9.0 MARKET POWER, MARKET FAILURE, AND GENERAL EQUILIBRIUM

 9.1 INTRODUCTION TO MARKET POWER AND MARKET FAILURE

  1. Describe the relationship between the concepts: general competitive equilibrium and general equilibria.
  2. Identify the unique characteristic of a general competitive equilibrium that distinguishes it from all other general equilibria.

9.2 MARKET POWER

  1. Describe and explain the efficiency and equity effects of market power on the general system.
  2. Describe the benefit of power.
  3. Describe the costs of power.
  4. Define: monopoly, monopsony. Give examples of each.
  5. Identify the source of naturally occurring market power and explain its relationship to commutative justice.
  6. Cite and explain examples of naturally occurring market power.
  7. Identify and explain two reasons why a natural gift is not always a ticket to a big income.
  8. Explain the concepts: scale of production and returns to scale. Contrast these two concepts.
  9. Define: economies of scale. Explain how such economies can create natural market power. Give an example.
  10. Describe how natural advantages and thus natural market power can erode. Give examples.
  11. Explain the concept: artificially created market power. Give examples.
  12. Describe the purpose of patents. Explain why a patent is artificially created market power.
  13. Define: rent-maintenance activity. Give and explain an example.
  14. Define: rent-seeking activity. Give and explain an example.
  15. Describe and explain the possible connection between rent-seeking/maintenance activity and contributions to political groups.
  16. Explain how socialization connects to markets.
  17. Describe how socialization that demarcates expectations by gender and/or race affects market outcomes. Give examples.
  18. Explain how socialized perceptions, your own or those in the market, can constrain your range of choices and effectively limit your access to the market.
  19. Identify the difference between how social and political institutions function as potentially powerful constraints on market behavior.
  20. Ceteris paribus, show and explain how these two markets for comparable jobs would adjust if one of these jobs initially had a higher wage under out nice assumptions.
  21. Describe the consequence of any institutional constraints, social and/or political, that crowded women into a limited set of labor markets. Use graphs to tell your story.
  22. Describe the equity and efficiency implications of market power.
  23. Explain how controlling access to education can serve as a rent-generating mechanism. Give examples.
  24. Describe the costs and benefits of a rent-generating structure like apartheid.
  25. Explain how and why non-violent and/or violent resistance to a rent-generating power structure can possibly lead those who hold power to negotiate. Give examples.

9.3 MARKET FAILURE

  1. Describe the phenomenon called market failure.
  2. Describe a public good. Give an example.
  3. Explain why a public park is not a pure public good.
  4. Explain why national defense in often cited as a good example of a pure public good.
  5. Describe the free rider problem. Explain why it occurs.
  6. Explain why public television and public radio suffer from the free rider problem.
  7. Explain the role of property rights in a liberal, market society.
  8. Describe an externality. Identify the general cause of externalities. Identify the “missing signal,” the absence of which allows externalities to occur.
  9. Contrast positive and negative externalities. Give an example of each.
  10. Explain why pollution is often associated with the concept of negative externality.
  11. Demonstrate with an example how an externality can be positive and negative at the same time in the same place.
  12. Using an appropriately labeled graph, represent the case of a positive externality. Interpret your graph. Show and explain the difference between the optimal view of activity from a private versus a social perspective.
  13. Using an appropriately labeled graph, represent the case of a negative externality. Interpret your graph. Show and explain the difference between the optimal view of activity from a private versus a social perspective.
  14. Given an externality graph identify the exact size of the positive or negative externality it represents.
  15. Using an appropriate graph, describe the efficiency effect of a negative externality, of a positive externality.
  16. Describe a risk externality. Give an example.

 10.0 THE MICROECONOMY AND GOVERNMENT

 10.1 INTRODUCTION

  1. Identify the possible roles for government in the micro market economy.
  2. Identify the two principles that underlie the debate about the role of government in the economy.

10.2 GOVERNMENT INTERVENTION IN THE MICROECONOMY – CASES AND ISSUES

  1. Explain the concept of internalizing an externality.
  2. Define proxy. Explain the role of a proxy in solving an externality problem.
  3. Describe why government intervention in an externality problem is a real and significant challenge.
  4. Identify some key questions that must be addressed relative to the case for government intervention to solve a market power problem.

10.3 GOVERNMENT INTERVENTION AND EFFICIENCY – THE PHILOSOPHICAL DEBATE

  1. Comment on the statement: Some governments abrogate their responsibility by having no economic policy.
  2. Identify the distinguishing characteristics of a coherent policy.
  3. Identify and explain the philosophical questions you must answer for yourself before you decide for yourself what role if any government should play in this complex web we call a microeconomy.
  4. Explain the concept: laissez-faire. Identify its origin.
  5. Contrast the policy perspectives of a non-interventionist and an interventionist. Identify and explain the philosophical foundation that underlies each of these positions.

10.4 DISTRIBUTIVE JUSTICE AND THE ROLE OF GOVERNMENT

  1. Identify the most fundamental problem of government intervention in the name of equity.
  2. Explain why achieving a consensus on a definition of equity is a significant challenge.
  3. Explain why, even if a generally acceptable definition of equity is agreed upon, the government still faces the problem of implementing a policy that will realize equity.
  4. Describe the objectives and the problems of a rent control policy.
  5. Describe the efficiency/equity trade-off.
  6. Comment on the following statement: the efficiency/equity trade-off is unavoidable.

11.0 INTRODUCTION TO MACROECONOMICS

 11.1 OVERVIEW

  1. If the web of connections that makes up the economy is a micro phenomenon, explain why we study the economy at a macro level.Identify and describe a non-economic example of the contrast between micro and macro perspectives and the value of each.
  2. Describe the relationship between conditions in the microeconomy and conditions in the macroeconomy.
  3. Identify and describe the four basic aggregate questions our macroeconomic model is designed to explore.
  4. Describe the different perspectives of an interventionist and non-interventionist with respect to macro policy. Identify the source of these different perspectives.

11.2 DEFINING TERMS

  1. Define Gross Domestic Product.
  2. Define each term and explain the distinction between: Full, sustainable capacity (potential) GDP and Actual GDP
  3. Identify the condition at which the microeconomy must be functioning if the macroeconomy is performing at full sustainable capacity (potential) GDP.
  4. Identify how economists use comparisons of actual GDP to the potential GDP. Cite the conditions that economists define as a recession, as a depression.
  5. Explain why we need to be careful when we think of GDP as indicator of the well-being of individuals in a society or as an indicator of general social welfare. Give examples.
  6. Explain the following assertion: With any aggregate variable we must be careful to look behind the aggregate number if we want to understand the underlying micro reality. Give examples.
  7. Define labor force, voluntarily unemployed. Explain the relationship between the labor force and the voluntarily unemployed.
  8. Distinguish employed, unemployed, unemployment rate.
  9. Identify and explain the three different kinds of unemployment.
  10. Distinguish the three kinds of unemployment by their respective causes.
  11. Describe why job search takes time, and how this relates to frictional unemployment. Give an example.
  12. Identify and explain the problem that causes structural unemployment. Give an example.
  13. Explain the following statement: with frictional and structural unemployment the problem is not a lack of jobs.
  14. Explain the following statement: frictional and structural unemployment are both consistent with a dynamic, growing, healthy economy. Identify how each kind of unemployment can be reduced.
  15. Explain the concept: the natural rate of unemployment. Identify the relationship between the natural rate and what economists mean by full employment. Explain with an example.
  16. Define demand deficient unemployment. Explain why it is referred to as one of the villains in our macro story.
  17. Describe the kinds of costs demand deficient unemployment imposes on society. Give examples.
  18. Identify how much (roughly) the unemployment rate in the U.S. rose from 1929 to 1933 as the Great Depression took hold of the country.
  19. Define inflation, deflation.
  20. Distinguish a macroeconomic change in the price level from a microeconomic relative price adjustment.
  21. Identify and explain the efficiency and the equity costs that inflation or deflation impose on an economy.
  22. Describe hyperinflation and how it affects an economy.
  23. Define indexing. Describe how people use indexing to protect themselves from inflation. Give an example. Identify why it’s called indexing.
  24. Distinguish between nominal and real values. Explain why nominal economic values can mask underlying real changes across time.
  25. Explain the following statement: Changes from year to year in nominal GDP may reflect changes in real production (the actual physical output), the price level, or both.
  26. Explain why real values are useful for comparisons of economic data over time and nominal values are not.
  27. Identify the two methods the government uses to measure the price level.
  28. Explain what the CPI is and how it’s determined.
  29. Distinguish the scope of the CPI and the GDP Deflator.
  30. Describe how to take price effects out of nominal values. Given a nominal value and the appropriate price level measure, calculate the real value.

 12.0 THE BASIC MACRO MODEL

12.1  INTRODUCING OUR MACRO PICTURE

  1. Draw and label our Macro Picture. Identify a point as YF. Given the AD and AS lines you draw, identify the current level of real GDP (Y*) and the current price level (P*).
  2. Show cases of an AD shift and interpret what is happening to the price level and real GDP as the line shifts. Do the same for AS.

12.2 AGGREGATE DEMAND

  1. Define aggregate expenditure. Describe the relationship between aggregate expenditure and aggregate demand.
  2. Identify the relationship that the AD line represents. Explain why the AD line slopes down.
  3. On an appropriately labeled Macro Picture, show graphically and explain how the AD line will shift if AE increases, if AE decreases.
  4. Identify the six components of AE. Explain what each is. Specify the letter used to stand for each of the components and whether these are measured in real or nominal terms.
  5. Explain why in the AE equations, some variables are preceded by a plus sign (+) while others are preceded by a minus sign (-).
  6. Identify what (G-T) stands for. Specify the condition of the government’s budget and the government’s net effect of AE when (G-T) > 0, when (G-T) < 0, or when (G-T) = 0.
  7. Identify what (X-M) stands for. Specify the condition of trade and the net effect of trade on the AE when (X-M) > 0, when (X-M) < 0, or when (X-M) = 0.
  8. On an appropriately labeled Macro Picture, show graphically and explain how a dramatic fall in investment (I) contributed to the Great Depression.
  9. On an appropriately labeled Macro Picture, show graphically and explain how a dramatic rise in military spending by the government shifted the economy from high unemployment of the Depression to very low unemployment. Ceteris paribus, we would expect this shift in AD to stimulate inflation – explain why it did not do so during World War II.

12.3 AGGREGATE SUPPLY

  1. Define: long run. Comment on the following statement: It takes 20 years to reach the long run.
  2. Identify the condition of the microeconomy when the economy has reached the long run as we define it.
  3. Identify the level of real GDP in the macroeconomy when the long run condition has been reached.
  4. On an appropriately labeled Macro Picture, show graphically and explain the position of the LAS.
  5. Define: very long run. Identify changes that can occur in the very long run that shift LAS. Give examples. Show how growth in capacity is represented in our Macro Picture.
  6. Describe how economic growth is represented in our Macro Picture.
  7. Describe the sustainability challenge posed by economic growth.
  8. Define: short run. Identify the variables that are constant in the short run.
  9. On an appropriately labeled Macro Picture, show graphically and explain the shape of the short run aggregate supply (AS) line. Do this by interpreting movement along the line from segment to segment.
  10. Describe the issues surrounding the l segment of our AS line that are central to the larger debates about macro policy. Explain why these issues are so important for this policy debate.
  11. Interpret the term “slack” with respect to the macro economy.How would a “slack” condition be represented in our Macro Picture.
  12. Explain what “to heat up” means in the macroeconomy and explain what causes this to occur.
  13. Describe what the AS line represents.
  14. Identify what is assumed constant along a given AS line.
  15. Identify the shift variables with respect to the AS line.

12.4 COMBINING AD, LAS, and AS

  1. On an appropriately labeled Macro Picture, show graphically and explain the case of increasing unemployment due to falling aggregate demand.
  2. On an appropriately labeled Macro Picture, show graphically and explain the case of falling unemployment and falling price level as AS shifts down due to falling factor prices.
  3. On an appropriately labeled Macro Picture, show graphically and explain the case of increasing unemployment and increasing price level as AS shifts up due to rising factor prices.
  4. On an appropriately labeled Macro Picture, show graphically and explain the case of falling unemployment and rising price level due to increasing AD.
  5. Define: tight labor market. Describe how such a labor market condition affects the negotiating position of workers. Identify which workers may not enjoy this good negotiating position.
  6. Define: wage-price spiral.
  7. Describe the dynamic through which a tight labor market might give rise to a wage-price spiral.
  8. Explain why workers ask for indexed wages in the face of a wage-price spiral. Describe the effect of such indexing on the spiral.

13.0 AGGREGATE DEMAND

13.1 CONSUMPTION

  1. Identify the basis on which the average individual determines her level of consumption.
  2. Explain the concept of “smoothing out” consumption over time.
  3. Define: permanent income. Describe the relationship between permanent income and consumption.
  4. Describe personal financial planning.
  5. Identify the source of aggregate income in the economy and how we measure it in our model.
  6. Explain the “b(P*Y)” in the consumption equation.
  7. Define: autonomous consumption. Give examples.
  8. Write out and name the equation that represents the sources of consumption in the aggregate economy.
  9. Identify and explain each letter in the consumption function.
  10. Explain how consumer confidence affects the aggregate level of consumption.
  11. Describe the wealth effect and its role in determining the aggregate level of consumption.

13.2 INVESTMENT

  1. Identify the market in which the level of investment is determined.
  2. Explain why people go to the long term capital market for investment funds.
  3. Define: financial capital. Distinguish financial capital from real, production capital.
  4. Explain why financial capital is often referred to as liquidity.
  5. Describe the role of financial intermediaries in the capital market. Identify some financial institutions that serve as financial intermediaries.
  6. Explain why the market in which financial capital is exchanged for real investments is the long term capital market.
  7. Draw and label a long term capital market picture. Explain each axis.
  8. Explain why the long term capital supply line slopes up.
  9. Explain why the long term capital demand line slopes down.
  10. Explain the role of expectations in the long term capital demand.
  11. Define: expected rate of return. Give an example.
  12. Describe the relationship that must exist between the expected rate of return and the interest rate for an investment to make sense. Explain.
  13. Ceteris paribus, show how a specified shift of either supply or demand in the long term capital market changes the level of investment. Then show in our Macro Picture how this change in investment affects the aggregate economy.
  14. Describe how perceptions of risk of default affect interest rates.
  15. Describe the relationship between short term interest rates and long term interest rates.
  16. Identify the premiums that are added on to the short rate line to establish long rates. Explain each premium.
  17. Identify the three factors that determine the level of long term capital supply.
  18. Ceteris paribus, describe how a specified change in the short rate capital supply and/or inflationary expectations will shift the long term capital supply line.
  19. On an appropriately labeled capital market picture, show how entry into a country’s capital market will shift the capital supply line.
  20. On an appropriately labeled capital market picture, show how exit from a country’s capital market will shift the capital supply line.
  21. Describe the relationship between domestic wealth accumulation and entry or exit into a nation’s capital market. Describe examples.
  22. Define: international capital flows.
  23. Explain the relationship between international capital flows and entry or exit into a nation’s capital market. Describe examples.
  24. Explain why international capital flows are often the most volatile source of entry or exit.
  25. Explain why international capital flows are playing a bigger and bigger role in the economies of individual nations.
  26. Describe the conditions that, ceteris paribus, lead to flows of international capital into a country. Give examples.
  27. Describe the conditions that, ceteris paribus, lead to flows of international capital out of a country. Give examples.
  28. Explain the concept of foreign direct investment. Give an example.
  29. On appropriately labeled graphs, ceteris paribus, show how an international capital flow into a country affects that country’s capital market and in turn its macroeconomy.
  30. On appropriately labeled graphs, ceteris paribus, show how an international capital flow out of a country affects that country’s capital market and in turn its macroeconomy.
  31. Explain the effect of expectations on capital market demand.
  32. On an appropriately labeled graph, ceteris paribus, show how increasingly positive expectations shift the capital market demand line. Then explain and show on an appropriately labeled Macro Picture how this change in expectations in the capital market affects the macroeconomy.
  33. On an appropriately labeled graph, ceteris paribus, show how increasingly negative expectations shift the capital market demand line. Then explain and show on an appropriately labeled Macro Picture how this change in expectations in the capital market affects the macroeconomy.
  34. Explain and show graphically how achieving peace in previously a war-torn nation can, ceteris paribus, increase investment and improve macroeconomic conditions.
  35. Explain and show graphically how the depression of the Great Depression contributed to the depths the U.S. economy sank into.

13.3 THE TRADE BALANCE

  1. Explain why international trade exists.
  2. Explain why most international trade requires exchange of currencies.
  3. Comment on the following statement: I bought a piece of art from Mexico for dollars right here in town, so that international trade did not require any exchange of currency.
  4. Identify the market in which nations’ currencies are exchanged.
  5. Draw and label a euro/dollar foreign exchange market in which the euro is a commodity priced in dollars.
  6. Explain what it means for a currency’s value to be allowed to “float” in the foreign exchange market.
  7. Suppose the demand for dollars by folks holding euros expands. Show what this would look like on an appropriately labeled graph in which dollars are the commodity. Show what this would look like on an appropriately labeled graph in which euros are the commodity.
  8. Describe the relationship between the two exchange rates: euros/dollar and dollars/euro.
  9. Given the euros/dollar exchange rate, identify the dollars/euro exchange rate.
  10. Describe what it means for a currency to get weaker or to get stronger. Give an example.
  11. Critique the following assertion: Strong currencies are good and weak currencies are bad.
  12. Ceteris paribus, using all appropriate graphs (appropriately labeled), show and explain how a shift out in the demand for financial capital in the United States affects U.S. interest rates, and (assuming some of the increased quantity supplied comes from overseas) how this in turn affects the dollar exchange rate, the trade balance, the aggregate demand and the macroeconomy. Ceteris paribus, do the same for a case of falling demand for financial capital.
  13. Ceteris paribus, tell the same stories about the U.S. economy as described in Objective 14, but let the shift in demand for financial capital be in the Japanese capital market.
  14. Describe and explain the market forces that, under normal circumstances, would slow down the outward flow of financial capital and ultimately stop it before it became a hemorrhage?
  15. Describe a global financial panic. Explain the underlying conditions and kinds of events that can lead to such a panic. Describe an example.

13.4 THE GOVERNMENT’S BUDGET POSITION

  1. Identify the conditions that determine the government’s budget position.
  2. Describe how the U.S. budget is determined.
  3. Identify and explain how parties that are not officially part of the budget position determination try to influence the budget process.
  4. Explain how unfolding events can dramatically shape budget decisions. Give an example.

14.0 AGGREGATE SUPPLY AND THE MICRO FOUNDATIONS OF MACRO

 14.1 SOURCES OF AGGREGATE SUPPLY SHIFTS

  1. Identify the source of shifts in the short run aggregate supply line.
  2. Give an example of an event that would shift AS. Describe the event and, using an appropriately labeled Macro Picture, show and explain how the event you’ve described would affect the macroeconomy.

14.2 TRANSISTION TO POLICY

  1. Using appropriately labeled Macro Pictures, show and explain two kinds of macro shocks that can lead to unemployment.
  2. Identify the micro conditions that ensure that the macroeconomy will move back to full employment.
  3. Identify the micro conditions under which the macroeconomy can get stuck in a less than full employment position.

15.0  POLICY: THE PROMISE AND THE PROBLEMS

15.1 BACKGROUND TO POLICY DEBATE, THE MICRO/MACRO CONNECTION

  1. Using appropriately labeled Macro Picture and micro picture, show and explain the micro condition that must exist when there is demand deficient unemployment in the macroeconomy.
  2. Using appropriately labeled Macro Picture and micro picture, show and explain how under our nice assumptions micro factor market adjustments eliminate macro demand deficient unemployment.
  3. Comment on the following assertion: Under our nice assumptions micro adjustments bring the macroeconomy to full employment and everyone is better off.
  4. Using appropriately labeled Macro Picture and micro picture, show and explain the micro condition that must exist when there is inflationary pressure in the macroeconomy.
  5. Using appropriately labeled Macro Picture and micro picture, show and explain how under our nice assumptions micro factor market adjustments eliminate macro inflationary pressure.
  6. Explain the following assertion: In the terms of our story, the quality of the invisible hand is analogous to how realistic our nice assumptions are.
  7. Describe and explain the possible macro consequences if the nice micro assumptions are strong assumptions.
  8. Describe and explain the polar case positions in the debate over government economic policy.

15.2  THE PROMISE AND THE PROBLEMS

  1. Describe most economists image of the ideal long run and very long run conditions in the macroeconomy. Identify the micro issue that is not resolved even if this macro ideal is achieved.
  2. Describe how most economists envisioned macro shocks until the 1970s. Identify the assumptions that underlay this view.
  3. On an appropriately labeled graph, draw the Phillips curve. Explain what it represents.
  4. On an appropriately labeled graph, describe and explain the conditions that give rise to a wage-price spiral.
  5. On an appropriately labeled graph, describe and explain the conditions that give rise to stagflation.
  6. Identify the three basic dimensions of macro policy.
  7. Identify the fundamental, philosophical difference of opinion that lies at the heart of the macro policy debate.

16.0 MONETARY POLICY

16.1 THE INSTITUTIONAL CONTEXT

  1. Define: monetary policy.
  2. Identify the institution that manages monetary policy in most countries.
  3. Identify the institution that manages monetary policy in the United States.
  4. Describe the institutional position of the Fed in the U.S. government.
  5. Describe the appointment process of members of the Fed. Specify the number of members on the Federal Reserve Board and the term length of a member of the Fed and of its Chair.
  6. Identify the voting membership of the Federal Open Market Committee.
  7. Distinguish the Fed from the U.S. Treasury Department.
  8. Describe how the Treasury Department gets the funds to pay the government’s bills if the government’s tax revenues are not sufficient to pay those bills.
  9. Explain the relationship between the price of a treasury security and the interest rate received by the owner of that security.
  10. Describe the financial system. Explain the role of financial intermediaries in the financial system.
  11. Give an example of a financial intermediary. Explain how financial intermediaries make a return from the business they do, and identify the size of that return if perfect competition prevails.
  12. Define: asset, liability, portfolio. Explain the relationship of assets and liabilities in a portfolio.
  13. Define: liquid assets. Give and explain an example of a liquid asset. Give and explain an example of an illiquid asset.
  14. Define reserves.
  15. Explain why financial institutions need to hold some of their assets in a liquid form.
  16. Define: full reserves.
  17. Explain why a financial institution does not want to hold full reserves.
  18. Define: fractional reserve system.
  19. Describe the level of reserves a prudent bank would hold in a fractional reserve system.
  20. Explain the benefits a fractional reserve system brings to an economy.
  21. Identify the down side of a fractional reserve system.
  22. Describe how a run on the financial system can get started and how such a run can bring down even the most prudent banks in the system.
  23. Explain the purpose of reserve requirements.
  24. Identify the tools the Fed uses to try to keep the U.S. financial system responsible.
  25. Explain the role of the Federal Deposit Insurance Corporation in maintaining stability in the financial system.

16.2 THE IMPLEMENTATION OF MONETARY POLICY

  1. Describe what the Fed does when it engages in open market operations.
  2. Explain the relationship between Fed open market operations and the level of reserves in the financial system.
  3. Define: excess reserves.
  4. Describe how the Fed can create excess reserves in the financial system.
  5. Describe the response of banks that find themselves holding excess reserves.
  6. Identify the market through which banks exchange reserves. Identify the term (length of time) of the loans made in this market.
  7. Identify the term (title) used for the rate paid for reserves in the Federal Funds Market.
  8. Identify the Fed Open Market activity that lowers the Fed Funds Rate. Describe the steps in the events that start with Fed Open Market activity and result in a lower Fed Funds Rate.
  9. Identify the Fed Open Market activity that raises the Fed Funds Rate. Describe the steps in the events that start with Fed Open Market activity and result in a higher Fed Funds Rate.
  10. Describe the relationship between Fed Open Market Operations and the amount of liquidity in the financial system.
  11. Describe the Fed’s Discount Rate. Identify the most common reason for the Fed changing the Discount Rate.
  12. Explain the role of the Reserve Requirement in Fed policy.

16.3 POLICY ISSUES – FINANCIAL CRISES

  1. Describe the relationship between real values and asset values in a speculative bubble.
  2. Explain how a speculative bubble gets started and expands.
  3. Explain the source of and the role of speculation in a speculative bubble.
  4. Describe how a speculative bubble might burst.
  5. Explain how the bursting of a speculative bubble can have effects on the real economy.
  6. Describe and explain the role the Fed can play in keeping a bursting speculative bubble from becoming a real economic disaster.
  7. Explain the interventionist and the non-interventionist positions with respect to Fed intervention in a financial crisis.
  8. Explain the moral hazard problem.

16.4 POLICY ISSUES – AGGREGATE DEMAND MANAGEMENT

  1. Describe the relationship between the Fed’s Open Market Operations, the Fed Funds Rate, and the long term capital supply line.
  2. Using an appropriately labeled graph show the macroeconomy in the less than full employment condition. Show and explain, using all relevant graphs (appropriately labeled), how the Fed can intervene in the economy to stimulate the economy and reduce unemployment. Include every step in the logic from the initial Fed policy to the final employment effect.
  3. Identify the leap of faith that a non-interventionist sees in an interventionist attempt to use Fed policy to bring the economy to full employment.
  4. Using an appropriately labeled graph show the macroeconomy in the less than full employment condition. Show and explain, using all relevant graphs (appropriately labeled), how a non-interventionist argues that intervention is not necessary to fix a less than full employment problem in the economy.
  5. Identify and explain the problems that a non-interventionist claims can be caused by an interventionist monetary policy. Identify and explain the interventionist reply.
  6. Explain the problem with the natural rate that makes calibrating any interventionist policy difficult.
  7. Explain how it is plausible that two economists could look at the same reported unemployment rate and argue respectively that the economy needs more stimulus and that the economy is already over stimulated.
  8. Explain why the shape of the AS line matters in the interventionist versus non-interventionist debate.
  9. Describe the role that different assumptions about the structure of the economy play in the interventionist versus non-interventionist debate.
  10. Explain why it is virtually impossible to resolve different assumptions about the structure of the economy empirically.
  11. Identify the different structural assumptions often made by interventionists versus non-interventionists with respect to the natural rate and the shape of the AS line.
  12. Explain why, even if we know the natural rate and the shape of the AS line, interventionist policy would still be very challenging undertaking.
  13. Using appropriate graphs describe and explain how, ceteris paribus, a Fed intervention to stimulate the economy can, ceteris paribus, affect the trade balance and in turn Aggregate Demand and the entire macroeconomy. Include every step in the logic from the initial Fed policy to the final full macro effect.
  14. Using appropriate graphs describe and explain how, ceteris paribus, a Fed intervention to contract the economy can, ceteris paribus, affect the trade balance and in turn Aggregate Demand and the entire macro economy. Include every step in the logic from the initial Fed policy to the final full macro effect.
  15. Identify the policy the Fed would pursue to stimulate the economy. Explain how such a policy can in fact lead to a “double stimulus.”
  16. Identify the danger if the Fed overstimulates the macroeconomy. Explain.
  17. Explain the problem with imposing a wage-price freeze on a market economy.
  18. Describe how the Paul Volcker-led Fed squeezed inflation out of the economy. Using appropriate graphs, explain the process of the policy from the Fed tools used through the markets it affected to its consequences for the macroeconomy.
  19. Explain what a gold standard is and why some non-interventionists believe the country should go to a gold standard. Explain the non-interventionist’s criticism of a gold standard.
  20. Identify the ultimate source of the debate between the interventionists and the non-interventionists. Explain.

17.0 FISCAL POLICY

17.1 THE INSTITUTIONAL CONTEXT

  1. Define: fiscal policy.
  2. Describe a government fiscal policy that is stimulative.
  3. Describe a government fiscal policy that is contractionary.
  4. Explain how, ceteris paribus, a budget surplus affects the macroeconomy.
  5. Explain how, ceteris paribus, a budget deficit affects the macroeconomy.
  6. Explain the role of Treasury bonds in the government budget process.
  7. Explain what a government default is and describe the impact of such a default.
  8. Describe the factors that can affect the relationship between a government and the international capital markets.

17.2 THE IMPLEMENTATION OF FISCAL POLICY

  1. Show on our Macro Picture how, ceteris paribus, a stimulative fiscal policy affects the macroeconomy.
  2. Show on our Macro Picture how, ceteris paribus, a contractionary fiscal policy affects the macroeconomy.
  3. Ceteris paribus, identify and explain how the government budget would have to be changed in order to stimulate the economy.
  4. Ceteris paribus, identify and explain how the government budget would have to be changed in order to contract the economy.
  5. Explain and show graphically how a stimulative fiscal policy can generate inflation. Identify what this possibility depends on.
  6. Identify where the government gets the funds to finance a deficit.
  7. Show graphically and explain the effect of increasing government borrowing in the capital market, noting the effect on the interest rate and the total funds exchanged.
  8. Using appropriate graphs describe and explain how, ceteris paribus, increasing government borrowing affects private investors’ participation in the capital market and the level of private investment.
  9. Define the crowding-out effect.
  10. Using appropriate graphs describe and explain how, ceteris paribus, government activity in the capital market can affect the exchange rate and the trade balance.
  11. Explain how the Fed can monetize the deficit and how that eliminates the problems of crowding out.
  12. Explain the dangers of the Fed monetizing the deficit.
  13. Using appropriate graphs describe and explain, ceteris paribus, the non-interventionist’s argument that interventionist fiscal policy is not necessary and is fruitless and distorting.
  14. Identify and explain the constitutional amendment that some non-interventionists advocate. Explain the non-interventionist response to this proposed amendment.
  15. Explain the interventionists’ argument for their position and their case against the non-interventionists’ position.

18.0 TRADE POLICY

 18.1 TRADE POLICY TOOLS

  1. Explain why global economic analysis is fundamentally different from national economic analysis.
  2. Define: open economy macro.
  3. Identify the condition that makes trade policy even more complex than monetary or fiscal policy.
  4. Explain the statement: Global economic relations are a strategic game among nations.
  5. Describe how adopting different domestic policies regarding acceptable production conditions can create advantages or disadvantages in the global market place. Give examples.
  6. Describe ways in which a nation can generate a positive trade balance through developing a competitive edge.
  7. Describe ways in which a nation can generate a positive trade balance through developing red tape and many regulations.
  8. Describe two ways in which a nation can generate a positive trade balance by manipulating the exchange rate for its currency. Explain the limitations and problems with each.
  9. Describe how a nation can use a quota as a trade policy tool. Explain the risk of such a policy approach.
  10. Describe how a nation can use a tariff as a trade policy tool. Explain the risk of such a policy approach.
  11. Explain how a tariff war gets started. Identify who usually wins a tariff war.

18.2 TRADE POLICY ISSUES

  1. Identify the period when the first western writings specifically economics and economic policy began to emerge. Explain the events that stimulated this writing and the focal point of these writings.
  2. Explain the concept of a zero sum game.
  3. Explain the Mercantilist view of how to expand the wealth of a nation.
  4. Identify the kinds of policies prescribed by Mercantilism, and explain the logic of these policies.
  5. Explain the concept of a positive sum game.
  6. Describe the constructive possibilities for liberal society describe by Adam Smith.
  7. Explain the following assertion: The promise of a free and open global economy is essentially a generalization of the desirable outcome that we learned about in micro.
  8. Identify and explain the problems of a global liberal system.
  9. Describe why governments often find Mercantilist policies politically attractive, and why such policies can lead to degenerative global relations.
  10. Explain protectionism and briefly describe the political dynamics that lead to such policies.
  11. Explain how a trade war can hurt all participants.
  12. Describe the challenges facing emerging nations in the global economy. Explain some of the strategies such nations pursue to capture a global market share for their products.
  13. Describe the special vulnerability of emerging nations to international capital flows.
  14. Describe the role of the IMF in the global economy and how the IMF is sometimes seen by countries in desperate need of assistance.
  15. Describe the WTO including: What it is, its objectives, its principles, the case for its existence.
  16. Identify and explain an inherent weakness in any multilateral trade organization or agreement, such as the WTO.
  17. Explain the benefits and the cost of going to a common currency like the euro.

19.0 CONCLUSION

19.1 SOME HISTORICAL BACKGROUND ON THE INTERVENTIONIST VERSUS NON-INTERVENTIONIST DEBATE

  1. Explain Say’s Law.Describe how Say’s Law relates to the interventionist versus non-interventionist debate.
  2. Describe the interventionist v. non-interventionist debate between Ricardo and Malthus: Explain Ricardo’s assumption, logic, and policy. Describe Malthus’ critique of Ricardo’s position.
  3. Explain the impact of Ricardo’s Principles of Political Economy on the interventionist v. non-interventionist debate in mainstream economic theory. Describe Keynes’ response to this impact.
  4. Identify where Keynes saw strength and where he believed he saw a flaw in the mainstream, “orthodox” economic theory he inherited. Explain his argument that the theory he inherited only captures a special case that does not exist in reality.

19.2 WHY CAN’T ECONOMISTS RESOLVE THIS DEBATE ONCE AND FOR ALL:  THE PROBLEM OF TESTING

  1. Explain why there are multiple views of the economic process within mainstream economics and why no one view is able to prevail.
  2. Explain why a theoretical model must be operationalized in order for it to be tested.
  3. Identify the problems one faces when theoretical definitions are transformed into technical definitions. Give examples. Explain how this problem contributes to the inability of scientists to falsify models and thus makes it possible for competing models to coexist.
  4. Identify the technical criteria for being in the labor force. Cite and explain a problem with these criteria. Identify the technical criteria for being counted as employed. Cite and explain a problem with these criteria. Define discouraged worker, underemployed.
  5. Identify the four criteria for inclusion in the technical definition of the GDP. Explain the rationale for each.
  6. Identify the problem with the GDP technical definition criterion that production must be exchanged for money. Give an example. Explain the concept of an underground economy.
  7. Identify an exception the government makes to its own criteria for the technical definition of GDP. Explain why the exception is made.
  8. Explain what a proxy variable is and why they are used. Describe the problem with using proxies. Give an example.
  9. Explain how a model is specified in order for regression analysis to be performed. Explain the importance of the “sign” and “significance” results of a regression analysis.
  10. Describe two ways that one can manipulate the specification of the model in order to achieve desired sign and significance results. Explain the terms: cooking the data or data mining.
  11. Explain how this ability to manipulate the test contributes to the inability of scientists to falsify models and thus makes it possible for competing models to coexist.