Economics 121 - Fall 1997 - Prof. A. D. Becker
Macroeconomics Exam
Instructions: You will have the whole two hours to complete this exam. Answer on the sheets of paper provided and staple them, in order, to this page. Answer only one question on any page and only write on one side of each page. Do not discuss this exam with anyone as others may be taking it later.
1. (14 points) In the U.S. economy, suppose that the aggregate consumption function is estimated to be C = 0.75 Y
and private investment, government purchases of goods and services, and net exports total $2,000 billion.
a. Determine Gross Domestic Product (GDP) when national income (Y) is 4000 and when it is 5000. (4 points)
b. What is the numerical value of the simple multiplier for expenditures such as investment and government purchases? (3 points)
c. If net exports fall by $10 billion, by how much would equilibrium national income change if prices do not change? (4 points)
d. How much is the equilibrium amount (level) of national income and GDP? (3 points)
2. (15 points) Use the information below to answer this question.
| Item | 1976 |
1997 |
| CPI (base period = 1982-4) | 60.7 |
161.5 |
| Federal Minimum Wage: $/hour | $2.30 |
$5.25 |
| Gallon of regular gasoline: $ | $0.609 |
$1.109 |
| Typical Mid-sized American Car: $ | $6000 |
$20000 |
a. Has the minimum wage risen or fallen in real dollars since 1976? (3 points)
b. By what percentage has the real price of gasoline gone up or down? (3 points)
c. What are the prices of gasoline and mid-sized cars in 1976 converted into today's dollars? (4 points) d. Why might comparisons of gasoline and car prices from 1976 to 1997 be misleading? (5 points)
3. (15 points: 3 for each part) Consider the following information on our monetary system:
| total bank reserves | $60 billion |
| required reserves | $55 b. |
| checkable deposits | $1,000 b. |
| currency in circulation (inc. traveler's checks) | $550 b. |
| small time deposits, savings accounts, and money market funds | $2,340 b. |
a. What is the amount of the money supply, M1, in dollars?
b. What is the amount of the money supply, M2, in dollars?
c. What is the amount of the monetary base (MB) in dollars?
d. Suppose the Federal Reserve wants to increase the money supply by $15 billion. Should it conduct an open market purchase or sale? What should be the approximate amount of the purchase or sale?
e. Will this action tend to increase or decrease interest rates?
4. In the early 1980's, there was substantial unemployment in the U.S. economy and interest rates were at uncommonly high levels. Congress enacted a large tax cut and increased federal government spending at the same time. In the years following, the real GDP expanded greatly, inflation was moderate, and interest rates fell. Is the experience of the 1980's consistent with a Keynesian or Classical view of the economy? Explain with the help of appropriate graphs. (10 points)
5. Unemployment is currently quite low in the U.S. and real GDP has been growing at a moderate rate. OPEC has just announced an increase in oil production quotas. What are the likely macroeconomic effect of this in the U.S.? Explain with the help of appropriate graphs. (12 points)