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.

	Created by Rio Shinkawa over 11 years ago

Note on IB Economics Study Guide, created by Rio Shinkawa on 19/05/2015.