Department of Economics

Iowa State University

Intermediate Macroeconomic Theory

Spring 1998 First Exam Alexander

Given prices and quantities for year1 and year2, explain the manner in which the chained price index is calculated. What relation is there between the price index and the nominal rate of growth of GDP?

2. (20 points)

Graphically depict the effect on output and on the government's budget of a simultaneous decrease in the government's purchases of goods and services (G) and tax collections (through a change in the marginal tax rate, t) of the same dollar amount.

4. (55 points)

Consider the following model:

TE = C + I + G

C = a + b ( Y - t*Y + TR)

Where a = 100 G = 240

b = .8 TR = 200

I = 300 t = .25

a. What is the equilibrium level of output?

b. What is the budget surplus (deficit)?

c. Assume that the government, in an attempt to eliminate the budget surplus, decreases the tax rate by 0.03 (Dt = -.03). What is the change in Y from this policy? What is the multiplier? What is the change in the Budget Surplus?

d. Graphically depict the effect of this policy on TE and the Budget Surplus.