Economic Development Exam Solutions
Course Introduction
Economic Development explores the processes by which countries improve the economic, social, and institutional well-being of their people. The course examines key theories and models of development, the measurement and comparison of development indicators, and the role of factors such as capital accumulation, technology, human capital, policy, and institutions. Topics include poverty and inequality, population growth, education, health, rural development, globalization, and the challenges of designing and implementing effective development policies. Through case studies and empirical data, students analyze development strategies in different countries and assess the impact of international organizations and government interventions on economic growth and development outcomes.
Recommended Textbook
Macroeconomics Policy and Practice 2nd Edition by Frederic S Mishkin
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Page 2
Chapter 1: The Policy and Practice of Macroeconomics
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Q1) Which of these economies has the highest saving rate?
A)Greece
B)China
C)United States
D)Brazil
E)Japan
Answer: B
Q2) Policies to encourage higher personal saving rates include ________.
A)raising income taxes
B)lowering sales taxes
C)raising taxes on pension plans
D)all of the above
E)none of the above
Answer: E
Q3) There are no questions for this section.
Answer: As the input statement "There are no questions for this section." suggests that there are no inquiries to address within a particular section, there is no specific question to provide an answer for. If you have any questions or need information on a different topic, feel free to ask, and I'll be happy to help!
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Page 3
Chapter 2: Measuring Macroeconomic Data
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Q1) According to the fundamental identity of national income accounting,income and output are identical.Why,then,is national income not equal to GDP?
Answer: National income is net of depreciation,while GDP is a gross measure.National income is earned by residents of the economy,while GDP measures the economic activity that occurs on national territory.Thus,income earned by residents as a result of economic activity abroad is included in national income,but not in GDP.Income arising from domestic production that is paid to foreigners,rather than residents,is included in GDP,but not in national income.
Q2) An international comparison of eight major industrialized countries reveals the following about the components of GDP: ________.
A)China has the highest share of investment among the eight countries
B)India has the largest government share of output
C)the U.S.is the largest consumer as a share of GDP
D)all of the above
E)none of the above
Answer: D
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Chapter 3: Aggregate Production and Productivity
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Q1) The marginal product of labor (MPL)is given by the ________.
A)labor share of income + average output per unit of labor
B)labor share of income - average output per unit of labor
C)labor share of income ÷ average output per unit of labor
D)labor share of income × average output per unit of labor
E)none of the above
Answer: D
Q2) Which of the following is (are)likely to cause the marginal product of an input to decrease?
A)an increase in the real price of the input
B)a decrease in the quantity of the input used in production
C)technological advances
D)all of the above
E)none of the above
Answer: E
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5
Chapter 4: Saving and Investment in Closed and Open Economies
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Q1) How can the U.S.federal government induce increases in the national saving rate?
A)implementing a value added tax
B)lowering the capital gains tax
C)reducing budget deficits
D)all of the above
E)none of the above
Q2) If we observe an economy in which desired saving has changed,but there has been no change in actual investment,we may infer that ________.
A)this is a closed economy
B)this is a large economy
C)the world real interest rate has not changed
D)all of the above
E)none of the above
Q3) Consumption expenditures are a function of ________.
A)the real interest rate
B)disposable income
C)autonomous consumption
D)all of the above
E)none of the above
Q4) How does a decline in the real interest rate cause an increase in investment?
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Chapter 5: Money and Inflation
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Q1) Which of the following is true for the European Central Bank (ECB)?
A)its executive board meets less often than the FOMC
B)the members of its executive board have lifetime appointments
C)it is a more decentralized system than the Federal Reserve
D)all of the above
E)none of the above
Q2) The quantity theory of money ________.
A)is used by classical economist to explain how changes in the quantity of money lead to proportional changes in the price level
B)gives mathematical grounding for the view that a country's central bank determines the general price level through control of the money supply
C)implies that changes in the money supply have no long run impact on real variables
D)all of the above
E)none of the above
Q3) Credit cards are a popular means of payment.Why are credit card accounts not included in M1 or M2? Are credit cards of no relevance to these money measures?
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Chapter 6: The Sources of Growth and the Solow Model
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Q1) On the Solow Diagram,an increase in population growth is shown by ________.
A)an upward shift of the depreciation plus capital dilution line
B)an upward shift of the investment function
C)an upward shift of the per-worker production function
D)a downward shift of the investment function
Q2) According to Figure 6.1,the period from 1974 to 1995 is particularly remarkable for the slow growth of ________.
A)output per worker
B)labor input
C)output
D)capital input
Q3) If an economy initially starts away from the steady state ________.
A)output will gradually fall over time
B)the economy will converge to the steady state in the long-run
C)consumption spending must be greater than investment spending
D)consumption spending must rise
Q4) There are no questions for this section.
Q5) On the diagram above,show the new steady-state capital-labor ratio that results from a decrease in the saving rate.Can you say what has happened to the equilibrium level of consumption per worker?
Page 8
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Chapter 7: Drivers of Growth: Technology, policy, and Institutions
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Q1) Which of the following is nonrival in character?
A)labor
B)capital
C)a desk
D)technology
Q2) The knowledge and skills that workers have built up through education and training programs is known as ________.
A)the college premium
B)human capital
C)productivity
D)financial torsion
Q3) The Romer and Solow models reach the same conclusion with respect to ________.
A)output growth in the long-run
B)the impact of changing population
C)the effect of an increase in the saving rate
D)the general level of prices
Q4) Because old ideas are an input in the production of new ideas,nothing prevents the growth rate of output per person from rising without limit.Comment.
Q5) Use the distinction between rival and nonrival to explain the college premium.
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Chapter 8: Business Cycles: an Introduction
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Q1) During the 1970s in the U.S.________.
A)the inflation rate peaked at over 14%
B)oil prices quadrupled
C)the unemployment rate rose above 8%
D)all of the above
E)none of the above
Q2) Referring to the graph above,an economic variable that had peaked in December 1911,November 1914,and February 1919 is likely a ________ variable.
A)leading countercyclical
B)leading procyclical
C)lagging countercyclical
D)lagging procyclical
E)none of the above
Q3) A lagging variable ________.
A)reaches a peak or trough before the turning point of the business cycle
B)reaches a peak or trough after the turning point of the business cycle
C)reaches a peak or trough at the same time as the turning point of the business cycle
D)all of the above
E)none of the above
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Page 10
Chapter 9: The Is Curve
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Q1) The IS curve shifts to the right when ________.
A)autonomous consumption decreases
B)taxes increase
C)autonomous investment increases
D)all of the above
E)none of the above
Q2) If planned expenditure is below output,as the economy approaches equilibrium,________.
A)planned expenditure is rising
B)output is rising
C)saving is rising
D)all of the above
E)none of the above
Q3) A change in which of the following causes a movement along - not a shift in - the IS curve?
A)autonomous consumption
B)government purchases
C)financial frictions
D)all of the above
E)none of the above
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Chapter 10: Monetary Policy and Aggregate Demand
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Q1) The demand for real money balances ________.
A)is downward sloping with respect to prices
B)is downward sloping with respect to interest rates
C)is downward sloping with respect to income
D)all of the above
E)none of the above
Q2) If the nominal interest rate is above the equilibrium level ________.
A)purchases of bonds and other assets will cause the interest rate to fall
B)issuance of bonds and other assets will cause the supply of real money balances to increase
C)the opportunity cost of holding money is low,and is rising
D)all of the above
E)none of the above
Q3) A rightward shift of the money supply ________.
A)may come about from an increase in the quantity of money supplied by the Federal Reserve
B)may come about from a decrease in the price level
C)leads to a decrease in interest rates ceteris paribus
D)all of the above
E)none of the above
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Chapter 11: Aggregate Supply and the Phillips Curve
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Q1) What are price shocks? Why were they not included in the original formulation of the Phillips curve? Why were they added to the modern Phillips curve?
Q2) The natural rate of output is ________.
A)independent of the inflation rate
B)always lower than potential output
C)unrelated to the natural rate of unemployment
D)all of the above
E)none of the above
Q3) Which statement(s)is (are)consistent with a positive relationship between inflation and the output gap?
A)If output rises above its potential level,the unemployment rate falls and firms will raise wages and prices more rapidly.
B)In the short run,the AS curve is upward sloping.
C)Through Okun's law,the negative relationship between the output and unemployment gaps allows the modern Phillips curve to be translated into the AS curve.
D)all of the above
E)none of the above
Q4) Why is there no long-run trade-off between unemployment and inflation?
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Page 13
Chapter 12: The Aggregate Demand and Supply Model
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Q1) The price of a barrel of oil doubled between 2007 and the middle of 2008.To make matters worse,a financial crisis hit the U.S.economy starting in August of 2007.Which of the following is true of the Chinese experience?
A)The worldwide decline in demand led to a collapse of Chinese exports.
B)Instead of relying solely on the economy's self-correcting mechanism,much more aggressive fiscal expansions than those of the U.S.(in addition to a substantial monetary easing)served to shift the AD curve back to general equilibrium relatively quickly.
C)The Chinese economy was better able than the U.S.economy to weather the financial crisis with output growth starting to grow earlier and more quickly than that of the U.S.
D)all of the above
E)none of the above
Q2) A fall in import prices or an increase in productivity ________.
A)constitute a positive supply shock
B)typically leads to a rise in commodity prices
C)typically comes with a reduction in output
D)all of the above
E)none of the above
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Page 14
Chapter 13: Macroeconomic Policy and Aggregate
Demand and Supply Analysis
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Q1) If workers push for wages that are beyond what productivity gains can justify
A)a positive output gap ensues which will lead to lower unemployment if the Federal Reserve does not act
B)a temporary negative supply shock ensues driving up prices
C)and the Federal Reserve eases monetary policy aimed at increasing aggregate demand to counter the negative supply shock,the inflation rate will decrease
D)all of the above
E)none of the above
Q2) The American Recovery and Reinvestment Act of 2009 ________.
A)placed greater emphasis on monetary policy than fiscal policy
B)finally put an end to the inflationary spiral that had begun in 2005
C)was intended to reverse the sharp increase in the equilibrium real interest rate
D)all of the above
E)none of the above
Q3) On the graphs above,show how the central bank implements a decrease in the inflation target.In words,explain why the change in the real interest rate is temporary.
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Page 15
Chapter 14: The Financial System and Economic Growth
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Q1) Suppose you have money to lend,but will do so only if you are compensated for the risk of default.If you set a high interest rate on your loan,a likely consequence is that
A)safe borrowers will look elsewhere,and only risky borrowers will find your terms attractive
B)risky borrowers will look elsewhere,so your money is more likely to go to a safe borrower
C)competition from other lenders will force you to lower your interest rate
D)you will be prosecuted for predatory lending
Q2) Credit unions ________.
A)acquire access to funds by accepting deposits then use these monies in lending to households and firms
B)are a special type of mutual fund
C)raise funds by selling commercial paper then lend these funds to consumers
D)acquire access to monies through the payment of premiums by employees
Q3) Equities is to ________ as bond is to ________.
A)ownership;debt
B)fairness;constraint
C)stock;asset
D)banks;exchanges
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Chapter 15: Financial Crises and the Economy
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Q1) The key reason that the bursting of the tech-stock bubble of the late 1990s had a mild impact on the macroeconomy is ________.
A)rapid intervention by the central bank averted economic catastrophe
B)the increase in tech-stock prices was driven by the economic fundamental of technological progress
C)the technology sector is a rather small portion of the aggregate economy
D)tech-stock prices had not been much influenced by credit availability
Q2) Management of expectations by a central bank is based on the view that ________.
A)decreasing the federal funds rate will lead to a reduction in the discount rate
B)if economic agents believe that the price of an individual asset will rise in the future,they will buy that asset today,contributing to its eventual price increase
C)if households expect an increase in prices in the future,they will engage in spending today
D)households will increase their spending today if they believe that the monetary authorities are committed to maintaining low interest rates
Q3) Describe how a central bank can increase aggregate demand by influencing expectations.
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Chapter 16: Fiscal Policy and the Government Budget
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Q1) Ricardian Equivalence theory assumes that ________.
A)an anticipated increase in the income of future generations will reduce the amount that is saved today on their behalf
B)government spending remains constant
C)many people are subject to borrowing constraints
D)tax cuts have a positive impact on aggregate supply
Q2) A government debt larger than the economy's GDP ________.
A)is an example of debt repudiation
B)is a predictor of future large budget deficits
C)is a consequence of debt intolerance
D)is a possible consequence of tax smoothing
Q3) According to Ricardian Equivalence,a tax cut will not have a material impact on consumption spending since ________.
A)households will simply save the monies received from the tax cut
B)the value of the tax multiplier is one
C)a tax cut must lead to an increase in prices,which leaves the real value of consumption unchanged
D)a decrease in taxes will be balanced,under current federal law,by a government spending increase
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Page 18
Chapter 17: Exchange Rates and International Economic Policy
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Q1) If any country decides to exit from the Eurozone,it will gain ________.
A)free capital mobility
B)a fixed exchange rate
C)reduced transactions costs
D)monetary policy independence
Q2) A decline in the value of net exports in the U.S.is most likely to result from an increase in ________.
A)foreign income
B)U.S.exports
C)foreign real interest rates
D)the value of the U.S.dollar
Q3) Suppose the U.S.dollar depreciates,and monetary authorities respond to stabilize both output and inflation.Which of the following is a correct description of the short-run consequences?
A)output,inflation,and the real interest rate have all increased
B)output,inflation,and the real interest rate have returned to their original values
C)output and inflation are higher,while the real interest rate has fallen
D)output and inflation have returned to their original values,while the real interest rate is increased
Page 19
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Chapter 18: Consumption and Saving
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Q1) Disposable income represents ________.
A)the income received by firms,e.g.corporations
B)an increase in GDP
C)a decrease in GDP
D)the after-tax income received by the household
Q2) During the 2007-2009 financial crisis,many households found themselves with debts to repay.How might this explain the consumer response to the 2008 Tax Rebate?
Q3) ________ will increase current consumption,saving,and future consumption.
A)an increase in future income
B)an increase in initial wealth
C)an increase in current income
D)a decrease in the real interest rate
Q4) Discounting involves dividing next-period income by ________.
A)one plus the real rate of interest
B)the nominal rate of interest
C)current income
D)the real rate of interest
Q5) Would the Keynesian consumption function work well in a world of libertarian paternalists?
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Chapter 19: Investment
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Q1) A decline in the desired level of capital and investment will result from ________.
A)a rise in the real price of capital
B)a decrease in the rate of depreciation
C)a decrease in the real interest rate
D)a decrease in the real price of capital
Q2) Through its impact on the desired stock of housing,higher expected income would lead to ________.
A)an increase in residential investment
B)a decrease in expected house price appreciation
C)a decrease in residential investment
D)a decrease in single-family dwellings
Q3) One explanation for the sharp decline in inventory investment during the 2007-2009 financial crisis was ________.
A)financing constraints
B)the rise in the level of income
C)the volatility of interest rates
D)the increase in total spending and therefore costs
Q4) Why is residential investment procyclical?
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Chapter 20: The Labor Market, employment, and Unemployment
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Q1) The wage gap between high school and college graduates can be explained,other things the same,by ________.
A)a greater increase in the demand for high school educated labor than college-educated labor
B)a greater increase in the supply of college-educated labor than high school educated labor
C)a greater increase in the demand for high school educated labor than in the supply of high school educated labor
D)a greater increase in the demand for college-educated labor than high school educated labor
Q2) Among the causes of an increase in labor supply is ________.
A)a relaxation of restrictions on child labor
B)an increase in enrollment at colleges
C)an improvement in worker productivity
D)a contraction of economic activity
Q3) Typically,employers compete with each other in the labor market to get and to retain the best possible workers.Explain how such competition might prevent the unemployment rate from ever being close to zero.
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Chapter 21: The Role of Expectations in Macroeconomic Policy
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Q1) Which of the following is least likely to enhance central bank credibility?
A)"town meetings" on the topic of monetary policy
B)policy makers' expertise
C)independence from short-run political influences
D)accurate measurement of macroeconomic variables
Q2) In 1973,1979 and 2007,the U.S.economy was hit by ________.
A)the collapse of the financial sector
B)the assassination of a Federal Reserve Board member
C)three major aggregate supply shocks
D)the after-effects of the process of creative destruction
Q3) Assume that prices have risen in a given economy by an average of 5 percent over the last nine years.If consumers base their expectations about future price movements on that knowledge alone their forecasts rely on ________.
A)reverse expectations
B)adaptive expectations
C)rational expectations
D)monetary expectations
Q4) How does central bank independence cause lower inflation?
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Q5) Under what circumstances might it be "rational" to rely on adaptive expectations?
Chapter 22: Modern Business Cycle Theory
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Q1) Shocks to long-run aggregate supply can be a source of business fluctuations
A)only in real business cycle models
B)only in new Keynesian models
C)in both real business cycle and new Keynesian models
D)only if the money supply rises
Q2) Credibility is not important in ________.
A)new Keynesian and traditional Keynesian theory
B)real business cycle and traditional Keynesian theory
C)real business cycle and new Keynesian theory
D)traditional Keynesian,new Keynesian and real business cycle theory
Q3) The complete wage and price flexibility of the real business cycle framework implies that ________.
A)the velocity of money is a constant
B)the velocity of money times the money supply is equal to the nominal value of transactions over a given period of time
C)aggregate output always equals potential output
D)sustained economic contractions,like the Great Depression,cannot occur in real,historical time
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