2026 Exam 2

2026

Translation to a letter grade:

43-44 A
41-42 A-
38-40 B+
33-37 B
29-32 B-
26-28 C+
22-25. C
18-21 C-

Basic Facts, with the Approximations to Remember

  • 2025 US GDP: $30.8 trillion ≈ $30 trillion

  • 2025 measure of the Fed’s preferred measure of inflation: 3% per year
    (Core Personal Consumption Expenditures Price Index inflation)

  • Manufacturing share of GDP by valued added now: 10%. (In the 1950s, it used to be 27%.)

Readings

The Taylor Rule and Miles's Triple-Strength Taylor Rule

See this post on the Taylor Rule and the Triple-Strength Taylor Rule. There is a link there to an exercise that will give you practice. I’ll choose 4 of the practice questions as exam questions.

RESOURCES FOR LEARNING MORE ABOUT HOW TO WORK WITH THE INTERNATIONAL FINANCE DIAGRAMS (SR & LR).

Steps for Analyzing Shocks in the SR International Finance Diagram

0. Exogenous shock story —> which curve starts the ball rolling

—or instead how the exogenous shock might show up directly for C or G in the arrow diagram.

Order of further analysis: top graphs, left to right, then bottom graph.

  1. Given the interest rate (r or r’) find the quantity of CF and I

  2. NX = CF

  3. Because of 2, you don’t need this for NX, but for the exchange rate (value of the dollar), figure out what happened to the supply of dollars curve. Interact that with any shift in the NX curve. (Typically only one will shift.)

  4. Go to the arrow diagram to see what happened to C, Y and AD. (In step zero, you might have learned that G changed; that is treated as an exogenous shock. And a shock that raises household saving will reduce C in the arrow diagram.)

Steps for Analyzing Shocks in the LR International Finance Diagram

0. Exogenous shock story —> which curve shifts

—Note that anything the Fed does has no effect on the LR international finance diagram!!!!

Order of further analysis: top graphs right to left to figure out if D shifts, then left to right, then bottom graph last.

  1. If I(r) or CF(r) shifts, shift D (demand for loanable funds) in the same direction!!!!

  2. Check if S or D shifts in the market for loanable funds and determine the interest rate in the market for loanable funds.

  3. NX = CF

  4. Because of 3, you don’t need this for NX, but for the exchange rate (value of the dollar), figure out what happened to the supply of dollars curve. Interact that with any shift in the NX curve. (Typically only one will shift.)

Slides:

Also, study up on working with the international finance diagrams by looking at these posts:

PLUS

Look at the answers for these question in the answer sheets for exams earlier than 2024 (saving the 2024 final exam as a practice exam). (Or if you are willing to spend more time studying, you can treat the 2022 final exam as a pre-practice exam.)

(with full graphs in the answer sheet), but first do these questions before looking at the answers:

I will ask questions about aggregate demand. In the long run, the only things that could affect aggregate demand would be things that increase the natural level of output: a change in technology or a change in the amount of labor. (Because of the stock-flow distinction, the capital stock can’t change much at all in the long run. Changes in the capital stock are a very-long-run thing.)

In the short run, assume the following:

  • If the initial shock is to consumption—whether directly or because of tax changes—that direction dominates what happens to aggregate demand.

  • If the initial shock is to government purchases, that direction dominates what happens to aggregate demand.

  • As long as the initial shock is NOT to consumption or government purchases, aggregate demand moves in same direction as I + NX.