**UPDATED WITH PRACTICE QUESTIONS**
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Each title is a link to the problem set for that topic. Your complete set of problem sets is due on Thursday with the exam.
The problem sets should be your primary review aids. Below is a brief outline of the topics we have covered and the general things you need to know/be able to do for each topic.
3.1: Circular Flow Model. You need to know the circular flow model and how it can be used to calcuate GDP. You need to know and be able to use the expenditure approach formula for calculating GDP.
3.2: GDP. You need to know the difference between real and nominal GDP and how to apply the relationship between total and per capita GDP
3.3: Real v. Nominal GDP. You need to be able to convert between real and nominal GDP given a measure of inflation.
3.4: CPI. You need to be able to calculate CPI. You need to be able to use CPI to determine the changes in real values between two years.
3.5: Costs of Inflation and Deflation. You need to know the costs of both expected and unexpected inflation. You need to know why deflation is worse than inflation.
3.6: Measuring Unemployment. You need to be able to apply the relationship between population, civilian non-institutionalized population, labor force, employment, unemployment, labor force participation rate and unemployment rate. You need to be able to differentiate between the types of unemployment.
3.7: The Natural Rate of Unemployment. You need to be able to apply the relationship between overall unemployment, cyclical unemployment, and the natural rate of unemployment. You need to be able to apply the relationship between cyclical unemployment and labor market equilibrium. You need to understand how the labor market equilibriation process is different in the short term from the long term.
** UPDATE **
Here is a practice FRQ for you (it is the same as the one I gave out in class today). Below is a breakdown of the answers:
1) This is just memorization. Look at your problem set for 3.1 to know exactly how to do this
2) If unemployment is less than the natural rate, cyclical unemployment is less than 0%. This means that the current wage in the labor market is less than the equilibrium wage. You should draw a diagram of the labor market that shows a current wage below equilibrium
3) If a bunch of people leave, the labor supply will decrease (shift to the left). You diagram should start with the labor shortage from part 2 and show how the decreasing labor supply makes the shortage even worse (since wages don't change in the short run)
4) Inflation is the percent change in CPI. Application of the % change formula: (new-old)/old. (300-400)/400 = -25% or 25% deflation
5) Application of the formula to find the real value of income: (nominal income/CPI)*100 = real income. Hans' real income last year was $3/hour: ($12/400)*100. His real income this year is $6: ($18/300)*100. The percent change from $3 to $6 is 100%: ($6-$3)/$3 = 1 = 100% increase
6) Application of the formula to calculate GDP: C+I+G+(X-M)=Y. The total change in nominal GDP is -$18 billion (-$3 billion-$12 billion-$3 billion+$6 billion). To find the real change, use the same formula from above: (nominal/CPI)*100. (-$12 billion/300)*100 = -$4 billion.
