Deck 38: Macro Policy in Developing Countries

Question 1

Infant mortality rates in developing countries:

A)are substantially higher than in developed countries.
B)are about the same as in developed countries.
C)are substantially lower than in developed countries.
D)cannot be computed because the data are not available.

Answer 1

are substantially higher than in developed countries.

Question 2

The purchasing power parity (PPP) consists of a method of comparing the:

A)labor force in different countries.
B)daily calories supplied in different countries.
C)income in different countries by looking at the domestic purchasing power of money.
D)life expectancy rates in different countries.

Answer 2

income in different countries by looking at the domestic purchasing power of money.

Question 3

Countries such as China and South Korea have increased not only the size of their labor force but also the quality of their labor force over time.Workers in these countries have higher levels of education and skills that promote changes in the productivity per worker.If this is the case, these countries have experienced:

A)growth but not development.
B)development but not growth.
C)both development and growth.
D)neither growth nor development.

Answer 3

both development and growth.

Question 4

Suppose that a typical basket of goods costs 400 pesos in Mexico and 25 pounds in Britain and that the market exchange rate is 25 pesos per pound.Using purchasing power parity, the appropriate exchange rate for comparing the incomes of the two countries is:

A)0.25 pesos per pound.
B)10 pesos per pound.
C)16 pesos per pound.
D)25 pesos per pound.

Question 5

Educational policy in most developing countries focuses too much on primary and secondary education and not enough on higher education.

Question 6

Ecuador's GDP per capita in 2008, based on market exchange rates, was $3 ,100.In that same year, Ecuador's GDP per capita based on purchasing power parity was $7
,700.The difference between these two measures of GDP per capita is most likely explained by:

A)Ecuador's dual economy.
B)differences in relative prices between Ecuador and other countries.
C)Ecuador's limited capital account convertibility.
D)credentialism.

Question 7

Developing countries tend to focus more on the goal of economic growth than developed countries.

Question 8

A regime change occurs when a government changes one aspect of its actions.

Question 9

The central banks of many developing countries choose to pursue policies that generate high levels of inflation because the benefits of doing so seem to exceed the costs.

Question 10

In contrast to development, growth refers to an increase in:

A)productive capacity with no change in output.
B)output with no change in productive capacity.
C)output brought about by an increase in inputs.
D)output brought about by a change in the production function.

Question 11

Using exchange rates based on purchasing power parity to compare per capita incomes in developing and developed countries might lead one to conclude that people in developing countries:

A)are no worse off than if market exchange rates are used.
B)are worse off than if market exchange rates are used.
C)are better off than if market exchange rates are used.
D)do not use markets enough to make such a comparison feasible.

Question 12

Most of the world's population lives in developed, rather than developing, countries.

Question 13

Developing countries, like many developed countries, have a dual economy.

Question 14

If political instability and corruption could be eliminated, economic growth would increase in most developing countries.

Question 15

Communal property rights and tradition, rather than market institutions, determine economic relationships in many developing countries.

Question 16

Some economists and international organizations use the PPP method in order to compare the:

A)income among countries.
B)income among citizens of a country.
C)life expectancy rates among countries.
D)labor mobility among countries.

Question 17

If a currency is convertible for the current account, then it is fully convertible.

Question 18

Development refers to an increase in:

A)productive capacity with no change in output.
B)output with no change in productive capacity.
C)output brought about by an increase in inputs.
D)output brought about by a change in the production function.

Question 19

When income comparisons are made using purchasing power parity rather than market exchange rates, the gap in per capita income between developed and developing countries becomes smaller.

Question 20

The United Nations, in its annual publication Human Development Report, computes what it calls the human development index.If the purpose of this index is to measure development rather than growth, which of the following factors is most likely to be included in it?

A)Number of workers in the labor force
B)Literacy rate
C)Size of the capital stock
D)Availability of natural resources

Question 21

Developing countries have different institutional priorities than developed countries for all of the following reasons except that they:

A)have dual economies, unlike developed countries.
B)have more socially-minded leaders than developed countries.
C)have weaker financial institutions than developed countries.
D)lack the institutional ability to collect taxes, unlike developed countries.

Question 22

Which of the following countries is least likely to have a dual economy?

A)Brazil
B)India
C)South Africa
D)Austria

Question 23

Relative to developed economies, budget deficits are:

A)more likely in developing economies.
B)less likely in developing economies.
C)equally likely developing economies.
D)politically less acceptable in developing countries.

Question 24

In developing countries, government expenditure levels are most closely related to:

A)what is necessary to achieve long-term macroeconomic objectives.
B)what activist fiscal policy is necessary to achieve potential output.
C)considerations about what will keep the existing government in power.
D)what will bring about regime change.

Question 25

In most developing countries, an effective fiscal policy is:

A)easier to conduct than in developed economies because there are fewer institutional checks and balances.
B)easier to conduct than in developed economies because politicians tend to be more socially-minded.
C)harder to conduct because taxes are difficult to collect.
D)harder to conduct because fiscal policy is discretionary in developing countries, unlike developed countries.

Question 26

When considering activist fiscal policy in developing countries, these governments:

A)usually have greater flexibility in determining expenditures than governments in developed countries.
B)have about the same degree of flexibility in determining expenditures as governments in developed countries.
C)usually have less flexibility in determining expenditures than governments in developed countries.
D)do not have to worry about their expenditures because they have no taxes with which to finance them.

Question 27

Because the political institutions of many developing countries are weak:

A)it is easier for them to conduct activist economic policies that foster development.
B)it is harder for them to conduct activist economic policies that foster development.
C)it is no more difficult for them to adopt activist economic policies than it is for developed countries.
D)a laissez-faire policy is counterproductive.

Question 28

Suppose an economy consists of two sectors: a sophisticated manufacturing sector and modern agricultural sector in which most of the crops that are grown are sold for cash.Such an economy:

A)would be considered a dual economy.
B)would not be considered a dual economy.
C)might be considered a dual economy if its institutions are underdeveloped.
D)might be considered a dual economy if its political system lacks institutional checks and balances.

Question 29

The dual nature of most developing countries implies that:

A)their financial sectors are not integrated into Western financial markets.
B)their financial sectors are fully integrated into Western financial markets.
C)only a portion of their financial sectors are integrated into Western financial markets.
D)their financial sectors are similar to Western financial markets.

Question 30

Which form of taxation do many developing countries rely on the most?

A)Import taxes or tariffs
B)Income taxes
C)Sales taxes
D)Corporate taxes

Question 31

Developing countries place:

A)greater emphasis on both development and growth than developed countries.
B)greater emphasis on development and less emphasis on growth than developed countries.
C)greater emphasis on growth and less emphasis on development than developed countries.
D)less emphasis on both growth and development than developed countries.

Question 32

The normative economic goals of developing countries:

A)are the same as those of developed countries.
B)focus primarily on achieving economic stability.
C)focus primarily on achieving an equitable distribution of income.
D)focus primarily on meeting basic needs.

Question 33

The difference in terms of economic goals between developing countries and developed countries is that:

A)developing countries focus primarily on achieving an equitable distribution of income while developed countries focus on higher economic growth rates.
B)developing countries focus primarily on achieving economic stability while developed countries focus on an acceptable growth rate.
C)developing countries focus primarily on meeting basic needs while developed countries focus on economic stability.
D)there are no differences between the economic goals of developing and developed countries.

Question 34

Developing countries have:

A)the same normative economic goals as developed countries even though they have much lower per capita incomes.
B)different normative economic goals than developed countries because they have much lower per capita incomes.
C)different normative economic goals than developed countries because they have less unemployment.
D)different normative economic goals than developed countries because they have lower inflation.

Question 35

Developing economies are generally characterized by a dual economy, which means that they have:

A)a public sector and a private sector.
B)a market sector and a traditional sector.
C)a manufacturing sector and an agricultural sector.
D)an international sector and a domestic sector.

Question 36

The macroeconomic policy choices of developing countries like Zambia and Namibia:

A)are similar to those of developed countries because their institutions are similar.
B)differ from those of developed countries even though their institutions are similar.
C)are similar to those of developed countries even though their institutions differ.
D)are different from those of developed countries because their institutions are different.

Question 37

Which of the following economies is most likely to be a dual economy?

A)Bangladesh
B)Canada
C)Norway
D)Japan

Question 38

In a dual economy, it is generally the case that the majority of the population works in the:

A)manufacturing sector.
B)international sector.
C)market economy.
D)traditional (barter) economy.

Question 39

The dual nature of financial markets in developing countries-traditional and modern-implies that central banks in developing countries:

A)play essentially the same role as they do in developed economies.
B)find it more difficult to conduct monetary policy than central banks in developed economies.
C)find it easier to conduct monetary policy than central banks in developed economies.
D)have effectively no role to play in the conduct of monetary policy.

Question 40

In countries such as El Salvador or Ghana, the tax revenue is extremely limited due to the lack of an adequate tax-collection agency.These countries most likely will issue bonds and sell them to the central bank in order to cover government expenditures.Thus, the lack of:

A)government intervention may lead these economies to inflation and poor economic performance.
B)property rights and laws may lead these economies to inflation and poor economic performance.
C)a banking system may lead these economies to inflation and poor economic performance.
D)well-developed bond markets may lead these economies to inflation and poor economic performance.

Question 41

In 1991, El Salvador ended a fifteen-year civil war, and the new government in place introduced a number of liberalization policies that included privatization, exchange rate liberalization, tariff reductions, tax exemptions to foreign direct investment, and a more market- oriented economy.These economic reforms are examples of:

A)a fiscal and monetary policy change.
B)a policy change.
C)a regime change.
D)both a policy change and a regime change.

Question 42

If the government of a developing country reduces its budget deficit, then the inflation tax:

A)should increase.
B)should decrease.
C)should not change.
D)may increase, decrease, or not change depending on whether the government cuts taxes or raises government expenditures.

Question 43

In dealing with their financing needs, developing countries have found that the inflation tax provides:

A)both a short-run and a long-run solution.
B)neither a short-run nor a long-run solution.
C)a short-run solution but not a long-run solution.
D)a long-run solution but not a short-run solution.

Question 44

A regime change is a change in:

A)one aspect of government policy.
B)monetary policy.
C)fiscal policy.
D)the entire atmosphere within which the government and the economy interact.

Question 45

Generally speaking, central banks in developing economies are:

A)completely independent from political pressures.
B)more independent from political pressures than central banks in developed economies.
C)about as independent from political pressures as central banks in developed countries.
D)less independent from political pressures than central banks in developed economies.

Question 46

In the early 1990s, Serbia, a developing country, experienced hyperinflation because its central bank increased the money supply too rapidly.Serbia's central bank most likely adopted this monetary policy because:

A)it didn't care about inflation.
B)it believed that its actions would not trigger inflation.
C)the Serbian government granted independence to the central bank.
D)the Serbian government had no other way to finance its expenditures.

Question 47

Central banks in most developing countries:

A)do not recognize the link between money creation and inflation.
B)recognize the link between money creation and inflation but don't care about inflation.
C)recognize the link between money creation and inflation and exploit this link to reduce their budget deficit.
D)recognize the link between money creation and inflation but often have no other means of financing government expenditures than increasing the money supply.

Question 48

The more rapidly the government creates money to finance its budget deficits, the:

A)greater the inflation tax and the greater the reduction in the real value of any assets specified in nominal terms.
B)greater the inflation tax and the smaller the reduction in the real value of any assets specified in nominal terms.
C)smaller the inflation tax and the greater the reduction in the real value of any assets specified in nominal terms.
D)smaller the inflation tax and the smaller the reduction in the real value of any assets specified in nominal terms.

Question 49

Central banks in developing countries:

A)do not monetize government debt.
B)monetize government debt, but in a more limited manner than developed countries.
C)monetize government debt to roughly the same extent as developed countries.
D)monetize government debt to a much greater degree than developed countries.

Question 50

If the government cuts taxes, then it has undertaken:

A)a regime change.
B)a policy change.
C)both a policy change and a regime change.
D)neither a policy change nor a regime change.

Question 51

If central banks could not create money, developing countries:

A)could still finance their expenditures by simply raising taxes.
B)could still finance their expenditures by issuing bonds.
C)would find it very difficult to finance their current expenditures.
D)could not finance any of their expenditures.

Question 52

In developing countries, the government's revenues are:

A)limited because the tax base is too large and the government lacks the institutional ability to collect taxes.
B)limited because even though the government can readily collect taxes, the tax base is too small.
C)limited because of the small tax base and the government's inability to collect taxes.
D)no more limited than in developed economies.

Question 53

The movement from socialism to capitalism undertaken by Poland in the early 1990s represents:

A)a regime change.
B)a policy change.
C)both a policy change and a regime change.
D)neither a policy change nor a regime change.

Question 54

If government expenditures exceed tax receipts in a developing country, the government is most likely to:

A)cut spending.
B)increase taxes.
C)sell bonds to the central bank.
D)buy bonds from the central bank.

Question 55

In 1980, Robert Mugabe was elected president of Zimbabwe.After his election, Mugabe introduced a number of Marxist economic reforms that were designed to give the government much greater control over the economy.His economic reforms are an example of:

A)neither a policy change nor a regime change.
B)a policy change.
C)a regime change.
D)both a policy change and a regime change.

Question 56

Issuing money to finance budget deficits:

A)increases the resources consumed by both the government and the private sector.
B)increases the resources consumed by the government but does not change the resources consumed by the private sector.
C)increases the resources consumed by the government and thereby leaves fewer resources for the private sector.
D)does not increase the resources consumed by either the government or the private sector.

Question 57

The inflation tax is an:

A)implicit tax on the holders of cash and the holders of assets specified in real terms.
B)implicit tax on the holders of cash and the holders of assets specified in nominal terms.
C)explicit tax on wealth.
D)explicit tax on firms that raise their prices.

Question 58

When governments in developing countries run budget deficits, central banks in these countries typically:

A)buy the bonds issued by the government and increase the money supply in the process.
B)buy the bonds issued by the government and decrease the money supply in the process.
C)sell the bonds issued by the government and increase the money supply in the process.
D)sell the bonds issued by the government and decrease the money supply in the process.

Question 59

A policy change represents a:

A)change in one aspect of the government's policy.
B)systemic change in the relationship between the economy and the government.
C)change from one economic system to another.
D)change in the political system.

Question 60

In the early 2000s Ecuador suffered high inflation because the central bank was financing a government deficit.In terms of fiscal and monetary policy, what created the problem of inflation was that Ecuador's:

A)fiscal and monetary policy were expansionary.
B)fiscal policy was expansionary but its monetary policy was contractionary.
C)fiscal policy was contractionary but its monetary policy was expansionary.
D)fiscal and monetary policy were contractionary.

Question 61

A monetized debt prompts:

A)a contractionary fiscal policy.
B)an inflationary tax.
C)a contractionary monetary policy.
D)an expansionary tax base.

Question 62

In the early 2000s in Ecuador, the central bank financed the government deficit and created high inflation.The high level of inflation and its relationship to the government deficit are an example of:

A)an inflation tax.
B)the underground economy.
C)disinflation.
D)the central bank dependency.

Question 63

In the early 2000s, Ecuador replaced its currency, the sucre, with the U.S.dollar as its official currency.What would prompt a country to abandon its own currency and adopt the currency of the United States?

A)With dollars, monetary policy will be better able to offset shock to the economy.
B)Adopting the dollar will bring inflation under control, which will aid economic growth.
C)In making the transition to dollars, corrupt government officials are able to amass tremendous fortunes.
D)Adopting the dollar will result in the elimination of U.S.tariffs on exports from Ecuador to the United States.

Question 64

The expectation of greater inflation resulting from the government's creation of money to finance budget deficits often results in a:

A)higher nominal demand for goods.
B)lower money velocity.
C)less inflationary pressure.
D)less rapid money growth.

Question 65

Developing countries employ the inflation tax because it provides a:

A)long-run solution to their budget problems even if it is politically unpopular.
B)short-run solution that helps keep the government afloat, even if only temporarily.
C)a solution to their inflation problem.
D)long-run solution to both their economic and political problems.

Question 66

Developing economies:

A)generally allow their citizens to buy and sell foreign currency freely.
B)are generally committed to full exchange rate convertibility.
C)generally oppose full exchange rate convertibility but are required by the IMF to implement it anyway.
D)generally do not have fully convertible currencies.

Question 67

In the early 2000s there was a strong black market for Chinese yuan.It is widely held that the Chinese yuan is undervalued.Based on this information, we know that China:

A)has flexible exchange rates.
B)has partially flexible exchange rates.
C)has fixed but convertible exchange rates.
D)does not allow complete convertibility of its currency.

Question 68

If a developing country wants to limit the ability of its citizens to purchase foreign assets but does not want to restrict other international transactions, it would offer:

A)full convertibility.
B)convertibility on the current account.
C)convertibility on the capital account.
D)not allow convertibility of domestic currency into foreign currency.

Question 69

On January 1, 2001, El Salvador "dollarized" its economy.The U.S.dollar circulated throughout the country along with the Salvadoran colon for the first year.By the end of 2002 the official currency circulating in this economy was the U.S.dollar.El Salvador abandoned its own currency and adopted the currency of the United States because:

A)with dollars, monetary policy would be more effective at offsetting demand shocks in the economy.
B)the government would no longer be able to finance deficits by printing money, and inflation would be under control.
C)the government would still be able to finance deficits by printing U.S.dollars, and inflation would be under control.
D)the government would still be able to run deficits by printing money.

Question 70

Almost no developing country offers full convertibility because they want to:

A)increase foreign saving to depreciate their currency.
B)limit investment by foreign multinationals.
C)avoid an outflow of domestic saving.
D)encourage domestic residents to save abroad.

Question 71

When Zimbabwe needed to finance the war against Congo, the government issued bonds and forced the Central Bank to buy those bonds in exchange of new printed Zimbabwean dollars.This action prompted a hyperinflation of almost 100,000 percent.This is an example of a lack of:

A)a central bank independency.
B)a central bank dependency.
C)a central bank effectiveness in its monetary policy.
D)central bank economists running the institution.

Question 72

With full exchange rate convertibility individuals can:

A)not exchange their currency for the currency of any other country.
B)exchange their currency for the currency of any other country, but only to purchase goods produced in other countries.
C)exchange their currency for the currency of any other country, but only to purchase assets from other countries.
D)exchange their currency for the currency of any other country for any purpose they choose.

Question 73

In the 1980s and 1990s, Chile adopted capital controls that limited the ability of its citizens to buy or sell assets abroad.This action:

A)introduced full convertibility.
B)limited only current account convertibility.
C)limited only capital account convertibility.
D)limited both current and capital account convertibility.

Question 74

In the early 2000s, Ecuador replaced its currency, the sucre, with the U.S.dollar as its official currency to solve its inflation problem.As long as Ecuador maintains the U.S.dollar as its official currency, what will happen to the monetary policy of Ecuador?

A)it will become both more powerful and more flexible
B)it will become more powerful but less flexible
C)it will become less powerful but more flexible
D)it effectively will cease to exist

Question 75

In the early 2000s, Ecuador replaced its currency, the sucre, with the U.S.dollar as its official currency.What will no longer be possible for the government of Ecuador?

A)financing government deficits by printing money
B)financing government deficits by borrowing in the financial markets
C)running a balance of payments deficit on the current account
D)running a balance of payments deficit on the capital account

Question 76

The IMF often requires countries that borrowed from it to introduce policies that privatize government-owned industries such as telecommunications and power generation.This is an example of:

A)a balance of payments constraint.
B)conditionality.
C)limited capital account convertibility.
D)infrastructure investment.

Question 77

In comparison to most developed economies, developing countries:

A)offer greater currency convertibility.
B)offer about the same degree of currency convertibility.
C)offer more restricted currency convertibility.
D)sometimes offer higher levels of currency convertibility and sometimes offer lower levels.

Question 78

An effect of the inflation tax is that it redistributes income from the:

A)borrowers of fixed-interest-rate debt to the government.
B)borrowers of fixed-interest-rate debt to the lenders of this debt.
C)lenders of fixed-interest-rate debt to the borrowers of this debt.
D)government to the borrowers of fixed-interest-rate debt.

Question 79

Proponents of using the inflation tax to finance government budget deficits argue that:

A)these deficits would be far worse otherwise.
B)inflation is ultimately beneficial in the long run.
C)while inflation is undesirable, the breakdown of the economy that would occur in the absence of an inflation tax would be worse.
D)the economic slowdown produced by the inflation tax is preferable to the hyperinflation that would occur in the absence of the inflation tax.

Question 80

Opponents of using the inflation tax to finance government budget deficits argue that:

A)the government can raise taxes to eliminate any budget deficit.
B)inflation is ultimately beneficial in the long run.
C)the inflation tax is a temporary solution that requires ever higher levels of inflation to remain effective.
D)the economic slowdown produced by the inflation tax is more damaging than the hyperinflation that would occur in the absence of the inflation tax.