IB Economics Study Guide

Page 1

Review Guide for Final Exam IB Year One –

Macroeconomics

Time: 2 hours, 1 hour for Paper One and 1 hour for Paper Two

·

Paper 1: Students will pick

from 1 of 2 possible questions

·

Paper 2: Students will pick

from 1 of 2 possible questions

Format: 1 Paper One (Part A, 10 marks +

Part B, 15 marks) + 1 Paper Two (Article, Part A-B, 20 marks) à See Edmodo for documents

that review writing strategy for both types of papers

Content: Major topics that we have

studied this semester

(Chapters for the new textbooks are in

parenthesis)

2.1

: Level of overall economic activity (Ch. 11, Pearson)

·

Measurements for growth: GDP,

GNP, GDP per capita, real GDP

-GDP: Value of all final goods and services produced in a country within a

given time period.

GDP=C+I+G+(X-M)

-Consumption

(C): Goods purchased by individuals, consumers, households. Ex. Goods

and services

-Investment

(I): Spending by firms and households. Ex. Buildings, machinery, houses,

etc.

-Government

Spending (G): All spending on government purchases, including salaries,

capital goods spending.

-Net

Exports (X-M): Count all exports and an increase in GDP while

subtracting imports and a decrease in GDP. Export revenues (X) – Import

payments (M) = Net exports

-GNP: Market value of all the products and

services produced in a time period by the labor and capital supplied by

residents of country.

-GNP=GDP + net property income from abroad

-GDP per capita: Average based on national income of the country

divided by the country’s population.

-Real GDP: Value in constant price, of all final goods and services produced in a

country within a given time period.

·

Diagrams for illustrating

growth: business cycle, aggregate demand and aggregate

supply, circular flow of income

2.2:

Aggregate Demand and Aggregate Supply (Ch. 12, Pearson)

·

Determinants of Aggregate Demand/AD: Total demand for nation’s goods

and services from domestic households, firms, government.

-Wealth: Net worth/value of an individual or a household including

the value of all its assets minus all its liabilities.

-Interest Rates: Opportunity cost

of spending money.

-Household debt and expectations of

future income: Amount of money owed by household to lenders.

-Consumer confidence: Economic

indicator that measures the degree of optimism that consumers feel about the

overall state of the economy.

·

Determinants of Aggregate Supply/AS:

-

·

Full output level

·

Inflationary gap v.

deflationary gap (HL only)

·

Keynesian v. Neo-Classical

debate

2.3:

Macroeconomic Objectives: Low unemployment (Ch. 13, Pearson), stable inflation

(Ch. 14, Pearson), economic growth (Ch. 15, Pearson), Equity in Distribution of

Income (Ch. 16, Pearson)

·

Unemployment: the definition,

types (cyclical, structural, underemployment, frictional, seasonal), diagrams

for each type, methods for addressing each type, unemployment rate definition

-Unemployment: Condition of someone of

working age who is willing/able to work, but unable to find a job.

-Unemployment rate: % of total labor force

in a nation that is unemployed.

UR = number of unemployed/labor force x 100

-Labor force participation rate: # of people

in labor force/working age population x 100

-Natural Rate of Unemployment: Unemployment occurring when an

economy is producing at full-employment output level; structural plus seasonal

plus frictional unemployment.

Solution: Can be reduced via government policy aiming to increase productivity

off labor force and create incentives to accept work.

-Underemployment: Condition of worker who is technically

employed, but is either over-qualified, or working part-time when full-time is

desired.

-Cyclical Unemployment: Workers unable to find work because a

reduction in private and public spending reduces AD. Fall in consumption,

investment or net exports reduce demand for labor.

Solution: Fiscal or monetary stimulus aimed at increasing level of AD and

raising nation’s output and employment.

-Frictional Unemployment: People who are in

between jobs or looking for their first job; generally short-term. Young

workers entering labor force.

Solution: Improve information between employers and job seekers. Reduce

unemployment benefits.

-Seasonal Unemployment: Seasonal workers who

need to seek other work between seasons; part of NRU. Workers choosing jobs

that allow flexibility of time and location.

Solution: Same as frictional.

-Structural Unemployment: Workers unable to

find work because their skills do not meet the demanded by firms.

Solution: Improve training, education and mobility of labor force to

encourage relocation as demands for labor change in regional areas.

Frictional/Seasonal/Structural

Individual consequences of

unemployment:

-Decreased household income and purchasing power

-Increased levels of psychological and physical illness, including stress

and depression.

Social consequences of unemployment:

-Downward pressure on wages for the employed

-Increased poverty and crime

Transformation of traditional societies

Economic consequences of

unemployment:

-Lower level of AD

-Under-utilization of the nation’s resources

-Increased budget deficits

·

Stable inflation: definitions

(inflation, deflation, disinflation)

-Inflation:

Increase in APL of goods and services in nation.

-Deflation:

Decrease in APL of goods and services in nation.

-Disinflation:

Inflation rate decreases

·

Measuring inflation: Consumer Price

Index

-Consumer

Price Index: Measure prices of consumer goods and

services, used by government to measure in price level of products.

CPI = (Good A price x Good A weight) *Weight - % of income

+ (Good B price x Good B weight) + (Good C price x

Good C weight)

Ex. CPI 2010 – CPI 2009/CPI 2009 x 100

·

The relationship between

unemployment and inflation (short-run v. long-run Phillips Curve)

·

Equitable distribution: Lorenz

curve diagram, Gini coefficient, examples of transfer payments (know at least

3)

-Equity: Fairness in economics

-Equality: Minimizing difference in income

and wealth among a nation’s household.

-Lorenz curve: Represents distribution of

income across a nation’s population.

Gini

coefficient

-Gini coefficient: Measures ratio of area A

to the area A + B. Higher the ratio, greater the inequality in a country. Indicated

by Gini index, level of income distribution.

Countries with highest Gini index are mostly sub-Saharan African nations

and other extremely poor developing nations. Nations with lowest Gini indexes

are greatest in income distribution are mainly Northern and Western European

countries in which government plays an active role in redistribution of income

through taxes and government spending.

-Relative poverty: Income is lower than 50%

of the population

-Absolute poverty: Individuals who cannot

afford basic necessities.

Causes of poverty:

-Low income

-Unemployment

-Lack of human capital

Transfer Payments: Payment by government to an individual as a support,

made without any exchange of goods or services.

-Student Scholarship grants

-Social Security benefits

-Welfare checks

-Subsidies to certain businesses

-Food Stamps

-Progressive taxes: Tax which percentage

paid in tax increases as income increases. Higher the income, more the tax

increases, lower the income, less the tax decreases.

-Direct tax: Taxes paid directly to government. Ex. Income tax – taken directly out of

a worker’s earned income.

-Indirect tax: Taxes paid by households through an intermediary such as retail store. Ex.

Sales tax, goods and services tax, etc.

·

Steady growth: see à see 2.1

2.4

: Fiscal Policy (Ch. 17, Pearson)

·

Definitions: government budget

deficit, government budget surplus, the difference between deficit and debt,

expansionary fiscal policy v. contractionary fiscal policy

-Fiscal

Policy: Government’s use of taxes and spending to influence overall

level of AD in economy to promote macroeconomic

goals of full employment, stable prices, and economic growth.

-Expansionary

fiscal policy: Decrease in taxes and/or increase in government spending

aimed at increasing level of AD to close recessionary gap.

-Contractionary

fiscal policy: Increase in taxes and/or decrease in government spending

aimed at decreasing AD to close inflationary gap.

-Government

Budget Deficit: Total government spending exceeds total revenue brought in

from taxes.

-Government

Budget Surplus: Total government spending is less than tax revenue.

-National debt: Accumulation of all past

year’s deficits.

-Demand-side policies: Macroeconomic

policies of government aimed at stimulating/reducing overall level of AD to

promote short-run achievement of macroeconomic objectives.

·

Crowding out theory (HL only)

2.5

: Monetary Policy (Ch. 18, Pearson)

·

Definition of money supply and

tools for adjusting it

-Monetary

policy: Manipulation of the money supply to meet economic goals by the

central banks.

-Central

bank: Monetary authority of a country; issue currency,

manage money supply, control interest rates. Ex. US Federal Reserve (Fed),

European Central Bank (ECB), Bank of Japan, Bank of England, etc.

-Money supply: Combined value of the

currency and demand deposits.

-Money demand: Desire to hold money as an

asset, means to purchase goods and services. Inversely related to interest

rates. Increases or decreases with overall level of national income.

-Contractionary monetary policy: Actions by

central bank to decrease the money supply and increase interest rates. Central

bank sells bonds.

-Expansionary monetary policy: Actions by

central bank to increase the money supply and decrease interest rates. Central

bank buys bonds.

Tools for changing money supply:

-Changing discount rate

-Buying or selling bonds

Changing the reserve requirement

·

Diagram for money supply

2.6

: Supply-Side Policies (Ch. 19, Pearson)

·

Examples of supply side

policies à Market-oriented (know at least 3) v. interventionist (know at least

3)

-Supply-side

policy: Combination of government-led and free market policies designed

to increase productive capacity of country.

-Market-based supply-side

policy: Reduce

·

Evaluation of supply side

policies

IMPORTANT: Read through the bullet points

of the IB Economics Course Guide

(posted to Edmodo) for your level. Under

any bullet point where you would feel uncomfortable answering a question, make

sure you record this and make it an emphasis of study as you review for your

final exam.