Chicago. Preliminary Exam for PhD, Theory of Income, Employment and Price Level, 1967

 

The following preliminary examination for the economics Ph.D. at the University of Chicago comes from Milton Friedman’s papers at the Hoover Institution Archives. Friedman’s own answers for the 20 true-false questions as well as equations for one question and diagrams for another are included below, following the exam.

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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 (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

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[Handwritten note on top of first page: “Mr. Friedman (grade sheet attached)”]

CORE EXAMINATION
Theory of Income, Employment and Price Level
Summer, 1967

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.

 

Part I. Indicate whether each of the following statements is True (T) or False (F) and state briefly your reason. (One hour).  [2 points each]

1. ____ Free reserves are the difference between total reserves and required reserves.
2. ____ Member banks may count both currency in vault and deposits at their Federal Reserve Bank as satisfying reserve requirements.
3. ____ All banks in the U.S. that are members of the Federal Reserve System are required to be members of the Federal Deposit Insurance Corporations, but the reverse is not true.
4. ____ The Federal Funds rate is the rate at which member banks may borrow from the Federal Reserve System.

5-8: A depositor in a commercial bank transfers funds from a demand deposit to a time deposit at that bank.

5. ____ The bank’s total reserves are thereby increased.
6. ____ The bank’s excess reserves are thereby increased.
7. ____ The amount of currency plus demand deposits that can be outstanding in the System is increased.
8. ____ The amount of currency plus demand deposits plus commercial bank time deposits that can be outstanding in the System is increased.

 

9. ____If income velocity of circulation of money is not affected by an increase in real income per capita, then the income elasticity of demand for real balances is zero.
10. ____ A rise in interest rates can be expected to raise the income velocity of circulation of money.
11. ____ The real balance effect is absent if all money is “inside” money.
12. ____ In order for a real balance effect to exist, wealth must be one of the variables entering the consumption function.
13. ____ The real interest rate can be obtained from the nominal interest rate by dividing by a price index.
14. ____ The more rapidly the quantity of money grows, the lower will be the quantity of real money balances.
15. ____ The higher the rate of interest, the lower will be the Keynesian multiplier.
16. ____ A tariff reduction involves a shift in the IS (or EE) curve associating a lower real income with each interest rate.
17. ____ A substitution of taxes on property for taxes on earnings (to yield the same revenue at the same national income) will tend to lower national income.

18-20: In the simple income-expenditure model with rigid prices:

18. ____ A constant positive rate of growth of the quantity of money implies a constant interest rate.
19. ____ A constant rate of government deficit spending with a fixed stock of money implies a constant interest rate.
20. ____ A rising stock of capital is inconsistent with a constant interest rate.

 

Part II: Each of the following statements is true. Prove it. (1/2 hour).

1. The slope of the LM (or LL) curve is flatter, the more elastic the demand for money with respect to the interest rate and the less elastic with respect to income.
2. Monetary velocity can be expected to be uncorrelated with the level of prices but to be sensitive to the rate of change of prices.
3. Treasury policy of substituting long term obligations for short-term obligations in the federal debt outstanding will produce deflationary pressure on the economy if and only if the expectations hypothesis about the term structure of interest rates is false or incomplete.
4. For a given quantity of money, an increase in the government deficit will produce inflationary pressure on the economy, if and only if the elasticity of demand for real money balances with respect to the rate of interest is less than zero.
5. The usual balanced budget multiplier is unity if and only if liquidity preference is either absolute or depends on income excluding government expenditures.

 

Part III. Consider the following two proposed fiscal policies: (1/2 hour).

(a) Balance continuously the high-employment budget.
(b) Keep tax rates constant.

In considering (a), assume that it can be followed (i.e., that it is possible with at most a brief lag to change taxes in response to changes in government expenditures so that, at high employment, the proceeds of all taxes would equal the amount of expenditure at that level of employment.) Assume also all other conditions, including monetary policy, the same for (a) and (b).

Aside from the effect on the average level of income, which policy do you believe would produce greater stability of income? Justify your answer as rigorously as you can.

 

Part IV. Analyze the likely short and long run effects on interest rates, prices, employment and income velocity of an increase in the rate of monetary expansion from, say, a non-inflationary full employment rate to a higher rate. (1/2 hour).

 

Part V. In a closed economy the central bank can determine the nominal quantity of money, while the public determines its real value, whereas in an open economy the nominal quantity of money is determined by the balance of payments.
Discuss the validity of this statement under alternative assumptions of fixed and flexible exchange rates. (1/2 hour).

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Milton Friedman’s answers and notes

1. False. = Excess Reserves, Free Reserves = Excess Reserves less Borrowing.
2. True.
3. True.
4. False.
5. False.
6. True.
7. False.
8. True.
9. False. Not zero, unity.
10. True.
11. True.
12. True.
13. False.
14. True.
15. True.
16. True.
17. Uncertain. Lower W/Y therefore raises savings[?]. [ six words illegible]
18. False.
19. True.
20. False.

Part II.

1. 

Part V.

 

Source:  Hoover Institution Archives. Papers of Milton Friedman. Box 77, Folder “University of Chicago Econ. 331”.

Image Source:  Element from Social Science Research Building. University of Chicago Photographic Archive, apf2-07449r, Special Collections Research Center, University of Chicago Library.