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ECO 205 Principles of Macroeconomics Spring 2006 Final Exam Prep Sheet Short Answer: Answer fully, but concisely. Only answer what the question is asking. 1. Distinguish between a laissez-faire economist and an activist economist. 2. If an economy is in short run equilibrium (SRE) that is below potential, what forces will bring the economy back to long run equilibrium (LRE)? 3. What are the three functions of money? 4. What is the key characteristic a commodity must have for it to become commodity money? 5. What is the key difference between convertible paper money and fiat money? 6. True/False/Uncertain: Explain ­ The United States, like other modern economies, uses a highly evolved paper money system that is backed by the vast gold reserves stored in the lower levels of the Federal Reserve Bank of New York. 7. Is the United States banking system susceptible to panic? If so, how might a panic occur? 8. What are the three tools of the Fed in conducting monetary policy? 9. What are the macroeconomic goals of the Fed? 10. Describe briefly the monetary transmission mechanism. 11. Describe briefly how banks create money. 12. What are the two primary responsibilities of the Federal Reserve System? 13. What is the quantity theory of money/inflation? 14. Who is Milton Friedman? 15. What is Phillps Curve? (SR and LR). 16. What is the Classical Dichotomy? 17. What are inside and outside lags? 18. What is the economists' definition of money? 19. Why did convertible paper replace commodity money in early societies? 20. How does the Fed use monetary policy to influence the macroeconomy? 21. What is the political business cycle? Short Essay: Discuss fully in short essay style (complete, grammatically correct sentences with more or less accurate spelling, a clear organization, and exceptional penmanship). Answer the question completely without providing extraneous information. 1. Describe the evolution of the various forms of money from barter to fiat by carefully describing each form in detail, and discussing why money evolved from one form to the next. 2. Describe the entire process of using monetary policy to stimulate the economy: How does the Fed use its primary tool to eventually achieve its goals? Show and discuss. 1. Imagine that oil prices begin to fall, and positive animal spirits also prevail. Using AS/AD, show the result. Discuss the business cycle problems that might show up. What policy response (fiscal and monetary) could be used in this situation, and what are the limitations of using each? 2. Show an AS/AD model and a SR/LR Phillips Curve model, and show the SR and LR effects of a decrease in animal spirits. What policy would a Keynesian suggest, how about a Classical?

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