CL4 Listening Exam 1 Level B2

CL4 Listening Exam 2 – Level B2 September 2007

Prof. Peter Cullen

Text

Listen to the following text about Milton Friedman.

(from the Economist: Nov. 25, 2006)

The Legacy of Milton Friedman, a Giant Among Economists.

In 1930’s, with the Great Depression that followed the 1929 Stock Market Crash still in full force, economist Milton Friedman’s positive theories regarding the free market were far from popular at the time. Surely the depression had demonstrated that markets were not to be trusted! Intellectually equipped with John Maynard Keynes’ “General Theory”, economists thought that governments themselves should spend and borrow to keep the economy healthy and un-employment under control.

It is largely due to Milton Friedman’s work that economists think differently today. He was the most influential economist of the second half of the 20th century, if not of the entire century. Mr. Friedman brought about profound changes in the way his profession, politicians, and the public thought about economic questions in three enormously important and connected areas.

The first of these areas is summed up by the title of his book “Capitalism and Freedom”, published in 1962. To Mr. Friedman, these two concepts were very closely connected. He believed that without economic freedom, or precisely – capitalism, there could be no political freedom. Governments, he argued, should do little more than enforce contracts, promote competition, provide a monetary framework for the economy, and protect the irresponsible. The US government was supporting far too many expensive and inefficient programmes in the 1930’s, programmes that interfered with free market exchange.

Secondly, Mr. Friedman revolutionised how economists and policymakers approached money and inflation. Post-war governments appeared able to balance unemployment against inflation, such that cutting inflation increased unemployment and vice versa. Friedman believed that this inverse relationship was an illusion. In the 1970’s, rich western economies suffered both rising inflation and higher unemployment, a situation known as “stagflation”. Friedman argued that the solution to this was for governments to implement stable monetary frameworks based on growth in the money supply. This rule is known as monetarism.

Thirdly, Mr. Friedman created the base for modern theories of consumption. John Maynard Keynes had suggested that as income rose, so would savings. Economic data proved, however, that as countries became richer, general savings rates did not increase. Milton Friedman resolved this paradox with a theory known as the “permanent income hypothesis”, which he outlined in 1957. He suggested that people did not spend on the basis of their annual income, but rather according to the amount of money they expected to have year after year. They saved money when they had a surplus, and spent their savings in times of scarcity. This and his work on monetary policy won him the Nobel Prize in 1976.

Milton Friedman was well respected by American President Ronald Reagan, British Prime Minister Margaret Thatcher, and Chilean dictator Augusto Pinochet, although many of the details of his theories have proved difficult to apply since the late 1980’s. Milton Friedman died on November 16th 2006.

Listening Exam 2 – Level B2 September 2007

Prof. Peter Cullen

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Name, Date, and Registration Number

Questions: Answer only 5 of the following questions. ANSWER ONLY 5!!! NOT 6!!!

YOU DO NOT HAVE TO WRITE COMPLETE SENTENCES!!!!!

1. Were Milton Friedman’s theories on the free market popular in the 1930’s? Why or why not?

2. Why is Milton Friedman considered to be one of the most important economists of the 20th century?

3. What did Milton Friedman think about the relationship between government, capitalism, and freedom?

4. What economic problem did rich western governments face in the 1970’s and how did Milton Friedman propose to solve the problem?

5. What does Milton Friedman’s “Permanent Income Hypothesis” say about the relationship between income and savings?

6. Which politicians respected Milton Friedman? When did he die?

Listening Exam 2 – Level B2 September 2007

Prof. Peter Cullen

Answer Sheet

1. Were Milton Friedman’s theories on the free market popular in the 1930’s? Why or why not?

2. Why is Milton Friedman considered to be one of the most important economists of the 20th century?

It is largely due to Milton Friedman’s work that economists think differently today. Mr. Friedman brought about profound changes in the way his profession, politicians, and the public thought about economic questions in three enormously important and connected areas.

3. What did Milton Friedman think about the relationship between government, capitalism, and freedom?

To Mr. Friedman, these two concepts were very closely connected. He believed that without economic freedom, or precisely – capitalism, there could be no political freedom. Governments, he argued, should do little more than enforce contracts, promote competition, provide a monetary framework for the economy, and protect the irresponsible. The US government was supporting far too many expensive and inefficient programmes in the 1930’s, programmes that interfered with free market exchange.

4. What economic problem did rich western governments face in the 1970’s and how did Milton Friedman propose to solve the problem?

In the 1970’s, rich western economies suffered both rising inflation and higher unemployment, a situation known as “stagflation”. Friedman argued that the solution to this was for governments to implement stable monetary frameworks based on growth in the money supply. This rule is known as monetarism.

5. What does Milton Friedman’s “Permanent Income Hypothesis” say about the relationship between income and savings?

Mr. Friedman created the base for modern theories of consumption. John Maynard Keynes had suggested that as income rose, so would savings. Economic data proved, however, that as countries became richer, general savings rates did not increase. Milton Friedman resolved this paradox with a theory known as the “permanent income hypothesis”, which he outlined in 1957. He suggested that people did not spend on the basis of their annual income, but rather according to the amount of money they expected to have year after year. They saved money when they had a surplus, and spent their savings in times of scarcity. This and his work on monetary policy won him the Nobel Prize in 1976.

6. Which politicians respected Milton Friedman? When did he die?