Economics 121 - Quiz Answers

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Quiz 6 Answers

 Below are the latest annual figures on U.S. economic output from the Bureau of Economic Analysis. All measures are in billions of (nominal) dollars. Use the back of this page for scratch work. Do show your work.

1. Using the price index given, calculate the value of GDP in real dollars for both 1995 and 1996.

1995 Real GDP
1996 Real GDP
6992.6
6906.1
2. Calculate the inflation rate between 1995 and 1996 using the price index given.
Inflation Rate
1.95%
3. Calculate the amounts of investment (I) and exports (X) for 1995.
Investment
Exports
1337
806
4. A house was built in 1940 for $10,000. In 1988, that house sold for $120,000 and today it sells for $220,000. In 1940 the CPI was 14, in 1988 it was 118.3, and today it is 159.6 (CPI base years are 1982-84). During which year -- 1940, 1988, or 1997 -- did (does) the house have the highest price in today's dollars? Explain

$10,000 in 1940 is $114,000 in today's dollars (10,000/14x159.6)

$120,000 in 1988 is $161,893.49 in today's dollars (120,000/118.3x159.6)

The house's highest price in today's dollars is $220,000 today.
 

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Quiz 7 Answers

1. (6 points) Draw two graphs of aggregate demand (AD) and aggregate supply (AS) in the spaces below.

On figure 1, show the effect of the OPEC embargo (1973-4) on AD and AS. The embargo raised oil prices significantly. Oil is used to produce or transport most goods and so made almost all production more expensive.

On figure 2, show how AS and AD may have been shifting over the last few years. During that time, our economy has been experiencing low inflation and steady growth of real GDP.

Figure 1 Oil Price Increase

Figure 2 Stable Growth

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Quiz 8 Answers

In the table are data for macroeconomic aggregates for a country in billions of real (1992) dollars. Net exports (NX) are zero both years.
Year
Income/
Output
(Y/AD)
Consump-
tion
(C)
Invest-
ment
(I)
Govern-
ment
(G)
Net
Taxes
(T)
Govt.
Deficit
Disposable
Income
(Yd)
Savings
(S)
1
6730
4500
970
1260
1180
80
5550
1050
2
6850
4580
1010
1260
1200
60
5650
1070
a) (6 points) Fill in the missing values in the table.

b) (6 points) Based on the information in the table, provide an estimate of the marginal propensity to consume out of total income.

MPC = (change in C)/(change in Y) = 80/120 = 2/3 = .667

c) (6 points) If government expenditures are reduced by 60, what do you predict the new level of national income/aggregate demand (Y, AD) will be?

(Change in Y) = multiplier x (change in G) = multiplier x (-60)

multiplier = 1/(1-MPC) = 3

Change in Y = 3 x (-60) = -180

New Y = 6850 - 180 = 6670

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Quiz 9 Answers

The banking system has currently There is also $410 billion of currency in circulation.

a) Fill in this table:
Money Supply
Monetary Base
Reserve Requirement
Total Bank Reserves
700+410=1110
410+56+6=472
56/700= 0.08=8%
56+6=62
b) What is the most the money supply could be expanded by the banking system?

Maximum expansion = 1/Reserve Requirement x Excess Reserves

= (1/0.08)6

= 75

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Quiz 10 Answers

Suppose that the Federal Reserve Board of Governors has decided to increase the rate of growth of the money supply. At the same time, substantial technological advances greatly increase labor productivity.

What will be the likely effects on prices (or inflation), interest rates, and unemployment? Use graphs to explain, if appropriate.

Inflation will be moderate (little change in prices) and growth will be high as both AD and AS are increasing. The increased money growth will raise AD. Technological innovation that leads to increases in labor productivity will raise AS.

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Anthony D. Becker: becker@stolaf.edu

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