Instructions:
You will have two hours to complete this exam. Answer only in the blue examination booklets provided. If you have questions during the exam, come to my office but do not bring your exam. Leave it at your place. When you have completed the exam, begin having a nice summer.
(8 points) The consumer price index for selected years is shown in the table:
| Year | CPI (base year = 1982-4) |
| 1974 | 49.3 |
| 1987 | 113.6 |
| 1988 | 118.3 |
| Today (April 1997) | 160.2 |
a) Determine which new-car price is highest in real dollars: $4,000 in 1974, $17,000 in 1988, or $32,000 today. Explain.
b) Convert $32,000 in today's dollars into 1974 dollars.
c) Convert $17,000 in 1988 dollars into 1974 dollars.
d) Calculate the rate of inflation between 1987 and 1988.
(12 points) This problem uses the macroeconomic aggregate data in the table.
| Date | Consumption (C) | Investment (I) | Government (G) | Net Exports (NX) | GDP | Government Deficit/Surplus (G-T) | Net Taxes (T) | Savings (S) |
| 1998 | 1900 | 405 | 805 | ? | 3060 | -95 | 900 | ? |
| 1999 | 1960 | 405 | 865 | -50 | ? | -40 | 905 | 315 |
| 2000 | ? | 420 | 865 | -65 | 3390 | -25 | ? | 330 |
a) (5 points) Provide numerical values for the missing numbers in the table.
b) (4 points) Estimate the marginal propensity to consume out of total income using the information from 1998 and 1999.
c) (3 points) Using your answer for the MPC, provide a value for the simple multiplier.
(16 points) The recent budget memorandum between the president and Congress contained a provision for a capital gains tax cut. If enacted, this would make the tax rate on investment gains lower than the tax rate on other forms of income. It is thought that it would encourage savings by private individuals.
What are the likely macroeconomic effects of this tax cut assuming that it does stimulate more savings by households?
(14 points) The banking system has $85 billion in total reserves of which $80 billion are required reserves. There are $1,200 billion in checkable deposits and $520 of currency in circulation.
a) (3 points) What is the amount of the money supply in dollars?
b) (3 points) What is the most by which the banking system could expand the money supply?
c) (8 points) If the Federal Reserve were to announce an increase in the "discount rate" would this tend to increase or decrease the money supply? Explain.
(16 points) The macroeconomic situation in our country is this:
Would you recommend expansion or contraction of the money supply? Provide answers from both Keynesian and Classical perspectives.
(10 points) Lately, the U.S. dollar has been increasing in value relative to the Japanese Yen (¥). At the same time, interest rates in the us are rising relative to interest rates in Japan.
a) Are these two observations possibly related? Explain.
b) What is the likely effect of the change in exchange rates on U.S.-Japan trade? Explain.