Economics Chapter 16—Creating an Environment for Growth and Prosperity
MULTIPLE CHOICE
1. Economic growth is important because expansion in the output of goods and services
a.
necessarily creates more jobs (more work for people).
b.
makes it possible for individuals to consume more and achieve higher living standards.
c.
leads to an increase in the general level of prices.
d.
generates additional tax revenues for the government.
2. The major sources of economic growth are
a.
gains from trade, entrepreneurial discovery, and investment.
b.
high taxes, an expansion in the size of government, and restrictions on investments by
foreigners.
c.
rapid expansion in the supply of money, trade restrictions, and government licensing of
business activities.
d.
free and open elections and politicians who are willing to place the general welfare of the
populace above their political ambitions.
3. The replacement of the phonograph by the cassette tape player and the eventual replacement of the
latter by CD and MP3 players is an example of
a.
economies of scale.
b.
planned obsolescence.
c.
diseconomies of scale.
d.
creative destruction.
4. When competition is present and private ownership rights are clearly defined and securely enforced by
the legal system, business firms will have a strong incentive to
a.
innovate and develop better products and lower cost production methods.
b.
spend time attempting to plunder (take) the resources of others.
c.
engage in wasteful activities that increase the cost of producing goods and services.
d.
use resources during the current period rather than conserving them for the future.
5. Which of the following is most important if a country is going to achieve and sustain rapid economic
growth?
a.
large government expenditures as a share of GDP
b.
institutions and policies that are supportive of competition (open markets) and freedom of
exchange.
c.
free elections and political democracy
d.
monetary policy makers who are willing to expand the supply of money rapidly
6. For a country to double its per capita income every twenty years, it would have to sustain an annual
economic growth rate equal to
a.
1.75 percent.
b.
2 percent.
c.
3.5 percent.
d.
4 percent.
7. Which of the following is most important if a country wants to move from a low-income to a
high-income status?
a.
high rates of monetary growth.
b.
sustained economic growth.
c.
high real interest rates.
d.
high nominal interest rates.
8. If a poor country is going to grow rapidly and achieve a high level of per capita income, which of the
following is most important?
a.
abundant natural resources
b.
substantial aid from rich countries
c.
central planning and a high level of government expenditures
d.
institutions and policies that encourage productive activities
9. Which of the following is most likely to help promote the efficient use of resources and rapid
economic growth?
a.
high tariffs and imposition of other trade restrictions
b.
high marginal tax rates
c.
an open and competitive capital market
d.
high rates of inflation
10. Which of the following did Thomas Malthus believe would deter sustained increases in the growth of
income per capita?
a.
excessive growth of government expenditures
b.
rapid growth of population
c.
the availability of natural resources
d.
adverse climate conditions
11. According to Angus Madison, a leading authority in the area, world per capita GDP
a.
increased by about 50 percent during the 800 years following year 1000, but it increased
by nearly tenfold during the past 200 years.
b.
increased by nearly tenfold during the 800 years between 1000 and 1813, but it increased
by only 50 percent during the past 200 years.
c.
has grown steadily during the past 1000 years.
d.
Grew at an annual rate of more than 2 percent during 1000-1813, but the annual growth
rate has declined as the population increased during the past 200 years.
12. Measured in 1990 dollars, the GDP per person of the world was $667 in 1820. By 2003, the world’s
income per person had risen to
a.
nearly $1200, almost twice the level of 1820.
b.
$2,422, almost four times the level of 1820.
c.
a little more than $3,600, approximately six times the level of 1820.
d.
$6,516, nearly ten times the level of 1820.
13. Life expectancy at birth for the world rose from 24 years to 26 years between 1000 and 1820, but by
2003, life expectancy had risen to
a.
36 years.
b.
44 years.
c.
52 years.
d.
64 years.
14. During the past 200 years, income per person has
a.
increased in the developed countries of Western Europe and North America, but declined
in the rest of the world.
b.
declined in the developed countries of Western Europe and North America, but increased
in the rest of the world.
c.
increased far more rapidly in both developed and less developed countries than during
the centuries prior to 1800.
d.
Increased far less rapidly in both developed and less developed countries than during the
centuries prior to 1800.
15. Which of the following is true regarding the per person income of the world during the past 1000 years
a.
The world’s income per person has approximately doubled during the past 1000 years and
most of that growth has occurred since 1900.
b.
The world’s income per person changed very little during the 800 years prior to 1813, but
it has increased by nearly tenfold during the past 200 years.
c.
The world’s income per person has grown steadily during the past 1000 years.
d.
The world’s per person income grew at an annual rate of more than 2 percent during
1000-1813, but the annual growth rate has declined as the population increased during the
past 200 years.
16. Which of the following is true of the per person income of the West (Western Europe and its offshoots
of the United States, Canada, Australia, and New Zealand)
a.
It has increased each century and grown steadily since 1500.
b.
It is now approximately 20 times greater than the figure of 200 years ago.
c.
It rose steadily between 1000 and 1800, but income growth has slowed during the past 200
years.
d.
While income per person has increased since 1800, there has been little change in life
expectancy and other indicators of quality of life during this time period.
17. During the past 1000 years, the income per person of the world has
a.
increased each century, and it is now five times greater than the level of 1000 years ago.
b.
risen rapidly in Western Europe, North America, Japan, and Australia, but there has been
little change in income per person in other parts of the world.
c.
increased by approximately tenfold during the past 200 years, but there was only a small
increase during the 800 years prior to 1800.
d.
persistently increased, but the largest increases occurred during the 1200 to 1800 era.
18. Which of the following is true for the world as a whole?
a.
During the past 200 years, the income per person of the world has increased sharply, but
there has been little change in the years of life expectancy at birth.
b.
During the past 200 years, the years of life expectancy at birth has increased sharply, but
there has been little change in the world’s income per person.
c.
During the 800 years between 1000 and 1800, the increases in both world income per
person and life expectancy at birth were small, but both of these indicators have increased
sharply during the past 200 years.
d.
Both income per person and life expectancy rose steadily during 1000-1800, but neither
of these indicators have increased much during the past 200 years as the population of the
world has become larger and larger.
19. When per capita real GDP is increasing, real output is growing
a.
more rapidly than prices.
b.
more rapidly than population.
c.
less rapidly than prices.
d.
less rapidly than population.
20. Which of the following is most important if the living standards of people residing in a country are
going to improve?
a.
growth of population
b.
growth of per capita GDP
c.
growth of the money supply
d.
growth of government expenditures as a share of GDP
21. If real GDP is increasing more rapidly than population,
a.
population must be declining.
b.
the country will have to export more than it imports.
c.
the general level of prices must be increasing.
d.
per capita real GDP will be increasing.
22. Economic growth will
a.
reduce the future real GDP of an economy.
b.
expand the production possibilities of an economy.
c.
increase an economy’s nominal income, but not its real income.
d.
increase real output, but the real income level of the country will decline.
23. An increase in per capita income will generally lead to
a.
more material goods, but a decline in the quality of the environment.
b.
a reduction in life expectancy because working conditions are less desirable.
c.
an increase in the number of hours worked by residents.
d.
an increase in the living standards of most people.
24. An increase in real per capita income will generally lead to
a.
a cleaner environment and more time for recreation.
b.
a reduction in life expectancy because working conditions are less desirable.
c.
an increase in the number of hours worked by residents.
d.
an increase in real GDP that is less rapid than the increase in population
25. Which of the following is true?
a.
Real GDP is a measure of income, but not output.
b.
Real GDP is a measure of output, but not income.
c.
Real GDP is a measure of inflation.
d.
Growth of output is necessary for the growth of income.
26. The “rule of 70″ is a simple rule
a.
(70 divided by the growth rate) that approximates the number of years it will take for
income to double at various growth rates.
b.
(70 multiplied by the growth rate) that approximates the number of years it will take for
income to double at various growth rates.
c.
(70 divided by the percentage of population over age 70) that can be used to approximate a
nation’s growth of real GDP.
d.
(70 multiplied by the percentage of population over age 70) that can be used to
approximate a nation’s growth of real GDP.
27. In a country that is experiencing economic growth at 7 percent per year, per capita income will double
in approximately
a.
seven years.
b.
ten years.
c.
fourteen years.
d.
twenty-one years.
28. An economy growing at a consistent rate of 5 percent per year will double its income in
a.
twenty-five years.
b.
twenty-one years.
c.
fourteen years.
d.
twelve years.
29. Country A and country B initially have the same per capita income. Suppose that A sustains an annual
growth rate of 3.5 percent, while the annual growth rate of country B is 1.75 percent. The “rule of 70″
indicates that after forty years, the per capita income of country A will be approximately ____ that of
country B.
a.
one-half
b.
70 percent greater than
c.
twice
d.
four times
30. To move up the income ladder and achieve high-income status, countries must
a.
have sustained economic growth.
b.
restrict international trade.
c.
encourage the production of consumption goods rather than investment goods.
d.
maintain high inflation.
31. In 1960 the per capita GDP of Hong Kong was substantially less than that of Argentina and
Venezuela. By 2005, the per capita income of Hong Kong was more than three times the figures for
Venezuela and Argentina. This dramatic change occurred because
a.
Venezuela and Argentina lacked the natural resources of Hong Kong.
b.
the United States provided aid to Hong Kong but not to Argentina and Venezuela.
c.
Hong Kong was able to achieve and sustain a high rate of economic growth while the
growth rates of Argentina and Venezuela were exceedingly low.
d.
Hong Kong was a developed country in 1960, but Argentina and Venezuela were not.
32. Which of the following is important if a country is going to achieve and sustain high rates of economic
growth?
a.
investment in physical and human capital
b.
improvements in technology
c.
institutional and policy arrangements consistent with economic efficiency
d.
All of the above.
33. Investment in both physical and human capital tends to enhance economic growth because it generally
a.
increases consumption during the current period.
b.
makes it possible for individuals to produce more goods and services per hour worked.
c.
encourages firms to expand output by employing more low productivity workers.
d.
encourages workers to unionize and thereby fight for higher wages.
34. Which of the following is most likely to be a major source of growth in per capita GDP?
a.
a high investment/GDP ratio
b.
a high rate of inflation
c.
rapid population growth
d.
rapid growth in the money supply
35. Which of the following would be most likely to cause the per capita income of less-developed
countries to rise?
a.
development of strong labor unions
b.
more rapid population growth
c.
investment expenditures that enhance the human capital of labor force participants
d.
an international minimum wage law
36. Which of the following would be most likely to improve the standard of living of the residents of a
less-developed country?
a.
the development of strong labor unions
b.
a sharp increase in the legal minimum wage
c.
an increase in expenditures on education and capital investment
d.
rapid growth rate of the money supply
37. Which of the following is most likely to help the residents of a nation produce more goods and
services and achieve higher income levels?
a.
higher tax rates
b.
a higher rate of investment
c.
a smaller trade sector
d.
greater use of taxation to transfer income from the rich to the poor
38. When individuals and businesses are permitted to trade freely over a larger market area,
a.
wages will decline to the level of the poorest country in the region.
b.
the monopoly power of business firms will increase.
c.
they will be able to produce a larger output and consume a more diverse bundle of goods.
d.
businesses will be able to earn higher profits, but the income levels of individuals will
decline.
39. Obstacles that restrict trade, either domestic or international, will
a.
reduce output, income, and the general living standard of the populace.
b.
help people achieve higher income levels.
c.
help promote high rates of economic growth.
d.
encourage domestic business firms to expand output so they can achieve larger gains from
the adoption of mass production techniques.
40. The replacement of older products by newer improved ones is called
a.
trickle-down economic growth.
b.
creative destruction.
c.
economies of scale.
d.
planned obsolescence.
41. Which of the following is a driving force underlying economic growth?
a.
trade restrictions that protect domestic businesses from competition with foreign producers
b.
regulations that require businesses to obtain permission from the government before
starting a new business
c.
tax increases that expand the revenues of the government
d.
entrepreneurial discovery and production of improved products
42. The successful introduction and adoption of a new product or process is called
a.
invention.
b.
innovation.
c.
economies of scale.
d.
economic growth.
43. Which of the following goods are available at highly economical prices because the use of mass
production techniques substantially reduces their per unit production costs?
a.
automobiles
b.
DVD players
c.
microwave ovens
d.
all of the above
44. In recent years, wireless cellular telephones have been replacing land-line phone service. This is an
example of
a.
economies of scale.
b.
division of labor.
c.
creative destruction.
d.
entry barriers into a market.
45. A legal system that protects private property and enforces contracts in an even-handed manner helps
promote economic growth because it
a.
makes it possible for individuals to generate large incomes and get ahead without
cooperating with others.
b.
provides people with a strong incentive to supply others with things that they value at an
economical price.
c.
encourages people to use resources now rather than conserving them for the future.
d.
keeps the real wages of workers low and thereby makes it possible for business firms to
supply goods and services economically.
46. Which of the following would be most likely to improve the standard of living of a less-developed
country?
a.
development of strong labor unions
b.
more foreign investment, attracted by the expectation of economic and political stability
c.
adoption of trade barriers (higher tariffs and quotas)
d.
widespread use of price controls to allocate goods and resources
47. Which of the following would be most likely to encourage capital formation in a less-developed
country?
a.
the expectation of sustained high inflation
b.
the expectation that property rights will be highly secure in the years ahead
c.
the imposition of high tariffs and other restraints limiting imports
d.
higher personal and corporate tax rates
48. Which of the following factors would be most likely to encourage capital formation in a
less-developed nation?
a.
high and variable rates of inflation
b.
tariffs and quotas that restrict international trade
c.
a legal system that provides for secure property rights and even-handed enforcement of
contracts
d.
high marginal tax rates
49. Which of the following is most likely to be a serious obstacle retarding the growth of less-developed
nations?
a.
a lack of knowledge about modern technology
b.
a lack of natural resources
c.
slow population growth
d.
low capital formation as the result of a weak legal system
50. Which of the following would be most likely to improve the standard of living of people in
less-developed nations?
a.
the development of strong labor unions
b.
an increase in foreign investment
c.
an increase in the share of the population under fifteen years of age
d.
higher tariffs and the imposition of other restraints designed to restrict international trade
51. Why do political instability and insecure property rights retard economic growth?
a.
Fear that private property will be confiscated substantially reduces the incentive to invest
and create wealth.
b.
When property rights are insecure, foreign investors will be reluctant to invest in the
country.
c.
Savings will tend to flow out of a country if individuals fear their property is insecure.
d.
All of the above are correct.
52. Which of the following is an important ingredient of efficient economic organization?
a.
high marginal tax rates
b.
competitive markets
c.
rapid increases in the money supply
d.
imposition of high tariffs that will protect domestic producers from the ravages of foreign
competition
53. When the markets of an economy are more competitive, economic growth
a.
is harmed by the resulting low rates of profit for industry.
b.
is enhanced because producers have a stronger incentive to provide goods efficiently.
c.
will be slower because prices do not rise as rapidly.
d.
is unaffected.
54. When competition is present and property rights secure, people will be encouraged to
a.
plunder the resources of others.
b.
pay the lowest possible wages.
c.
provide others with things that they value in exchange for income.
d.
Invest in other countries where markets are less competitive and property rights less
secure.
55. When the residents of a nation are free to trade with foreigners, domestic producers will be able to
a.
export more goods for which they are a high-cost supplier.
b.
supply a larger quantity of goods they can produce at a relatively low cost.
c.
charge higher prices then would otherwise be the case.
d.
survive in the marketplace even if they do not produce efficiently.
56. In a market economy, what determines whether an entrepreneur will continue in business or terminate
the production of a new product?
a.
government regulations
b.
licensing by industrial development agencies
c.
the profit or loss of the business
d.
the taxes paid to the government relative to the subsidies received
57. When regulations interfere with exchange and limit entry into various businesses and occupations,
they will
a.
help a country achieve more rapid economic growth.
b.
promote more efficient use of investment capital by entrepreneurs.
c.
retard economic progress.
d.
increase the profits of business firms.
58. When the government is heavily involved in the regulation of business activity, entrepreneurs will be
encourage to spend more time and resources on
a.
research and the development of better products.
b.
keeping their production costs low.
c.
rent seeking.
d.
productive activities and less on political lobbying.
59. When a country’s inflation rate varies substantially from year-to-year and is therefore difficult to
predict, this will
a.
reduce the volume of trade and the gains derived from it.
b.
reduce the risk accompanying investment.
c.
encourage entrepreneurs to innovate and develop better products.
d.
increase the level of foreign investment in the country.
60. Monetary and price instability will
a.
make it easier for both individuals and businesses to plan wisely for the future.
b.
generate uncertainty, and encourage investors and businesses to move their activities to
countries with a more stable monetary environment.
c.
encourage businesses to invest and expand their future output.
d.
encourage domestic citizens to increase their rate of saving.
61. Which of the following will discourage investment?
a.
well-defined property rights
b.
monetary instability
c.
a low and steady rate of inflation
d.
low tax rates
62. When the money supply is expanding and prices rise rapidly, economic growth
a.
is slowed by the resulting unpredictability of the future level of prices.
b.
is enhanced as economic activity grows more rapidly.
c.
is enhanced because profits are higher so that capital investment is greater.
d.
is enhanced because existing debt is reduced in value, so people are willing to buy more
goods.
63. Which of the following would be most likely to help the residents of a nation produce a larger output
and consume a wide variety of products at economical prices?
a.
imposition of tariffs on imported goods
b.
quotas that protect domestic businesses against foreign producers that pay workers low
wages
c.
free trade
d.
exchange rate controls
64. Economic growth is likely to be faster when
a.
higher tax rates are imposed on high income individuals in order to provide greater cash
payments to the poor.
b.
domestic markets are opened to foreign sellers and foreign investors.
c.
the supply of money is increased rapidly so individuals have more money to spend.
d.
dramatic changes in political and legal institutions occur often.
65. Which of the following policies would be most likely to reduce the efficiency of a country’s economic
organization?
a.
a legal structure that establishes secure property rights
b.
imposition of tariffs and other barriers limiting international trade
c.
competitive markets
d.
a stable monetary system
66. How do high tariffs and other restraints on international trade affect a nation’s prosperity?
a.
They increase employment and thereby promote the growth of real GDP.
b.
They prevent the nation from fully realizing the potential gains from specialization,
exchange, and competition.
c.
They protect domestic producers and thereby promote economic growth.
d.
Both a and c are correct.