REVIEW TOPICS FOR EXAM #2

THE INCOME-EXPENDITURE MODEL

- Who developed this?
- According to this model, what determines the level of economic activity?
- What do you know about all of the points along the aggregate supply (AS) curve in this model?
- What does it mean to say that the AS curve is an ex ante curve?
- How is the aggregate demand (AD) curve developed?
- According to Keynes, consumption depended primarily on what variable?
- Why is consumption considered a "passive" variable?
- Write down the equation for the consumption function. Identify the dependent variable, the independent variable, the slope and the y-intercept.
- What are some other ways to refer to the slope of the consumption function?
- What does the slope of the consumption function have to do with the slope of the AD curve?
- Why is investment so unstable?
- Why is investment considered the "driving" variable?

READINGS

- What are the two principles of Functional Finance?
- How do the principles of Functional Finance differ from the principles of "Sound Finance"?
- What is the estate tax, and why does John Miller think it should be repealed?
- Explain the "marriage penalty". Does it affect all income groups in the same way? Explain.
- Does Robert Pollin believe that big government is necessarily better than small government? Explain.
- What does Abby Scher mean by "corporate welfare"?
- What is the main argument made by Marc Breslow and John McDermott in Disappearing Corporate Taxes?

FISCAL POLICY

- What kinds of things can the government do to stimulate the economy through fiscal policy?
- What is the difference between discretionary and non-discretionary policy? Give an example of each.
- What is the tax multiplier? Write down a formula.
- How is the tax multiplier used?
- Which will have a greater stimulative effect, an increase in government spending or an equivalent cut in taxes? Explain carefully.
- What kinds of things would the government do if it wanted to pursue contractionary fiscal policy?  Why would a government do this?
-  What is the difference between a progressive tax and a regressive tax? Give an example of each.

MONETARY POLICY

- What are the three tools that can be used to influence the availability of bank reserves? Explain each tool carefully.
- Why would the central bank want to limit banks’ access to reserves? Explain carefully.
- Explain (carefully) the quantity theory of money.
- Write down a formula for the money multiplier.
- Write down the formula that will allow you to determine how a change in bank reserves will (ultimately) affect the money supply.
- Why do banks hold reserves?
- Why don’t they (usually) want to hold many excess reserves?
- If the Federal Reserve wants to restrict bank lending, should it conduct an open-market purchase or an open-market sale? Explain.