Johns Hopkins. Comprehensive Exams for Economics Ph.D. 1961

 

A memorandum written by Richard Musgrave to his economics department colleagues at Johns Hopkins University in October 1960 was transcribed for the previous post. He made a few proposals for a modest change in the first and second year general examinations for graduate students. This post provides transcriptions of six prelim examinations given in April 1961 found in the departmental files: microeconomic theory, macroeconomic theory, theory of international trade, public finance, economic history and monetary theory and policy. As there are neither statistics/econometrics nor history of economics questions, I strongly suspect that the following exams represent at best a significant subset of the exams from April 1961.

Earlier post with the ten exams from 1965.

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EXAMINATION
MICROTHEORY

April 24, 1961

Answer one question from each group

Group I

1. (a) It is sometimes said that “distribution costs too much”. What is a meaningful theoretical interpretation of the assertion?

(b) Suppose you were to set out to investigate the charge empirically. What sort of data would you want to collect? How would you use these data to shed light on the question?

1. Each year, the International Whaling Commission estimates the number of whales which may be taken in international waters without endangering the long-run supply of whales. When this limit is approached, a date is set after which no further whaling is allowed for that year.
   For purposes of this question, make the following assumptions: (1) all ships engaged in whaling abide by the decisions of the commission; (2) all whaling ships are identical; (3) the number of whales actually taken is in fact the optimal number in terms of the long-run supply of whales; (4) the number of independent whale-boat operators is very large
   1. Economic theory tells us that resources of capital and labor are allocated optimally under conditions of free competition. Does this happy conclusion follow also for the whaling industry under the described arrangement? Specifically, is the optimal amount of labor and capital devoted to whaling ships and crews? Explain.
   2. Suppose that instead a perpetual monopoly right to take whales were sold at public auction, and other whalers were prohibited from taking whales. Would this lead to an optimal allocation of labor and capital?
   3. The main products of the whaling industry are margarine, meal for animal feed, and meat for human consumption. Is this relevant to your answer.

Group II

3. The Council of Economic Advisers is asked to advise the Administration concerning the desirability of a more stringent anti-price-discrimination law. Write a memo to the chairman of the Council outlining the important theoretical economic considerations on this issue.
4. “A social welfare function can be conceived of only for situations in which members of society agree on criteria for decisions, for otherwise what is to be maximized cannot be specified. Moreover, the analytical use of such a function implies that men are able to survey and rank all possible states. But men do not usually agree on criteria and in any case are incapable of the required broad survey and ranking. Hence the social welfare function is not a useful tool or concept.” Discuss.

Group III

5. Point out the similarities and differences between the following two representations of the economic system.
   1. The theory of general equilibrium of prices and quantities of all commodities (as, for example, in Hicks).
   2. The theory underlying Leontief’s input-output analysis
6. In the past twenty years there have been numerous attempts to estimate statistically firms’ cost functions. Does this research indicate the need for any important revisions in the presentation of cost theory in price theory textbooks? Defend your answer.

Group IV

7. (a) Show that the first-order conditions for maximization of utility are invariant under a monotonic increasing transformation of the utility function. What is the relevance for the cardinal utility-ordinal utility controversy?

(b) Consider the utility function U = x₁¹ x₂² x₃³… x_nⁿ. Let the prices of the goods be p₁, p₂, …, p_n, and the income be y. Show that the price elasticity of the i^th good is -1, and the income elasticity is +1.

8. (a) What is a Cobb-Douglas production function? Is it homogeneous? Are the marginal product of the inputs homogeneous? Prove your assertions. What is implied about returns to scale?
   (b) Show that the expansion path (the locus of points of rational factor combinations) is linear in the inputs so long as the factor markets are competitive.
   (c) What is the relation of the Cobb-Douglas production function to the marginal productivity theory of distribution? Does the relation apply to the firm, industry, or economy, or to some combination of these?

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THE JOHNS HOPKINS UNIVERSITY
Macro Economic Theory

April 27, 1961

Answer No. 1 and TWO of the remaining three. Weights are equal.

I. Comparative Statics

A Macro-economic system runs as follows:

YD = C + I	YD = national income, demand side
YS = L + Q	YS = national income, supply side
C = CL + CQ	I = investment (autonomous)
L = N·w	C = total consumption
CL = CL(L)	CL = consumption of wage earners
CQ = CQ(Q)	CQ = consumption of non-wage earners
YS = Y(N)	L = wage income
w = Y´(N)	Q = non-wage income
YD = YS	N = employment
	w = wage rate
(all these magnitudes in real terms)

1. 1. Express the investment multiplier in terms of the marginal propensities to consume of wage earners and non-wage earners, the marginal productivity of labor, and the decline in marginal productivity with increasing employment.
   2. Represent the elements (“building blocks”) of this model in graphs.
   3. What assumptions about labor supply would be consistent with this model?
   4. Select one of the following two:

(d1) Kaldor showed that under certain assumptions distribution is determined by the savings ratios of wage earners and non-wage earners and by the proportion of total income used for investment. Does this conclusion follow from the above model too? If not: What special features of Kaldor’s model are responsible for the difference?

(d2) By introducing additional variables and equations extend the model in such a way that investment, instead of being autonomous, depends on the interest rate, while the money supply appears as the autonomous variable. Comment on the explanation of the absolute price level which is implied in your extended model.

2. Growth

1. 1. Suppose Americans became more thrifty in the sense of a permanent upward shift in the savings function. Would this accelerate or retard long-term economic growth? In what respects do different variants of modern growth theory suggest different answers to this question? How are these differences to be explained? What does classical growth theory say on this problem?
   2. In what sense (or senses) may it be said that Harrod’s (or Domar’s) warranted growth path is a “tightrope” path? In what respect (if any) is this aspect of Harrod’s (or Domar’s) model relevant for the American economy?

3. Dynamics

Consider a “period analysis model” with the following characteristics:

— Production consists of three components: autonomous investment, consumers’ goods, inventory accumulation.

— Initial conditions and autonomous investment are as given in the accompanying table (C = consumption, i = autonomous investment, I = total investment, Y = output, K = inventories).

— Autonomous investment is always correctly anticipated. Production of consumers’ goods in February is scheduled as the amount of actual consumption in January. Any increase in actual consumption relative to the previous month thus causes a “surprise” with a corresponding effect on inventories.

— Producers want to hold inventories in the amount of one month’s total output. Production for inventory accumulation in February is scheduled in the amount of the difference between actual output and actual inventories in January.

— To an increase in output from January to February households react with an increase in consumption from February to March, amounting to one-half of the increase in income.

1. 1. On the basis of these assumptions, complete the table [below] up to the ninth period. (The empty space may be used for auxiliary columns.) Describe the development of income.
   2. What would be the stationary equilibrium level of output, if any?
   3. Express the characteristics of this model (for given autonomous investment) in terms of difference equations. (Solving not required.)

Question 3: Dynamics
(return this table with your answer)

Month	C	I		I	Y	K
1	2400	1600		1600	4000	4000
2	2400	1600		1600	4000	4000
3		2000
4		2000
5		2000
6		2000
7		2000
8		2000
9		2000
(The figures represent actual amounts, which may be different from planned amounts.)

4. Economic Policy

“Present unemployment in the United States is largely due to the fact that labor is too expensive in relation to capital. Restoration of full employment thus requires a lowering of real wages. If this is not accomplished by a lowering of money wages, there has to be a rise in prices.” Explain to what extent (if any) this argument may be correct, and in what respects (if any) it may be fallacious. Put your answer in terms which, without being incorrect, an enlightened politician might understand, (No diagrams, no special theoretical terms, no reference to the literature.)

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THE JOHNS HOPKINS UNIVERSITY
Theory of International Trade

April 25, 1961

Answer any 6 of the following questions.

1. Compare and contrast the real-cost, opportunity-cost, and factor-endowments approaches to the theory of comparative advantage.
2. “Free trade is a substitute for factor mobility.” Discuss.
3. What is the Samuelson-Stolper theorem regarding the effect of tariffs on the distribution of income? What major addition or correction to that theorem was made by Metzler?
4. What are the international implications of alternative measures of domestic stabilization in the American economy in light of the current U.S. balance of payments problem?
5. Under what kinds of circumstances would you advise a country to devalue its exchange rate, and what are the conditions necessary for a successful outcome?
6. Define precisely what you mean by international liquidity. What are the factors determining the world’s need for international liquidity? Do you believe that the world is suffering from a shortage of international liquidity at the present time? Outline briefly the pros and cons of various suggestions that have been advanced to meet such a shortage.
7. In terms of income models of balance-of-payments adjustment, under what conditions would there be an (a) incomplete, (b) overcomplete, and (c) a perverse adjustment to a balance-of-payments disturbance?
8. (a) Discuss alternative concepts of the international terms of trade.
   (b) Is an improvement in the net barter terms of trade necessarily associated with an increase in the gains from trade? Why or why not?

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THE JOHN HOPKINS UNIVERSITY
Public Finance

April 25, 1961

Answer each Part. All questions carry equal weight.

I

1. Consider the following suggestions for individual income tax reform.
   1. Abolish the standard deductions and permit itemized deductions in excess of 10% of adjusted gross income. Use revenue gain of $8 billion for a 4 percentage point cut in all bracket rates.
   2. Reduce top bracket rate to 60% (revenue loss of $500 million) and give a dividend credit of 50% by British System (revenue loss $2 billion). In turn, tax capital gains at death (constructive realization) at a rate not exceeding 50%, permitting tax free realization if reinvested (roll over) during lifetime (revenue gain of $2.5 billion), and reduce depletion allowances by 50%.

Evaluate these proposals for income tax reform. Would you favor these packages or not, and why?

II

Choose ONE out of two.

2. It has been suggested that the criteria for a “good tax structure” are quite different, depending on the level of government (Federal, State or local) to which we refer. Analyze this proposition and the underlying reasoning.
3. “The trouble with the corporation income tax is that it is highly discriminatory as between corporations and unincorporated enterprise, equity and debt finance, corporations undertaking different types of investment, and so forth. If the corporation tax were transformed into a uniform tax on all capital income it would be rendered quite unobjectionable.” Analyze this statement.

III

Answer ONE out of two.

4. “It makes very little difference with regard to incidence, whether taxes are imposed on expenditures or on income as a base, provided that such taxes are general and uniform. What matters is that taxes usually are not general but selective and that the pattern of selectivity differs with the type of base which is used.” Analyze this statement.
5. “Incidence deals with the effects of tax policy on the distribution of income. The theory of incidence, therefore, can be no better than the theory of income distribution from which it is derived.” Discuss this statement and examine its validity with regard to specific taxes.

IV

Answer TWO out of three.

6. “The expansionary or restrictive role of fiscal policy is measured properly by the resulting change in the size of cash surplus or deficit.” Analyze this statement.
7. The effectiveness of monetary and fiscal policies depends upon certain characteristics of the model of income determination which applies. Under what circumstances, if any, can only fiscal policy be successful in raising employment? Under what circumstances, if any, is it bound to be unsuccessful? Under what circumstances, if any, can only the combined fiscal and monetary action be successful.
8. Recently there has been considerable controversy over the question whether a countercyclical policy of debt management is desirable. State the main issues in this controversy and give an evaluation thereof.

V

Answer ONE out of two.

9. What do the principles of public finance tell us about the requirements for a sound system of highway finance? In view of these requirements, how satisfactory is the present system?
10. “We do not accept the view that as our economy grows federal expenditures would necessarily grow in proportion, or more than in proportion, to the increase of national income — on the contrary, with higher incomes, people should be better able to provide for themselves some of the things for which they now look to government. The level of generally available services that government should provide would require a smaller and smaller proportion of the national income.” (C.E.D., February 1961.) Discuss.

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ECONOMIC HISTORY EXAMINATION

April 28, 1961

Answer one question from each part.

A.

1. Identify and discuss critically the views of Ashley and Unwin regarding the role of the central government in English economic development during the XVI and XVII centuries.
2. Discuss in some detail at least two stage-theories of economic development. Compare them with some alternative theory of economic development.
3. Assume you were the tutor hired to educate Frederick II of Prussia (1712-1786) in 1730. During the year he was to consider the colonial policies of Spain, France, and Britain in the New World. What would you tell him about each country’s policies? What questions would you put to him in order to point out the weaknesses and strengths of each country’s position?
4. What were some of the economic problems in the development of a stable political relationship between the British government and its American mainland colonies between 1763 and 1776? Why did these troubles not affect the political relationship between the London government and the West Indian colonies?

B.

5. What are the central ideas in Toynbee’s The Industrial Revolution? What “triggered” the “revolution”, and what, in your estimation, caused that phenomenon to occur?
6. What were the roles of political liberalism and religious minorities in the economic development of France, Germany, Russia and England in the XVIII and XIX centuries? Discuss, giving data.
7. Several observers have noted that there were few labor-saving agricultural inventions for general farming in the United States until the 1820’s. When one considers the comparative supply of land and labor, there seems to be a paradox. How can it be explained?
8. What were the economic issues separating the North and the South in the 1850’s? Examine each, giving your opinion whether it would have remained an issue if the peace had been preserved from then until 1890.

C.

9. Discuss the development of the Russian or British economy in the two decades prior to 1914.
10. Discuss the course of agricultural policy in the United States between 1860 and 1940.
11. Discuss the evolution of American or British tariff policy 1815-1940.
12. Discuss the development of the American or British labor movement from the 1840’s until the Second World War.

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MONETARY THEORY AND POLICY

[in pencil “1961”]

I.

Write for 40 minutes on two of the following three questions.

1. “Liquidity preference must be regarded as an explanation of the existence and level not of the interest rate but of the differential between the yield on money and the yield on other assets.” (Tobin) Discuss this statement and explain the factors which determine the slope of the liquidity preference function.
2. “The existence of dynamic or uncertain price and interest expectations is not a sine qua non of a theory of money.” (Patinkin)
   “The necessary condition for the existence of liquidity preference is the existence of uncertainty as to the future rate of interest.” (Keynes)
   Can these two statements be reconciled, and if so, how?
3. Consider the role which the concept of “natural rate of interest” has played in the development of monetary theory. In what respects is it a particularly useful concept? What changes may be made to render it more useful?

II.

Write for 30 minutes on one of the following two questions.

1. Write an essay setting forth and analyzing the credit-availability theory, and compare it with the pre-existing theory of central banking.
2. Review the history of Federal Reserve policy in terms of changing emphasis upon particular policy tools.

III.

Write for 20 minutes on two of the following three questions.

1. “In the boom, the stock market diverts capital from productive use into speculation.” Analyze this statement.
2. Analyze the factors which determine the “appropriate” level of bank capital.
3. “The financial intermediaries are essentially similar to commercial banks and should therefore be subject to similar controls.” Discuss.

IV.

Write for 30 minutes on the following question.

What are the effects of the following changes on (a) money supply, defined to include demand deposits adjusted plus currency outside banks; and (b) excess reserves, assuming a 20% reserve ratio.

1. Decrease in currency in circulation by $1 billion
2. Increase in float by $400 million
3. Sale of $200 million of government securities by the Treasury, of which $150 million is purchased by commercial banks and $50 million by nonbank investors. Assume the Treasury to deposit its proceeds with the Federal Reserve Banks.
4. Holders of savings deposits at mutual savings banks withdraw $300 million and deposit same as demand deposits at Commercial banks.

In answering the question, you may find it useful to use T accounts

Source: The Ferdinand Hamburger, Jr. Archives of the Eisenhower Library at Johns Hopkins University. Department of Political Economy, Series 6, Box 1. Folder: “Comprehensive Exams for Ph.D. in Political Economy, 1947-1965”.

Image Source: Fritz Machlup in an economics seminar. Evsey Domar visible sitting third from the speaker on his right hand side. Johns Hopkins University Yearbook, Hullabaloo 1956, p. 15.