UCLA. Macroeconomics PhD qualifying examination. Spring 1982

There are basically two kinds of artifacts that make it into the Economics in the Rear-view Mirror collection. There are items that come from (nearly) complete and neatly arranged sub-collections found in university archives and those somewhat random items plucked from the idiosyncratic personal collections of individual scholars. Today’s Ph.D. macroeconomics exam from UCLA is found in a folder of teaching materials for macroeconomics in Robert W. Clower’s papers at Duke University’s Economists’ Papers Archive. 

Other things equal, a balanced panel of such exams across departments and time is what we would ideally hope to accumulate. But the enemy of the good is the perfect in this as in all historical research. So without apology, indeed with a bit of pride, I enter this artifact into our digital record.

Fun Facts: The quote that heads question 9 comes from Charles Dickens’ David Copperfield, for question 10 from Harriet Beecher Stowe’s Uncle Tom’s Cabin.

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Ph.D. Qualifying Examination
UCLA Department of Economics

Spring 1982

ECONOMIC THEORY
MACRO PART

TIME: 3 hours — plus an additional 15 minutes for students whose native language is not English.

INSTRUCTIONS: Answer Part I in Bluebook #1 ONLY.

Answer Part II in Bluebook #2 and subsequent books.

DO NOT MIX ANSWERS TO PART I AND PART II IN THE SAME BLUEBOOK.

NOTE WELL: It is extremely important to answer only the questions asked. Extraneous material (whether correct or incorrect) will reduce the score of an otherwise correct answer and no positive credit will be given to correct answers to questions not asked. However, a wrong answer to the question asked will receive a higher score than no answer.

PART I — SHORT ESSAYS
(weight = 1/3)

All questions in this part of the exam are true, false, or uncertain questions. FIRST indicate whether the statement is T, F, or U, and then explain or prove your answer briefly.

Answer only six (6) of the eight (8) questions in this part.

1. What we should reject is the naive reasoning that there is a demand schedule for investment which could be derived from a classical scheme of producers’ behavior in maximizing profit.
2. An easy money policy is good for the housing industry in the short run but bad in the long run.
3. In testing the Quantity Theory of hyperinflations, one must realize that the usual money stock data are apt seriously to underestimate the theoretically relevant money stock. Cigarettes and all sorts of things that become money in hyperinflations are not included.
4. Although the 1933-1934 increase in the dollar price of gold increased U.S. base money growth, it mainly served at the time as a price-support program for gold.
5. Relative prices are explained by the theory of value, and, once relative prices are known, money prices are determined by the theory of money.
6. If the growth rate of nominal money follows a random walk with constant variance, there is no solution to the observational equivalence problem.
7. The first simple story about inflation is that its underlying cause is deficit spending by the federal government. In that case, the way to fix things up is simply to balance the federal budget.
8. If expectations are formed rationally and anticipated money does not affect real output, monetary policy cannot stabilize real output.

PART II — DISCUSSION QUESTIONS
(weight = 2/3)

Answer only four (4) of the six (6) questions in this part.

9. ANNUAL INCOME TWENTY POUNDS, ANNUAL EXPENDITURE TWENTY POUNDS, OUGHT, AND SIX, RESULT MISERY.
   The federal deficit in 1943 and 1944 was nearly $50 Billion, or some 12% of GNP. Long-term bonds yielded no more than 3% per annum in the same years. Do these facts raise any questions in your mind about the validity of present arguments to the effect that projected federal deficits amounting to some 4% of GNP explain present long-term bond yields in excess of 12% per annum? Defend your answer.
10. NEVER HAD NO FATHER, NOR MOTHER, NOR NOTHIN’. I WAS RAISED BY A SPECULATOR — TOPSY
    1. Explain the analysis behind the presumption, shared by almost all economists, that speculation will be “stabilizing” and not “destabilizing” in any given market that is exposed to regularly recurring “disturbances.”
    2. Explain the role of “speculative behavior” in producing the “instability” problems of Keynesian macrotheory.
    3. “In any system where speculation is based on rational expectations the Keynesian type of income fluctuations should not arise.” Discuss.
11. IT’S FINE IN THEORY, BUT WILL IT WORK IN PRACTICE?
    From October 1979 to March 1980, money growth slowed sharply in the United States. During the same period of time, inflation accelerated, the unemployment rate rose somewhat, nominal interest rates rose sharply: and the dollar generally appreciated against other major currencies.

1. 1. Can economic theory account for each of these occurrences? Consider each event separately.
   2. Under what circumstances, if any, are all these events simultaneously consistent with economic theory? Explain carefully.

12. GOLDEN AND/OR BRASS RULES

In recent years there has been considerable discussion of instituting a monetary “rule” which would make monetary policy non-discretionary. One question, of course, is what form such a monetary “rule” should take. In light of this question, compare and contrast the probable impact on inflation and unemployment in both the short run and the long run from the following two possible monetary rules:

Policy 1: A k-percent rule: legally requiring the growth rate of the money supply to be k-percent.

Policy 2: A modified k-percent rule: legally requiring the growth rate of the money supply to be k-percent only when unemployment is at some target rate . Formally, letting be the growth rate of the money supply, the modified k-percent rule would require that:

where β is a fixed, positive, non-discretionary constant and is the actual unemployment rate.

13. AN ESSAY ON THE ESSENTIAL ESSENCE
    “IS-LM analysis fails to capture the essence of Keynesian economics because it completely ignores the effect of current levels of output and employment upon current production and consumption plans.”
    1. Is this a fair comment on IS-LM analysis? Explain.
    2. Is its characterization of “the essence of Keynesian economics” valid? Explain why or why not.
14. SOMETIMES YOU CAN’T LOSE FOR WINNING.
    “Inflation is either unanticipated or anticipated. If unanticipated, it will increase output and employment. If anticipated, it has no effect on output and employment. So either it helps you or it does not hurt you.”

Source: Duke University. David M. Rubenstein Rare Book & Manuscript Library. Economists’ Papers Archive. Robert W. Clower papers. Box 4, Folder “Econ 202. Income, Employment, Monetary Theory”.

Image Source: Macro-Man from the DC comics fandom website’s wiki.