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# Econ 322 Midterm Exam 1 Study Guide Econ 322

USC

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This 6 page Study Guide was uploaded by Tulsi on Saturday February 13, 2016. The Study Guide belongs to Econ 322 at University of South Carolina taught by Hauk in Spring 2016. Since its upload, it has received 80 views. For similar materials see Intermediate Macroeconomics in Economcs at University of South Carolina.

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Date Created: 02/13/16

Econ 322 Midterm Exam 1 Study Guide Saturday, February 13, 2016 3:29 PM Solow Growth Model: -The major driving force of economicgrowth over time is accumulation of capital -Production function: Y = F (K,L) -inputs: K = capital, L = labor -exhibits constant returns to scale ( zY = f(zK, zL) z is a constant) -y = Y/L, k = K/L, y = f(k) -y = output per person, k = capital per worker y y= f(k) i = sf(k) Investment= new capital Savings = investment Y = C + I (consumption+ investment) i= sf(k) where s is the savings rate, i= s*y Depreciation= k k* is the deprecation rate -f'(k) > 0 Steady state -f''(k)<0 In the steady state: Golden Rule Steady State (k**) -The steady state that maximize consumption, depending on the economyremaining in a steady state -occurs when = marginal product of capital (f'(k)) y y= f(k) i = sf(k) k k** Golden Rule Steady state Solow Model with Technological Growth n = population growth rate -E = efficiency units of labor -g = growth rate of E -Y = F(K,L*E) -y = f( ) - = k/L*E - = sf( )-( * Steady state Endogenous Growth Theory -Capital does not have diminishing marginal returns -economydoes not converge to a steady state -growth rate is a function of savings and depreciation -Y = AK A = technology, K = capital stock -I = sY = sAK Y = AK Y I = sAK K -No steady state to converge to -if sA> k will grow -if sA< k will shrink Quantity Theoryof Money -MV = PY, M = money supply, V = velocity of money, P = price level, Y = real GDP -MV = PY, total spending = nominal GDP Quantity Theoryof Money -MV = PY, M = money supply, V = velocity of money, P = price level, Y = real GDP -MV = PY, total spending = nominal GDP -M/P = kY P LRAS SRAS AD Y Shifting the curve: -if money supply increases, AD shifts right -Respond by raising prices LRAS P SRAS AD2 AD Y -if there is a recession, AD shifts left -firms respond by lowering prices P LRAS SRAS AD AD2 Y IS-LM Model -IS: Goods market. Savings = Investment -LM: Money market. Liquidity = money supply Keynesian Cross -PE = C + I + G (planned expenditure) -C = C0 + c(Y-T) -C0 = autonomous consumption -c = marginal propensity to consume -Y-T = disposable income -I = I (r) investment spending is a function of interest rate -PE = C0 + c(Y-T) + I(r) + G -Actual expenditure = Y = GDP E AE (slope = 1) PE (slope = MPC) Goods market at equilibrium: AE = PE Y = C + I + G S = (Y-C-T) + (T-G) private saving = public saving y* Y If G goes up E AE PE2 PE -PE curve shifts up by G If G goes up E AE PE2 PE -PE curve shifts up by G -Y increases by 1/(1-MPC)* G due to multiplier effect Y If interest rate goes up E AE PE -Investmentwould decrease -PE shifts down PE2 -Y decreases Y If taxes increase PE E AE -consumption decreases PE2 -PE shifts down -Y decreases by -MPC/(1-MPC)* T IS Curve: r -r = interest rate -Y = GDP -IS curve is the combination of r and Y that keep goods marketin equilibrium IS Y If G increases r -IS shifts right by the govt spending multiplier IS2 IS Y If taxes increase r -IS shifts left by the taxation multiplier IS IS2 Y Money Market Equilibrium -M/P = L(r,Y) real money balances = liquidity function -as interest rates rise, demand for liquid money goes down -as GDP increases, or Y, demand for liquid money goes up M/P r L(r,Y) M/P If fed increases money supply M/P M/P 2 r -M/P shifts right -interest rate decreases L(r,Y) M/P If real GDP (Y) increases r M/P -L(r,Y) shifts right -interest rate increases L(r,Y) 2 L(r,Y) M/P Combine two curves for IS-LM curve r LM -IS: Y = C+ I + G -LM: M/P = L(r,Y) r* -at every point along LM, money marketis in equilibrium -at every point on IS, goods market is in equilibrium IS Y* Y If G increases r LM -IS shifts right by gov't spending multiplier -interest rate increases, which causes Investmentto decrease -results in crowding out effect r* IS2 -Increasing taxes causes opposite effect IS -interest rate increases, Y decreases Y* Increase Money Supply r LM LM2 -shifts LM right -interest rate decreases, causing Investmentto increase r* -Y increases as a result IS Y*

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