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Principles of Macroeconomics

Description of the Examination

The Principles of Macroeconomics examination covers material that is usually taught in a one-semester undergraduate course in this subject. This aspect of economics deals with principles of economics that apply to an economy as a whole, particularly the general price level, output and income, and interrelations among sectors of the economy. The test places particular emphasis on the determinants of aggregate demand and aggregate supply, and on monetary and fiscal policy tools that can be used to achieve particular policy objectives. Within this context, candidates are expected to understand basic economic concepts such as scarcity and comparative advantage and measurement concepts such as gross domestic product, consumption, investment, unemployment and inflation. Candidates are also expected to demonstrate knowledge of the institutional structure of the Federal Reserve Bank and the monetary policy tools it uses to stabilize economic fluctuations and promote long-term economic growth, as well as the tools of fiscal policy and their impacts on income, employment, price level, deficits, and interest rate. Basic understanding of foreign exchange markets, balance of payments, and effects of currency appreciation and depreciation on a country's imports and exports is also expected.

The examination contains approximately 80 questions to be answered in 90 minutes. Some of these are pretest questions that will not be scored. Any time candidates spend on tutorials and providing personal information is in addition to the actual testing time.

Knowledge and Skills Required

Questions on the Principles of Macroeconomics examination require candidates to demonstrate one or more of the following abilities.

  • Understanding of important economic terms and concepts
  • Interpretation and manipulation of economic graphs
  • Interpretation and evaluation of economic data
  • Application of simple economic models

The subject matter of the Principles of Macroeconomics examination is drawn from the following topics. The percentages next to the main topics indicate the approximate percentage of exam questions on that topic.

8–12%
Basic Economic Concepts

  • Scarcity, choice, and opportunity costs
  • Production possibilities curve
  • Comparative advantage, specialization, and exchange
  • Demand, supply, and market equilibrium

12–16%
Measurement of Economic Performance

  • National income accounts
    • Circular flow
    • Gross domestic product
    • Components of gross domestic product
    • Real versus nominal gross domestic product
  • Inflation measurement and adjustment
    • Price indices
    • Nominal and real values
    • Demand-pull versus cost-push inflation
    • Costs of inflation
  • Unemployment
    • Definition and measurement
    • Types of unemployment
    • Natural rate of unemployment

15–20%
National Income and Price Determination

  • Aggregate demand
    • Determinants of aggregate demand
    • Multiplier and crowding-out effects
  • Aggregate supply
    • Short-run and long-run analyses
    • Sticky versus flexible wages and prices
    • Determinants of aggregate supply
  • Macroeconomic equilibrium
    • Real output and price level
    • Short and long run
    • Actual versus full-employment output
    • Business cycle and economic fluctuations

15–20%
Financial Sector

  • Money, banking, and financial markets
    • Definition of financial assets: money, stocks, bonds
    • Time value of money (present and future value)
    • Measures of money supply
    • Banks and creation of money
    • Money demand
    • Money market
    • Loanable funds market
  • Central bank and control of the money supply
    • Tools of central bank policy
    • Quantity theory of money
    • Real versus nominal interest rates

20–25%
Inflation, Unemployment, and Stabilization Policies

  • Fiscal and monetary policies
    • Demand-side effects
    • Supply-side effects
    • Policy mix
    • Government deficits and debt
  • Inflation and unemployment
    • The Phillips curve: short run versus long run
    • Role of expectations

5–10%
Economic Growth and Productivity

  • Investment in human capital
  • Investment in physical capital
  • Research and development, and technological progress
  • Growth policy

9-13%
Open Economy: International Trade and Finance

  • Balance of payments accounts
    • Balance of trade
    • Current account
    • Financial account (formerly called capital account)
  • Foreign exchange market
    • Demand for and supply of foreign exchange
    • Exchange rate determination
    • Currency appreciation and depreciation
    • Exchange rate policies
  • Inflows, outflows and restrictions
    • Net exports and capital flows
    • Links to financial and goods markets
    • Tariffs and quotas

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