UCLA. PhD Qualifying Exam, Money. May 1974

This post adds a third Ph.D. qualifying exam for the field of monetary economics at UCLA found in the papers of Robert W. Clower at the Economists’ Papers Archive at Duke University. 

In other news, the U.S. House Committee on the Judiciary was between its first (May 9) and second (July 24) days of hearings regarding the impeachment of Richard Nixon.

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UCLA Qualifying Exams, Money
Previously posted

May 1971
May 1973

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Spring Quarter 1974
May 24, 1974

Ph.D. Qualifying Examination
MONEY

Four Hours

INSTRUCTIONS: Answer all of the following eight questions. Be as specific and rigorous as possible. There is plenty of writing time to answer all of the questions satisfactorily so try to spend a sufficient amount of time thinking before beginning to write. Irrelevant material presented, however correct, will be penalized.

1. State whether each of the following statements Is true, false, or uncertain and then briefly explain your answer. Your grade depends entirely upon your explanation.
   1. In countries which undergo frequent, large changes in the rate of monetary growth, changes in the rate of monetary growth have little impact on real income compared to the effect those changes would have had had monetary growth been more stable.
   2. No great error is introduced into the analysis of aggregate demand by assuming that the real income elasticity of the demand for money is unity for short-term fluctuations.
   3. Lags in the adjustment of the rate of inflation to changes in the rate of growth of the money supply imply a cyclical adjustment of the rate of inflation.
   4. If governments do not intervene, floating exchange rates imply a zero balance of payments deficit on the liquidity basis.
   5. A lag in adjustment of the rate at which banks pay interest on demand deposits implies a larger short-run than long-run effect on aggregate demand from equal changes in government spending and borrowing.
   6. If all wage contracts had escalator clauses (i.e., were tied to the price level), inflation would be self-perpetuating.
2. According to a well-known principles textbook: “The general price level usually rises when GNP is high relative to the physical productive capacity of the economy; similarly, prices generally decline when GNP is low relative to capacity, as during the 1930’s.” In fact, wholesale prices in the U.S. declined almost 50% between 1869 and 1890 although output was generally high relative to capacity during most of this period; and wholesale prices rose nearly 50% between 1932 and 1938 although unemployment during these years ranged between 17% and 25% of the labor force.
   Suppose a diligent student in a class you are teaching confronts you with the quotation and the facts above, How would you answer?
3. An economist recently wrote a letter to the Wall Street Journal complaining that much discussion of how to control Inflation has been based on a neo-quantity theory which emphasizes the “quantity of money” while ignoring the “quality of credit.” Central banks (he noted) have been established to regulate commercial bank assets, but current discussion and policy concentrates on the liability side of the commercial bank balance sheet and entirely ignores the asset side. He maintained that if, for example, commercial banks were forced to limit their lending activity to short-term, self-liquidating business loans, inflation would quickly be controlled. What do you think of this argument? Explain in detail.
4. “Only real magnitudes appear as arguments in individual utility functions; accordingly, the rate of inflation of money prices (a strictly nominal phenomenon) is of no welfare significance for individuals or for society at large.” Discuss critically.
5. A recent Wall Street Journal article noted the rapid rise both in the level of short-term interest rates and in the rate of growth of money that has occurred over the past few months. The reporter explained this phenomenon by asserting that individuals in the money market took the increase in the rate of growth of money as an indication that the Fed would later have to tighten up and therefore bid up interest rates in anticipation of this. Carefully evaluate this explanation and, if you disagree with it, present an alternative explanation.

1. The recent rise in short-term interest rates has led to much talk about financial disintermediation.
   1. Describe this process of “disintermediation.”
   2. What is the effect of “disintermediation” on the rate of growth of money?
   3. What are the socially harmful effects of such “disintermediation?”
   4. What changes in financial institutional arrangements would you suggest to prevent such “disintermediation” from occurring?
2. The Panamanian monetary unity is the same as that of the United States, and the circulating medium consists of U.S. coins and paper dollars. The Panamanian government cannot issue currency (it does mint coins, but this can be neglected from this problem), nor does Panama have a central bank. What monetary and fiscal tools would be available to the Panamanian Minister of Economics? What contracyclical policies are possible under what conditions?
3. There has been much discussion recently of the effects of international conditions on domestic inflation. Discuss the effects of each of the following foreign factors on the U.S. inflation rate, making explicit any assumptions you are using in your analysis.
   1. a world-wide boom
   2. a Russian wheat failure
   3. an Arab oil boycott

Source: Duke University. Economists‘ Papers Archive. David M. Rubenstein Rare Book & Manuscript Library. Robert W. Clower papers, Box 4, Folder “Monetary Economics PhD exams. Reading list, exams UCLA 1971-1988”.

Image Source: UCLA Daily Bruin at archive.org.