1. What is inflation? What’s the difference between inflation and hyperinflation? What happens to the velocity of money during a hyperinflation? Why?
2. What is the major cause of any sustained inflation?
3. What is monetary neutrality? Are monetary institutions (such as banks) "neutral" or do they affect long-run output?
4. What is the equation of exchange? What assumptions need to be made to use the equation of exchange to demonstrate monetary neutrality? Are these assumptions reasonable?
5. "Inflation distorts the price system." In what ways? Why is this important? Explain how such distortion affects the economy. [See web notes.]
6. Inflation arbitrarily redistributes income and wealth, causing most people to view the economy as "unfair." What negative consequences tend to follow from such feelings about the market economy? [See web notes.]
7. What three macroeconomic facts characterize all developed economies?
8. What three effects account for the negative slope of the aggregate demand curve?
9. What are the components of aggregate demand? What is included in each component?
10. In what direction and through what process does each of the following shift the AD curve?
a. An increase in personal income taxes.
b. Improving economic conditions in Europe.
c. Increased concern by business decision makers about future economic growth.
d. An increase in government purchases of goods and services.
e. An increase in the money supply.
11. In the long run, what effect does an increase in aggregate demand produce on the economy?
12. What determines the position of the long-run aggregate supply curve? What changes its position?
13. Why do most firms hold prices constant in the face of small or medium-sized changes in demand for their products? What causes firms to change prices?
14. Why is the short-run aggregate supply curve horizontal? (See web notes.)
15. In the short run, how does an increase in aggregate demand affect Y and the price level?
16. What happens to the SRAS curve, the price level, and Y after an increase in AD pushes output above its natural level (Y > Yn)?
17. Why does it take several months, or perhaps even a year, for prices to rise in response to excessively rapid growth in aggregate demand that pushes Y above its natural level?
18. What is true of the unemployment rate when Y > Yn? What is true when Y < Yn? When Y = Yn?
19. Why is the behavior of wages so important in understanding how output and the price level respond to a change in aggregate demand?
20. What are the three main reasons wages tend to rise? Which one is regarded as a good thing by economists? Why?
21. Describe the process by which an increase in aggregate demand causes the prices of final goods and services to rise.
22. What brings an inflationary process to a halt?
23. Can the Federal Reserve control the economy? How (if you said yes), or why not (if you said no)?
24. What variable does the Federal Reserve use as its target of monetary policy actions?
25. Explain the process by which the Federal Reserve can drive the market rate of interest up (or down).
26. In what way do changes in the market interest rate affect aggregate demand?
27. If the Fed wants to cause aggregate demand to grow faster, what will it do? If it wants AD to grow more slowly, what will it do?
28. What economic variables does the Fed watch intently in deciding whether to raise, lower, or leave unchanged its interest rate target?
29. Suppose the Fed observed that a) Y > estimated Yn; b) Y is growing faster than the estimated sustainable growth rate; c) u has fallen below estimated un; d) commodity prices have begun to rise; and e) business inventories are depleted. What should the Fed do?
30. The federal government's budget has grown tremendously over the past few decades. What spending categories have grown especially rapidly?
31. How can a change in government spending of, say $50 billion, have any significant effect on an economy whose GDP is more than $9 trillion? Why do such relatively small changes in spending matter?
32. In what way might deficit-financed government purchases negatively affect the private sector of the economy? Explain the process.
33. What type of financing of government purchases would produce the largest effect on aggregate demand?
34. How effective is fiscal policy in offsetting economic fluctuations (business cycles)? Why?
35. What is an "automatic stabilizer"? What does it do? How does it work?
36. What is a "graduated income tax"? How does it affect a taxpayer's calculation of taxes?
37. What is "the natural output level"? (What defines it?)
38. How does an increase in income tax rates affect the economy?
39. What is the basic problem raised by the way we finance U.S. social security and medicare programs?
40. Private saving accounts are a good idea for both individuals and the economy - but shifting social security taxes into private retirement accounts won't solve the program's financing problems. Why not?