This copy of the 1967 Money and Banking prelim exam comes from Milton Friedman’s papers and has Milton Friedman’s name noted. So we may strongly presume that Friedman was in fact on the Money and Banking prelim committee as he was on the Income, Employment, and Price Level prelim committee that year.
______________________
Previous posts with University of Chicago preliminary examinations for Ph.D. and A.M. degrees:
Preliminary Exam (Economic Theory I) 1955
Preliminary Exam (Money and Banking) 1956
Preliminary Exam (Economic Theory) 1957
Preliminary Exam (Money and Banking) 1959
Preliminary Exam (Economic Theory, Old Rules) 1960
Preliminary Exam (Price Theory) 1964
Preliminary Exam (Income, Employment and Price Level) 1967
Preliminary Exam (Price Theory) 1969
Preliminary Exam (Macroeconomics) 1969
Preliminary Exam (Money and Banking) 1969
Preliminary Exam (International Trade) 1970
Preliminary Exam (Price Theory) 1975
Preliminary Exam (Industrial Organization) 1977
Preliminary Exam (History of Economic Thought) 1989
___________________________
[Handwritten note, top of page: “Mr Friedman”]
MONEY AND BANKING
Preliminary Examination for the Ph.D. and A.M. Degrees
Summer, 1967
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—ALL QUESTIONS HAVE EQUAL WEIGHT
1. a) “The fallacy in the quantity theory of money is that it allows for the circulation of money but not the circulation of goods. A correct theory would have a velocity of circulation of goods to parallel the velocity of circulation of money.” Discuss.
b) According to one writer, one of the “fundamental laws of economics” is that “the inflation rate is approximately equal to the interest rate when averaged over several decades.”
(Andre Gleyzal, “Theory of Money in a Free Economic System.” Discuss (and do not dismiss out of hand).
2. a) What is the “Phillips Curve”?
b) Give the theoretical analysis on which it rests. Do you regard it as valid? If so, defend it; if not, why not?
c) What is its relation to the notion of a “trade-off” between unemployment and inflation?
d) What is your understanding of the present state of the empirical evidence on the Phillips curve?
3. a) Expand the standard analysis of the IS-LM (or EEL) curves to include foreign trade and the balance of payments when all economies are operating with fixed exchange rates under a pure gold standard.
b) Would this analysis be any different under
i) fixed exchange rates with national currency standards?
ii) floating exchange rates?
Why, or why not?
4. a) A once and for all change in the money supply is expected to affect only the price level and not any real economic magnitudes. Yet some economic theorists who accept the neutrality of money in this sense argue that a sudden decrease (say) in the money supply will cause unemployment. How do you reconcile these two positions?
b) Assume that a country is operating on a classical gold standard. It has a central bank but the bank does not engage in open market operations. It confines its policy to setting an interest rate (discount rate) at which it lends freely. Let important gold discoveries be made in that country such that, at the prevailing price of gold, the rate of gold production increases. Does the neutrality of money still hold true in the long run? Will the increased rate of gold production affect only the price level and not the level of real income in the given country?
5. Most empirical studies of the demand for money that use time series data take the real stock of money as the dependent variable and take measures of real income or wealth and of the interest rate as explanatory variables. However, most monetary theorists treat the nominal stock of money as exogeneous. This appears inconsistent with the empirical work. Can you describe a sensible economic model to defend the choice made by the empirical investigators? Assume it is your purpose to predict the increase in the demand for real money balances resulting from an increase in real income. For simplicity, assume that current real measured income is the relevant income variable. Do not discuss the econometric theory of identification, etc. Focus your attention on the economic hypotheses in terms of the price level, the nominal money stock, interest rates, and nominal income. Would it be better to treat real money balances as an explanatory instead of as a dependent variable in estimating the demand for money?
6. Comment on the following proposition:
In the portfolios of banks, private loans and government bonds are alternatives. The smaller the quantity of loans that banks make (i.e., the tighter the supply of bank credit), the greater must be the quantity of government bonds the banks are holding in their portfolios. But the total supply of government bonds is fixed, and so this implies that the tighter is bank credit, the smaller the supply of government bonds available to the non-bank public to hold in their portfolios. But the smaller the quantity of government bonds available to the non-bank public, the greater the quantity of other assets they will hold. In other words, the tighter is bank credit, the greater the supply of private credit from non-bank holders of wealth, and the portfolio behavior of banks is largely irrelevant in determining the total supply of private credit.
Source: Hoover Institution Archives. Papers of Milton Friedman. Box 77, Folder 8 “University of Chicago Econ. 331”.
Image Source: “Money Talks” from the cover of Puck, Vol LX, No. 1541 (September 12, 1906). Library of Congress Prints and Photographs Division Washington, D.C. “William Randolph Hearst sitting with two large, animated, money bags resting on his lap, with arms and legs, and showing two large coins as heads; on the floor next to Hearst is a box labeled ‘WRH Ventriloquist’.”