Question 1

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 2

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 can be achieved through decreasing government expenditures or increasing tax revenues. If the government reduces its expenditures, it would decrease the demand for goods and services, which would lessen pressure on prices and decrease inflation. Alternatively, if the government increases tax revenues, it would reduce the amount of money supply, which would also decrease inflation. In either case, the inflation tax should decrease.

Question 3

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

Inflation tax can provide a short-run solution as it generates revenue for the government quickly, but it is not a sustainable long-run solution. Inflation ultimately reduces the purchasing power of the country's citizens and can lead to a reduction in foreign investment, ultimately harming the country's economic growth in the long run. Thus, the inflation tax may only be a short-term solution for financing needs in developing countries.

Question 4

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 political and economic systems of a country, which affects the entire atmosphere within which the government and the economy interact. This can involve changes in leadership, ideology, policies and institutions of the government, and broader societal shifts. A regime change is not limited to one aspect of government policy, monetary policy, or fiscal policy, but rather encompasses a wide range of changes that affect the functioning of the state and the economy.

Question 5

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 often subject to political pressures and interference, such as government demands for lower interest rates to spur growth or financing of government deficits. This makes them less independent from political pressures compared to central banks in developed economies, which typically have more autonomy to pursue their mandate of price stability.

Question 6

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 7

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.

Accepted Answer

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

Question 8

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

The more rapidly the government creates money to finance its budget deficits, the greater the inflation tax and the greater the reduction in the real value of any assets specified in nominal terms. This is because when the government prints more money, it increases the money supply in the economy, which leads to inflation. Inflation reduces the value of money, and as a result, the real value of assets denominated in nominal terms (such as bonds, salaries, or rent) decreases. Inflation also acts as a tax on people who hold money, as their purchasing power decreases. Therefore, choice A is the correct answer.

Question 9

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 10

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 would be classified as a policy change, as it is a specific and targeted action taken by the government. It is not a regime change, which would involve a complete overhaul of the existing government or political system. Therefore, the best choice is B.

Question 11

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

The answer of If central banks could not create money,...

Question 12

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

Developing countries often have a small tax base due to a large informal economy and a low level of economic development, which limits the government's ability to collect taxes. Additionally, corruption and weak institutional systems can further hinder the government's tax collection efforts, leading to limited revenues. Therefore, option C is the correct answer.

Question 13

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...

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 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 16

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 increases the money supply which leads to inflation. As the government consumes more resources through its expenditures, it leaves fewer resources available for the private sector to use. Therefore, option C is the correct answer.

Question 17

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

Inflation tax is the reduction in the purchasing power of money due to inflation, which is an implicit tax on the holders of cash and the holders of assets specified in nominal terms. As the inflation rate rises, the real value of money or assets held in nominal terms decreases, resulting in a loss of purchasing power. Hence, option B is the correct answer. Option A and C are incorrect because the inflation tax does not involve an explicit tax on wealth or the holders of assets specified in real terms. Option D is also incorrect because the inflation tax does not involve an explicit tax on firms that raise their prices; instead, it is a general reduction in the value of money due to inflation.

Question 18

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, they typically issue bonds to finance their spending. Central banks in these countries often buy these bonds, which increases the money supply in the process. This is because when the central bank buys the bonds, it is essentially creating new money to pay for those bonds. As a result, the money supply in the economy increases.

Question 19

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 represents a change in one specific aspect of the government's policy, such as a change in tax policy or healthcare policy. It does not necessarily entail a systemic change in the relationship between the economy and government, a change in the entire economic system, or a change in the political system.

Question 20

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

The statement "the central bank was financing a government deficit" suggests that the fiscal policy was expansionary (i.e. government spending was high). Additionally, the mention of "high inflation" indicates that the monetary policy was also expansionary (i.e. the central bank was printing money to finance the deficit). Therefore, option A is the best answer.

Quiz 38: Macro Policy in Developing Countries

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

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

A regime change is a change in:

Generally speaking, central banks in developing economies are:

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:

Central banks in most developing countries:

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

Central banks in developing countries:

If the government cuts taxes, then it has undertaken:

If central banks could not create money, developing countries:

In developing countries, the government's revenues are:

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

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

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:

Issuing money to finance budget deficits:

The inflation tax is an:

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

A policy change represents a:

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: