Final Examination - Economics 121 C
Spring Semester 1998 - Professor A. D. Becker - Saint Olaf College

You will have the full two hours to complete the exam. Please answer on the paper provided and staple your pages together in order when you have finished using this sheet as a cover page. You may use a calculator but you may use no other books or notes. Items marked with a * are "new" items. If you don’t have a good summer, I will retroactively lower your grade.

1. (15 points) In the table is information on a house’s appraised market value and the consumer price index (CPI) for several different years. The base period for the CPI is 1982-4.

a) In what year was the real price the highest?

b) What is the house’s 1995 market value in 1998 dollars?

*c) What was the rate of inflation between 1997 and 1998 according to the data in the table?

2. (25 points) The accompanying table shows national income account data for the U.S. in billions of real (1992) dollars.

a) What was the value of government spending in 1996?

b) What was the value of net exports in 1997?

*c) Provide an estimate of the marginal propensity to consume out of total income. Use this value to determine the value of the simple multiplier.

*d) Based on your answer to part c, if investment rises by $120 billion, what will GDP rise to, other things equal?

*e) Suppose that full-employment GDP (potential GDP) is $7,500 billion. Do you think it likely that this increase in investment would be inflationary?

3. (20 points) Use the consolidated balance sheet to answer this question. Also, the public holds $420 billion in currency and there are no reserve requirements for savings deposits or money market funds.

a) What is the amount of the money supply using the definition M1?

*b) What is the amount of the money supply using the definition M2?

c) What is the most the banking system could expand the money supply?

*d) What amount open market operation would be required to raise the money supply by $30 billion? Would this be an open market sale or purchase?

*4. (15 points) Suppose that an industrialized economy, such as South Korea’s, suffers a major financial crisis. Expecting that domestic demand for goods and services will fall, firms reduce their investment expenditures.

a) What are the likely long-term consequences of the financial crisis for the economy? (Explain in three sentences or less – no Faulkneresque ones, either.)

b) What are the likely short-term consequences of the financial crisis for the economy? (Explain in three sentences or less.)

c) What government economic policies could be used to address the short-term and long-term consequences?

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