Practice Midterm One
First midterm to be given March 8
Economics 100b; Spring 1996; Brad DeLong
Part I (Short answers; one paragraph each; 20 minutes)
1. Why is it thought that the consumer price index, as presently
calculated, overstates the rate of inflation?
2. What is the difference between real and nominal GDP?
3. Will income and production in the IS-LM model rise or fall if (a)
the Federal Reserve decreases the money supply, and (b) taxes rise?
4. In the long run, does an increase in government spending (holding
taxes fixed) raise or lower private investment? Why?
5. What is the largest sub-category of net national product? What is
the largest sub-category of national income?
Part II (20 minutes)
Suppose that the consumption function (in billions of dollars)
C = 800 + 0.75(Y-T)
and, further, suppose that total net taxes and transfers T are
not a lump sum amount, but that instead:
T = .2 x Y
and that the investment function is:
I(r) = 1300 - 100(r)
(a) Solve for output and income Y as a function of G,
r, and the parameters of the model;
(b) Assume that the Federal Reserve holds the real interest rate
constant at 3 percent, and that government spending G is fixed
at 1,000; solve numerically for output and income Y;
(c) Suppose G is raised to 1,001; by how much does Y
(d) The marginal propensity to consume c' in this version of
the model is 0.75; thus the simple multiplier 1/(1-c') in this
version of the model is 4. Explain why there is a discrepancy between
the simple multiplier and your answer to part (c).
Part III (Identifications; one sentence each; 20 minutes)
1. Consumer price index
2. GDP deflator
3. Marginal propensity to consume
4. Government taxes less transfers
5. Government purchases of goods and services
7. IS curve
8. Production function
9. Diminishing returns
10. Quantity theory of money
Extra Credit/General Education
1. From which emperor did the University of Bologna receive its
charter in 1158? What was he emperor of?