The price theory prelim for 1969 at Chicago was transcribed for the previous post. Today’s post gives us the 1969 prelim examination questions for core macroeconomics (in Chicago speak of the day: “Theory of Income, Employment and Price Level”).
The M.I.T. general macroeconomic exams for 1959-1971 were transcribed and collected into a single post.
The copy of the exam in Milton Friedman’s papers at the Hoover Institution includes (Warning: Plot-spoiler!) the answers to the True-False-Uncertain questions: 1=F; 2=F; 3=T; 5=T; 5=F; 6=T; 7=T.
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CORE EXAMINATION
Theory of Income, Employment and Price Level
Winter, 1969
Preliminary Examination for the Ph.D.
WRITE THE FOLLOWING INFORMATION ON YOUR EXAMINATION PAPER:
Your Code Number and NOT your name
Name of Examination
Date of Examination
Results of the Examination will be sent to you by letter
Answer all questions. Time: 3 hours
I.
- [20] Indicate whether each of the following statements is True (T), False (F), or Uncertain (U), and state briefly your reasons:
____1. If the capital stock is growing, then the marginal efficiency of investment is greater than the marginal product of capital.
____2. In an economy growing at a rate of 4 percent per year in which the income elasticity of demand for money is 2.0, a budget deficit of up to 8 percent of government expenditures can be financed by money creation without producing inflation.
____3. In a simple income determination model, the elasticity of income with respect to changes in the marginal propensity to consume is mpc/(1-mpc).
____4. The instability of the growth equilibrium in Harrod-Domar models can validly be attributed to the particular assumptions made about the production function.
____5. A decline in prices raises real balances for a fixed quantity of money. This is known as the real balance effect.
____6. A real balance effect is compatible with a liquidity trap.
____7. A decrease in rental rates on cars which led to no change in the total number of cars in operation would raise recorded national income.
- [20] Fill in the missing numbers and briefly describe how you obtained them. Neglect any effects of the corporation or personal income taxes. Assume all rates are on an annual basis.
| Annual interest rate on government consols = | 6.5 percent |
| Annual dividends as a percent of earnings = | 25 percent |
| Dividend yield of common stock = | 3 percent |
| Rate of return on real estate = | 5 percent |
| Annual percentage rate of change of a price index of goods and services = | ______ |
| Percentage rate of change in the price per share of common stock = | ______ |
- [40] Assume that in a closed economy [with flexible prices] tax revenue is proportionate to income, that the government fixes the level of its spending, and that the government finances all budget deficits by money creation. Analyze the consequences of this policy for [What is] the equilibrium level or rate of change of nominal income and show the effect of an increase in the level of government spending from an initial position of equilibrium[?] Discuss separately two cases: (a) the government fixes the nominal level of its spending; (b) the government fixes the real level of its spending.
- [30] “It is of no manner of consequence with regard to the domestic happiness of a state whether money be in a greater or less quantity. The good policy of the magistrate consists only in keeping it, if possible, still increasing” (David Hume, 1742). What is the verdict of two centuries of further writing on money on this proposition?
- [30] “Many commentators have written as if commercial banks were losing deposits to their non-banking competitors. A closer look, however, shows that this notion is misleading.
“If a commercial bank depositor writes a check in favor of his mutual savings bank, the savings bank will either re-deposit the check in its own commercial bank account or extend mortgage credit to an individual. The individual, in turn, will either deposit the check in his bank account or turn it over to the seller of the house he is buying. And the seller will either put the check in his bank account or turn it over to his creditors who will put it in theirs….
“The crucial point is that commercial banks compete for deposits only with other commercial banks. They cannot lose deposits to other financial institutions or financial instruments.”
Discuss. - [30] Consider the following neo-Keynesian system in which Ctis real consumption, Itis real investment, Ytis real income and Xtis real autonomous expenditures.
What are the necessary conditions for stability? If these are satisfied, can the model generate cycles?
- [30] Panama has no central bank but uses U. S. currency (plus some coin of its own), relabeling a dollar as a Balboa.
Netherlands has a central bank, which issues a national currency denominated in guilders.
The U. S. has a central bank which issues a national currency denominated in dollars.
The U.S. and Netherlands have fixed exchange rates with other major currencies. Assume that none of the countries has any extensive exchange control.
The monetary authorities of all three countries proclaim that they cannot control the quantity of money.
Discuss.
Source: Hoover Institution Archives. Papers of Milton Friedman, Box 77, Folder 8 “University of Chicago , Econ 331”.
Image Source: David Hume’s toe in Edinburgh.