Hugh Rockoff

Second Exam: History of Economic Thought

Fall 2000 Version A

Instructions: Answer the multiple choice by filling in the scantron, and the short answer on the question sheet. Make sure that your name and ID is on both before you turn them in. There are 38 multiple-choice questions worth 2 points each, and 6 short answer questions worth 4 points each. There is one best answer to each question in the sense of the one that is generally true in light of the class lectures and the text. Don’t spend your time worrying about special cases and trick answers. I am just trying to find out whether you remember what your heard in the lectures and what your read in the text. Good luck.

1. Which of the following economists is famous for having stressed the fact that supply curves and demand curves become more elastic in response to a disturbance to the equilibrium, the more time people have to adjust.

a. William Stanley Jevons

b. Alfred Marshall

c. Leon Walras

d. Edward Hastings Chamberlin

2. In order to show that _____ William Stanley Jevons invented _____.

c. the economy went through cycles, the idea of gross domestic product

3. In the Coal Question William Stanley Jevons argued that

4. Where (according to the class lecture) was William Stanley Jevons in 1853?

a. In British Museum studying economics

b. In Paris buying and selling securities on the Bourse

c. In New York serving as a railroad executive.

d. In Australia assaying gold bullion.

5. William Stanley Jevons thought it would be best (although he didn’t follow best practice himself) to "weight" the prices of goods included in a price index ___

a. equally

b. by their share in consumer spending

c. equally, but with each price set to one in the base year

d. by their embodied labor

6. Which of these developments is most closely associated with Alfred Marshall

a. the introduction of time into economic analysis

b. the theory of comparative advantage

c. the development of general equilibrium analysis

d. the theory of comparative advantage

7. Marshall argued that a downward sloping supply curve (more output at a lower price)

a. is impossible

b. occurs frequently, but inevitably results in a non-competitive industry

c. could occur in a a competitive industry with external economies

d. is inconsistent with a stable equilibrium

8. Whereas Alfred Marshall advocated _______ analysis, Leon Walras advocated _______ analysis

a. partial equilibrium, general equilibrium

b. general equilibrium, partial equilibrium

c. disequilibrium, continuous equilibrium

d. unconditional rational equilibrium, bounded rational equilibrium

9. Whereas Walras advocated _____ to solve the problem of deflation in the economy of the late nineteenth century, Marshall advocated ____.

a. bimetallism, trimetallism

b. trimetallism, bimetallism

c. bimetallism, symmetalism

d. symmetalism, bimetallism

10. Leon Walras believed that a solution to the economic system was possible if the if the number of behavioral equations was ____ the number of unknowns.

11. In Walras’s model the main function of the famous "Walrasian auctioneer" is to

a. call out proposed schedules of production

b. call out proposed prices

c. purchase excess supplies of commodities

d. place tentative values and reservation prices on all commodities

12. Leon Walras called his famous process in which the economy finds its way to a general equilibrium through a process of trial and errror.

a. Market titration

b. Retrograde contracting

c. Contango

d. Tatonement

13. Thorstein Veblen believed that the source of economic growth was

a. entrepreneurs

b. engineers

c. intellectuals

d. the working class

14. Whereas Marx thought that technological progress was likely to be ____, Veblen thought it would be ____.

a. resource saving, resource using

b. resource using, resource saving

c. labor saving, capital saving

d. capital saving, labor saving

15. According to Thorstein Veblen, a rich businessman buys a sailboat, typically, because

a. he want to diversity his portfolio

b. he likes to get away from it all

c. by taking care of it he can satisfy his " instinct of workmanship"

16. It could be argued that Thorstein Veblen's masterpiece was "the Price of Wheat Since 1867" because it emphasized _____.

a. replacing the profit motive with psychological instincts

b. the role of speculation in financial markets

c. basing deductions about the economy on empirical evidence

d. asking about the evolution of economic institutions

17. The ideas of Thorstein Veblen appear to have influenced the administration of

a. William Jennings Bryan

b. Theodore Roosevelt

c. Franklin Roosevelt

d. Richard Nixon

18. Thorstein Veblen thought that the capitalist system should be replaced with ____.

a. a dictatorship of the proletariat

b. a technocracy

c. syndicalism

d. fascism

19. Edward Hastings Chamberlin believed that in the long run monopolistically competitive industries were characterized by

a. Abnormally high profits

b. Abnormally low profits

c. Normal Profits

d. Profits that cycled forever above and below normal

20. Edward Hastings Chamberlin believed that in the long run monopolistically competitive industries were characterized by

a. Excess capacity

b. Insufficient capacity

c. Optimal capacity

d. Capacity that cycled forever between excess and insufficient, but was never just right

21. Joseph Schumpeter argued that capitalism would ____ because (among other things) ____.

c. triumph over socialism, socialism would be incapable of innovation

22. Joseph Schumpeter believed that to cure the depression the main point would be for ____.

a. the federal government to run large budget deficits

b. the federal reserve to buy government bonds

c. the federal reserve to sell government bonds

23. In his "plucking" model Joseph Schumpeter argued that interest rates were driven down by ___ and up by ____.

a. saving, waves of innovations

b. waves of innovations, saving

c. saving, the accumulation of capital

d. the accumulation of labor, the accumulation of capital

24. Joseph Schumpeter believed that the Great Depression was caused primarily by

a. bad monetary policy

b. bad fiscal policy

c. the coincidence of the troughs in economic cycles

d. lack of coordination among markets

25. The longest cycle studied by Joseph Schumpeter was

a. the Kuznets cycle

b. the Kondratieff cycle

c. the building cycle

d. the Kramnik cycle

26. The shortest cycle studied by Joseph Schumpeter was

a. the Kuznets cycle

b. the Kondratieff cycle

c. the building cycle

d. the Kramnik cycle

27. The central thesis of Henry Simons' famous essay "Rules versus Authorities in Monetary Policy" was that the Federal Reserve should be ___.

a. given the freedom to take what ever action it thinks is in the public interest

b. privatized

c. given an explicit verifiable task such as maintaining price stability

d. abolished

28. Henry Simons believed that an important structural reform that would prevent a Great Depression from ever happening again was ___.

a. nationalization of major corporations

b. a flat-rate income tax

c. privatizing social security

d. 100% reserve banking

29. Henry Simons believed that a strong case could be made for mild ___ as a long-run objective because ___.

a. deflation; real wages would rise even if the nominal wage were sticky

c. inflation; real wages would rise even if the nominal wage were sticky

30. Henry Simons believed that ____ should be eliminated

a. short-term government debt

b. intermediate term government debt

c. long-term government debt (consols or infinitely lived debt)

d. private shares

31. Define the following: M = money, V = velocity of circulation, P = the price level, and y = real GDP. Which of the following equations defines the Quantity Theory of Money

a. M = VPy

b. My = VP

c. MP = Vy

d. MV = Py

32. Henry Simons argued that the best definition of money was one which included

a. currency only

b. bank deposits only

c. currency and bank deposits

d. currency, bank deposits, and short-term business and government loans

33. Thorstein Veblen’s idea of "conspicuous consumption" was that

a. people buy expensive items because they want to display their wealth

b. in modern economies people lose control of their basic appetites

c. governments encourage consumption to maintain full employment

d. only luxuries yield consumer surplus

34. John Kenneth Galbraith's book, The Theory of Price Controls argued that prices had been surprisingly ____ to control in World War II because ____.

a. easy, the government used financial incentives (taxes and subsidies)

b. easy, technocrats in large corporations were content to work for the government

d. hard, the government relied on voluntary compliance

35. The Strategic Bombing Survey which was led by John Kenneth Galbraith found that during World War II strategic bombing ____.

a. had reduced German war production practically to zero

b. had kept German war production at its 1941 (pre-bombing) level

c. had failed to prevent a substantial increase in munitions production

36. Leon Walras basic insight was that the economic system is analogous to a ______.

a. set of equations

b. living organism, such as an amoeba

c. concentration camp

d. machine, such as a steam engine

37. We have two candidates, a conservative and a liberal, running for political office. Voters can be described as lying on a single continuum (a line segment) stretching from left to right. According to Harold Hotelling’s model of spatial competition, the two candidates will end up at the end of the campaign ____.

1. at opposite ends of the political spectrum
2. in the middle of the political spectrum
3. with each of them about one third of the way from their own end of the political spectrum
4. with both at one end or the other, determined by chance

38. The following diagram is Jevons's famous diagram illustrating the advantages of trade. The horizontal axis measures holdings of corn from left to right, and holdings of beef from right to left. If the initial holdings of someone are at A, what is the gain from exchanging one unit of beef for one unit of corn?

1. AE
2. AD
3. ED
4. EDF

1. MU(CIGARS) = the marginal utility of cigars measured in utils, MU(CANDY) = the marginal utility of candy measured in utils, P(CIGARS) = the price of a cigar measured in dollars, and P(CANDY) = the price of candy measured in dollars. What is the equilibrium condition discovered by William Stanley Jevons?

2. Consider the following diagram intended to illustrate Marshall's theory of consumer's surplus. BC is the long-run market supply price. Now the price is raised to AC through the imposition of a tax of AB dollars per candle. What area represents the total revenues of the government? What area represents the net loss of welfare?

3. Consider the following demand schedule for used copies of Marshall's Principles of Economics

If the total price is $79. A. How many units will be sold? B. What is the consumer surplus?

4. Draw and a diagram illustrating the "Chamberlinian Tangency Solution." Carefully label both axes and all the curves in the diagram.

5. Match the following famous economists with the policies they advocated in the 1930s by writing the name of one of the following -- Joseph Schumpeter, John M. Keynes, or Henry C. Simons -- in each box.

6. Only two products, A and B, are produced in our economy. Define the following terms

QAS = the quantity of A supplied

QBS = the quantity of B supplied

QAD = the quantity of A demanded

QBD = the quantity of B demanded

PA = the price of A

PB = the price of B

Suppose that we are given the following equations.

1. QAS = F₁(PA,PB) is the supply function for A

2. QBS = F₂(PA,PB) is the supply function for B

3. QAD = F₃(PA,PB) is the demand function for A

4. QAD = F₄(PA,PB) is the demand function for B