Question 1

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.

Accepted Answer

The answer of In 1980, Robert Mugabe was elected president...

Question 2

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.

Accepted Answer

Cutting taxes is a policy change because it alters the government's approach to taxation and public finance, not the fundamental structure or leadership of the government, which would be a regime change.

Question 3

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.

Accepted Answer

Issuing money to finance budget deficits allows the government to spend more without immediately raising taxes or borrowing from the public, which increases the resources consumed by the government. This increased government spending can lead to higher demand for goods and services, potentially raising prices (inflation) and crowding out private sector investment, thereby leaving fewer resources available for the private sector.

Question 4

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.

Accepted Answer

When the government prints money rapidly to finance its deficits, it causes inflation to rise. This inflation acts as a tax on everyone who holds money because the value of their money decreases. Additionally, assets with values fixed in nominal terms (like cash or bonds with fixed interest rates) lose real value as the purchasing power of money falls.

Question 5

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.

Accepted Answer

A policy change specifically refers to an alteration in a particular aspect of government policy, rather than systemic or fundamental changes in economic or political systems.

Question 6

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.

Accepted Answer

The inflation tax refers to the loss of value in cash and assets specified in nominal terms due to inflation. It is considered an implicit tax because it reduces purchasing power without being a direct, legislated tax.

Question 7

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.

Accepted Answer

A regime change refers to a significant shift in the way a government operates or in its policies, affecting the overall environment of government and economic interactions, rather than just a single policy area.

Question 8

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.

Accepted Answer

The inflation tax, which refers to the revenue generated by the government through printing money and the resulting inflation, can provide a short-term solution to financing needs by increasing government revenue without immediate direct taxation. However, in the long run, it can lead to higher inflation rates, eroding purchasing power and potentially leading to economic instability, making it unsustainable as a long-term solution.

Question 9

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.

Accepted Answer

Central banks in developing countries often recognize the link between money creation and inflation but may resort to printing money to finance government expenditures due to limited access to other financing options.

Question 10

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.

Accepted Answer

When governments in developing countries run budget deficits and issue bonds to finance these deficits, central banks often buy these bonds. This action increases the money supply because the central bank pays for these bonds by creating new money.

Question 11

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.

Accepted Answer

C is correct because in developing countries, the government's revenues are often constrained by both a small tax base (due to lower incomes and less economic activity) and challenges in tax collection, such as lack of infrastructure and institutional capacity.

Question 12

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.

Accepted Answer

Without the ability to create money, developing countries would struggle to finance expenditures due to limited access to capital markets and challenges in raising sufficient tax revenue.

Question 13

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.

Accepted Answer

The Serbian government likely increased the money supply rapidly as a means to finance its expenditures, especially in times of economic distress or conflict, when traditional means of raising funds (like taxes or borrowing) are insufficient or not feasible. Hyperinflation often results when governments resort to printing money to cover their spending needs.

Question 14

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.

Accepted Answer

When government expenditures exceed tax receipts, a common method to finance the deficit is by selling bonds to the central bank. This increases the money supply and provides the government with the needed funds.

Question 15

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.

Accepted Answer

When both fiscal and monetary policies are expansionary, the government increases spending (fiscal policy) and the central bank increases the money supply (monetary policy), which can lead to higher inflation, as was the case in Ecuador.

Question 16

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.

Accepted Answer

Reducing the budget deficit typically involves either decreasing government spending or increasing taxes, both of which can lead to a decrease in the inflation rate. This is because both measures can reduce the amount of money circulating in the economy, thereby reducing the pressure on prices to rise. The inflation tax, which refers to the erosion of purchasing power due to inflation, would therefore decrease as well.

Question 17

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.

Accepted Answer

Central banks in developing economies are generally less independent from political pressures than their counterparts in developed economies. This is because governments in developing countries may exert more influence over monetary policy decisions to support short-term economic goals, which can compromise the central bank's ability to maintain stable financial conditions.

Question 18

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.

Accepted Answer

Central banks in developing countries often monetize government debt to a much greater degree than developed countries. This is due to limited access to international capital markets and a less developed domestic financial sector, making it difficult to finance government deficits through borrowing. Monetizing debt involves the central bank buying government bonds, effectively printing money to fund government spending, which can lead to inflation if done excessively.

Question 19

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.

Accepted Answer

The answer of In 1991, El Salvador ended a fifteen-year...

Question 20

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.

Accepted Answer

The answer of The movement from socialism to capitalism undertaken...

Quiz 38: Macro Policy in Developing Countries

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:

If the government cuts taxes, then it has undertaken:

Issuing money to finance budget deficits:

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

A policy change represents a:

The inflation tax is an:

A regime change is a change in:

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

Central banks in most developing countries:

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

In developing countries, the government's revenues are:

If central banks could not create money, developing countries:

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:

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

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:

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

Generally speaking, central banks in developing economies are:

Central banks in developing countries:

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