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									                              Santa Monica College
                                    ECON 2
                         STUDY GUIDE FOR FINAL EXAM

DATE: Thursday, July 24, 2008

CHAPTERS: 12, 13, 14, 15, and 19.

FORMAT: 60 multiple choice 6 short answer/essay questions.

YOU NEED TO BRING A SCANTRON FORM 882-E. NO NEED FOR BLUE BOOK.

TOPICS:
Chapter 12
 Show a deflationary gap and inflationary gap on an aggregate expenditures diagram.
 Calculate the multiplier and explain its significance.
 Calculate the change in spending needed achieve a desired level of GDP.
 Show a change in spending on an aggregate expenditures diagram.
 Define automatic stabilizers and discretionary fiscal policy and explain their function
   in the economy.
 Differentiate the federal deficit and the debt and summarize the US federal deficit
    experience since World War II.
 Summarize the costs and benefits of deficit spending.

Answers to Multiple Choice Questions:
1. c
2. a
3. c
4. b
5. c
6. d
7. c
8. d
9. a
10. d
11. b
12. c
13. b
14. a
15. a
16. a
17. a
18.   a
19.   a
20.   d
21.   c
22.   b
23.   b
24.   b
25.   d
26.   c
27.   d
28.   b
29.   c
30.   b

Answers to Fill-In Questions

1. government spending and taxes
2. equilibrium GDP equal to full employment GDP
3. raising taxes and lowering government spending
4. raising government spending and lowering taxes
5. automatic stabilizers
6. it crowds out borrowers
7. the corporate income tax
8. discretionary
9. John Maynard Keynes
10. zero

Chapter 13
 Describe and apply the four jobs of money.
 Define the US money supply in terms of M1, M2, and M3
 Differentiate money from other assets.
 Describe and apply four influences on the demand for money.
 Define and explain the importance of the liquidity trap.
 Graph the demand and supply for money to show the determination of the interest
   rate.
 Describe the origins of the US banking system.
 Explain money creation in principle and in a modern economy.
 Explain the role of deposit insurance in the US.
Answers to Multiple-Choice Questions:
1. d
2. a
3. b
4. c
5. d
6. c
7. a
8. d
9. d
10. c
11. b
12. c
13. e
14. a
15. c
16. d
17. c
18. a
19. b
20. c
21. b
22. a
23. b
24. d
25. d
26. b
27. a
28. a
29. c
30. d

Answers to Fill-In Questions
1.   medium of exchange; store of value; standard of value.
2.   barter; double coincidence of wants
3.   the Spanish milled silver dollar
4.   to provide an I.D. for people who have bank credit so that they don't have to pay cash
5.    large denomination time deposits and money market mutual funds held by institutions
6. 5
7. 20
8. 66
9. giving out loans; the loans are repaid
10. demand for and supply of money (or, demand for money and the Federal Reserve, or
    people who borrow, or the banks)
11. transactions
12. not lend it out, but simply hold it
13. the goldsmiths
14. People who came in to get back their gold coins did not insist on receiving the
    identical coins they had left; more and more people were not bothering to come in at
    all to get their money since they were paying debts with their receipts.
15. goldsmith's receipts
16. 50 percent
17. either their greed or that they did not keep a high enough reserve ratio; lending out
    too many receipts or gold.
18. 2 percent (or 3 or 4 percent)
19. people want to make sure their money is safe (The S & L debacle is not a great
    answer, but it is correct.) Also, to avoid a panic.
20. $100,000
21. another bank takes it over.

Chapter 14
 Describe the history, structure, and functions of the US Federal Reserve system.
 Compute required reserves.
 Explain deposit expansion based on fractional reserve banking.
 Calculate the deposit expansion multiplier and potential expansion of the money
   supply.
 Calculate bond interest rates.
 Describe the structure and function of the Federal Open Market Committee.
 Describe and evaluate the overall effectiveness of monetary policy.

Answers to Multiple-Choice Questions

1. d
2. d
3. d
4. a
5. d
6. e
7. c
8. a
9. b
10. a
11. a
12. d
13. c
14. a
15. d
16. d
17. a
18. b
19. a
20. a
21. a
22. a
23. d
24. d
25. c
26. d
27. c
28. c
29. a
30. d
31. e
32. d

Answers to Fill-In Questions
1.  1913
2.   12
3.  President, the Senate
4.   Board of Governors
5.  10
6.   they are not going to be withdrawn for a specified period of time
7.   0
8.  lower the discount rate and buy securities on the open market; lower reserve
   requirements
9. inflation than recession
10. the Federal Reserve District banks
Chapter 15
 State the equation of exchange and explain its importance.
 Differentiate the crude and sophisticated version of the quantity theory of money.
 Use the investment demand and saving diagram to explain the determination of
   interest rates.
 Summarize the propositions of Keynesian and monetarist theory.
 Differentiate Keynesian and monetarist ideas both historically and theoretically.
 Summarize the propositions of supply side economics and rational expectations
   theory.


Answers to Multiple-Choice Questions

1.     a
2.     c
3.     a
4.     c
5.     b
6.     d
7.     c
8.     b
9.     b
10.    b
11.    a
12.    c
13.    a
14.    d
15.    a
16.    a
17.    d
18.    d
19.    c
20.    a
21.    b
22.    b
23.    b
24.    d
25.    a
26.    a
27.    e
28.    c
29.    d
30.    b
31.    d
32.    c
33.    e

Answers to Fill-In Questions
1.     do nothing
2.     spent; purchased; invested
3.     interest rates would fall
4.     strong labor unions and highly concentrated industries
5.     monetarist
6.     insufficient aggregate demand
7.     increased government spending
8.     the rate of growth of the money supply
9.     rapid monetary growth
10.    spend it on various assets
11.    a slow-down in the rate of growth of M caused by the Fed
12.    a steady growth rate in the money supply each year
13.    only temporarily; only temporarily
14.    raise aggregate supply; high marginal tax rates
15.    lower marginal tax rates
16.    increased
17.    very predictable
18.    They just go too far in ascribing rationality to the general population.

Chapter 19
 Define the major items in the balance of payments.
 Describe the US current and capital account balances since 1960.
 Describe the shifts in exchange rate systems since 1933.
 Show the foreign exchange market in a supply/demand diagram.
 Summarize the pros and cons of fixed and flexible exchange rate systems.
 Summarize the advantages of a single exchange rate system such as the Euro.



Answers to Multiple-Choice Questions

1.      a
2.      c
3.      d
4.      b
5.      a
6.      d
7.      c
8.      a
9.      c
10.     a
11.     d
12.     b
13.     a
14.     c
15.     b
16.     b
17.     b
18.     d
19.     a
20.     a
21.     b
22.     b
23.     a
24.     c
25.     c
26.     a
27.     b
28.     d
29.     b
30.     c
31.     b
32.     a

Answers to Fill-In Questions
1.      balance of payments
2.      invested; corporate stocks and bonds and U.S. government securities
3.      well over 100 national currencies
4.      defines its currency in terms of gold
5.      its money supply
6.      gold; money supply; decline
7.      decline; rise
8.    supply and demand
9.    Euros
10.   capital; consumer

								
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