In an earlier post we saw that Milton Friedman resisted the move to relabel the Chicago courses in (aggregate) income and employment theory “macroeconomics”. Below we have the take-home problem sets for 1966 and 1967 together with the final examination questions for the 1966 version of the course transcribed from copies in Friedman’s papers at the Hoover Institution Archives.
Pro-tip: Incomplete transcripts of his taped lectures for the course are filed at the Hoover Archives along with the material posted here. These await the caring editorial hand of some (other) historian of economics.
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ECONOMICS 332
Winter, 1966
Problems for Reading Period
(Due at Final Exam, Monday, March 14, 1966, 1:30 P.M.)
- In an economy using fiduciary money, it costs nothing to create additional cash balances. Hence, it is desirable to encourage wealth-holders to hold additional cash balances so long as they get any additional non-pecuniary return from them. One way to do so is through a deliberate policy of announced deflation.
- For individuals, additions to cash balances are a substitute for real saving in the form of direct investment or loans to finance direct investment; hence, the larger the additions to cash balances, the lower will tend to be the volume of real capital formation. Since economic growth depends on the volume of real capital formation, it is desirable to discourage the hoarding of cash. One way to do so is through a deliberate policy of announced inflation.
Both statements offer plausible, yet they lead to precisely opposite policy conclusions. Can you reconcile them? If not, which, in your opinion, is in error? What is the source of the mistake?
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Milton Friedman
ECONOMICS 332
Final Examination. Winter, 1966
March 14, 1966
[25 Points]
- Indicate in each box whether the change in the indicated variable would, under the specified conditions, tend to be an increase (+), decrease (-), no change (0), or is uncertain (?). In each case, of course, assume other relevant variables unchanged.
Make usual assumptions about behavior functions.
|
Assumed change |
Underemployment |
Full Employment Flexible Wages |
||||||
| Employ- ment |
Interest rate |
Real stock of money |
Con-sump-tion | Price level | Interest rate | Real stock of money |
Consump-tion |
|
| (1) Rise in tariff | ||||||||
| (2) Increase in government taxes, no change in government expenditures | ||||||||
| (3) Reduction in legal reserve requirements of member banks | ||||||||
| (4) Discovery of vast oilfields | ||||||||
| (5) Substitution of tax on land values for tax on wages, no change in revenue | ||||||||
| (6) Emergence of widespread fear of civil disturbances | ||||||||
[30 Points]
- An earthquake destroys half the physical capital in a country but miraculously there is negligible loss of life. The earthquake was most unusual, was unexpected and no one expects a repetition.
- Show graphically the effect on (1) the stock demand and supply for capital; (2) the flow demand and supply curves.
- Assuming flexible prices and full employment throughout, what, if anything, can you say about the initial effects on (1) rental rate on capital goods; (2) sales price of capital goods; (3) interest rate [i.e., ratio of (1) to (2)]; (4) real wage rate; (5) fraction of income consumed; (6) absolute level of investment.
- What about ultimate effects on these variables?
- Assuming initially rigid wages and underemployment, what, if anything, can you say about initial effects on items listed in (b)?
[15 Points]
- “The relation between the volume of economic activity and the price level is not simple. As a first approximation, the classical law of supply and demand leads one to expect that the change in the price level will depend mainly on the size of the gap between capacity and actual output” 1966 Annual Report, Council of Economic Advisers, pp. 63-64.
“Money prices, as opposed to relative prices, can never be governed by the conditions of the commodity market itself (or of the production of goods)” K. Wicksell, Interest and Prices (1898), p. 24.
In your opinion, does this shift in economic theory over the past 68 years reflect progress or retrogression? Justify your answer.
[15 Points]
- Consider a hypothetical economy in which initially, government expenditures (G) are 100, private investment (I) is 50, and private consumption (C) is 350, so that national product (Y) is 100 + 50 + 350 = 500, and tax receipts (T) are 90. Assume that G and T are both reduced by 10 to 90 and 80 respectively, and that wage rates are rigid.
- If you neglect any effects on the rate of interest, what would be the resulting values of C, I, and Y? Prove your answer in general by a simple algebraic analysis.
- Would you expect any effects on the interest rate if nominal quantity of money is constant? If so, what effect? How would this in turn affect I, C, and Y? Give hypothetical numbers that might correspond to final outcome.
Again, prove your answer. - What additional complications, if any, are relevant in generalizing these effects of a balanced budget change to actual circumstances?
[15 Points]
- Discuss the “real balance effect,” indicating what you think to be its meaning, and what role it has played in discussions of the possibility of under-employment equilibrium. In the course of your answer indicate what economists have been the main contributors to the discussion and what their specific contributions have been.
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Milton Friedman
Spring Quarter, 1967
Economics 332
ECONOMICS 332
Problem for Reading Period
Due at Final Exam, Wed., June 7, 1967
(Maximum length = 1,000 words)
MONETARY vs. FISCAL POLICY
Define fiscal policy as deliberate changes in the government tax structure or expenditure structure for a given behavior of the quantity of money; monetary policy as a change in the rate of change of the quantity of money for a given tax and expenditure structure.
- Using the standard income-expenditure model, and assuming prices are rigid, analyze the effect on real income and interest rates of an increase in taxes which would raise the full-employment surplus (or lower the full-employment deficit) by X billion dollars. Specify the parameters on which the result depends and indicate limiting cases.
- Using the same model, indicate how to determine the change in monetary policy that would have the same effect on real income. How would other effects of the two policies differ?
- The standard model is in terms of comparative statics, so (1) and (2) would be analyzed in terms of a comparison of two alternative positions at a single date. In addition, the only stock variable in the standard model is the quantity of money. Modify the analysis in (1) in both respects. That is, indicate the time path of adjustment you might expect and why, taking into account any effects on such stock variables as total holdings of government and private securities.
- Similarly, analyze the time path of the effect of a decline in the rate of monetary growth by, say, X percentage points, again allowing for effect on stocks.
Source: The Hoover Institution Archives. Papers of Milton Friedman, Box 77, Folder “University of Chicago, Econ. 331 [sic]”.
Image Source: Milton Friedman at Pepperdine University in 1977.