Prof. Anthony D. Becker - December 16, 1996 The exam is "closed note, closed book;" the use of either books or notes is not allowed.
You may use a calculator.
There are four questions worth a total of 100 points. Half of the material is from the quizzes with minor alterations. The other half is new material.
A score of 90% or better on the old material will assure you of at least a "B" on this exam.
| Question | Old Material | New Material | Total | Score on Old Material | Score on New Material |
| 1 | 15 | 9 | |||
| 2 | 30 | 0 | |||
| 3 | 5 | 16 | |||
| 4 | 0 | 25 | |||
| Total | |||||
| Total |
(15 old points, 9 new points) The data below show gross domestic product (GDP) in billions of nominal dollars, the implicit price deflator (IPD, base year 1992) and the consumer price index (CPI, base years 1982-4) for three different years.
| Year | GDP | IPD | CPI | Unemploy- ment rate |
| 1973 | 1337.2 | 34.5 | 43.0 | 4.9 |
| 1977 | 1933.4 | 46.3 | 59.2 | 7.5 |
| 1996 | 7426.8 | 109.0 | 155.1 | 5.6 |
a) (9 old points, 9 new points)
| Fill in the values for these measures. | Value |
| Real GDP in 1972, expressed in 1992 dollars | |
| Real GDP in 1996, expressed in 1992 dollars | |
| Real GDP in 1977, expressed in 1996 dollars | |
| Average annual inflation rate for consumers between 1973 and 1977 | |
| A wage of $3.25/hour in 1977, in 1996 dollars | |
| The price of a 1973 VW Beetle, $2072, in 1996 dollars |
b) (6 old points) Draw a graph of aggregate supply and
aggregate demand. Shift the curves in a way consistent with the
changes in the price level (average inflation rate) and real
output (real GDP) between 1973 and 1977.
(30 old points) In the table are data for macroeconomic
aggregates for a nation's economy in billions of real (1992)
dollars.
| Year | Income/ Output (Y/AD) | Consump- tion (C) | Invest- ment (I) | Govern- ment (G) | Net Taxes (T) | Govt. Deficit | Disposable Income (Yd) | Savings (S) |
| 1995 | 6848 | 4578 | 1010 | 1260 | 59 | 1069 | ||
| 1996 | 6963 | 4668 | 1010 | 1285 | 1221 | |||
| Change | +115 | +90 | none | +25 |
a) (5 old points) Fill in the missing values in the table.
b) (5 old points) Based on the information in the table,
provide an estimate of the marginal propensity to consume.
c) (5 old points) Had taxes not risen (hint), what do you predict national income would have been in 1996? (That is, if taxes were autonomous, what would income/output have risen to?)
d) (5 old points) Now, assume that taxes are not autonomous. That is, taxes (T) depend on the level of national income/output (Y). What is the tax rate, approximately?
e) (5 old points) If the only exogenous (autonomous) change from 1995 to 1996 was in government purchases, what is the value of the government multiplier? (Hint: D Y = mG D G)
f) (5 old points) Assuming that investment multiplier and the
government multiplier have the same value, how much of a change
in investment spending would it take to raise 1997 national
income to the full-employment level if full-employment is at
7,000?
(21 points: 5 old, 16 new) The following data are from Federal
Reserve statistical releases.
| Date: | Currency in Circulation | Checkable Deposits | Total Bank Reserves | Monetary Base | M1 |
| November 25 | $400 billion | $673 billion | $49 billion | $449 billion | $1,073 billion |
| December 2 | $402 billion | $699 billion | $50 billion | $452 billion | $1,101 billion |
| % Change | +0.5% | +3.9% | +2% | +0.7% | +2.6% |
(a) (5 old points) If the Federal Open Market Committee engages in open market purchases of $5 billion beginning on December 2, how much of a change in the money supply will likely be generated? Explain and show your work.
(b) (8 new points) According to the Keynesian view, what are the likely effects on interest rates, unemployment, and national income or output of the change in M1 shown in the table above? Explain and provide graphs as appropriate.
(c) (8 new points) According to the Classical view, what
are the likely effects on interest rates, unemployment, and
national income or output of the change in M1 shown in the
table above? Explain and provide graphs as appropriate.
(25 new points) Suppose that households increase the amount they
want to save at every income level, ceteris paribus.
a) (5 new points) Will consumption rise or fall, ceteris paribus? Explain and provide an appropriate graph.
b) (5 new points) According to the simple model
of income determination, shown graphically below, will national
income rise or fall? Explain and show this on the graph.
c) (10 new points) On the circular flow diagram, label all of the flows and show their directions. Indicate the flows that would likely increase with a "+" and those that would likely decrease with a "-" from this increase in savings.
d) (5 new points) If the U.S. economy is showing slow growth, would you recommend replacing the current income tax with a consumption tax? A consumption tax does not tax savings and so is thought to encourage it.