Economics Chapter 17—Institutions, Policies, and Cross-Country Differences in
Income and Growth
MULTIPLE CHOICE
1. The purchasing power parity method of comparing income levels across countries
a.
calculates the cost of purchasing a common bundle of goods in each country and then uses
this price index to convert each country’s income to a common currency.
b.
uses the exchange rate to convert the income level of each country to a common currency.
c.
uses the prime interest rate in each country to convert the income level of each country to
a common currency.
d.
calculates the ratio of imports relative to exports in each country and then uses this ratio to
convert each country’s income to a common currency.
2. Compared to those in low-income countries, the residents of countries with high per person incomes
nearly always
a.
live longer.
b.
have a lower illiteracy rate.
c.
have a lower infant mortality rate.
d.
all of the above.
3. During 1980-2009, the countries achieving the most rapid growth of real GDP were nearly all
a.
high-income developed economies.
b.
low-income less developed economies at the beginning of the period.
c.
South American economies.
d.
European economies.
e.
African economies.
4. In order to achieve a high economic freedom rating, a country must
a.
elect political officials democratically.
b.
protect property rights, enforce contracts even-handedly, and rely extensively on markets
to allocate goods and services.
c.
provide citizens with housing, health care, and other basic goods free of charge.
d.
use the taxing power of the state to redistribute income from the rich to the poor and
thereby promote income equality.
5. Which of the following economies have the highest degree of economic freedom?
a.
Hong Kong and Singapore
b.
Argentina and Brazil
c.
Germany and Italy
d.
Russia and Nigeria
6. Which of the following about economic freedom is true?
a.
Low income countries that have adopted institutions and policies consistent with economic
freedom have grown rapidly.
b.
Low-income countries that have adopted institutions and policies consistent with
economic freedom have failed to grow more rapidly than economies that are relatively
unfree.
c.
Economic freedom appears to improve the performance of developed economies, but not
those that are less developed.
d.
Economic freedom appears to improve the performance of less developed economies, but
not those that already have a high degree of development.
7. Countries that have a higher degree of economic freedom tend to
a.
invest a larger share of their output, but the productivity of that investment is lower than
for economies that are less free.
b.
invest a smaller share of their output, but the productivity of that investment is higher than
for economies that are less free.
c.
invest a larger share of their output and the productivity of that investment is higher than
for the economies that are less free.
d.
invest a smaller share of their output and the productivity of that investment is lower than
for economies that are less free.
8. Which of the following countries have liberalized their economies and substantially improved their
economic freedom rating since 1990?
a.
Argentina and Brazil
b.
Zimbabwe and the Republic of Congo.
c.
Estonia and India
d.
Italy and France
9. Countries that have adopted liberal reforms and substantially increased their economic freedom rating
in recent years
a.
experienced falling income levels per capita during 1995-2009.
b.
grew slowly during 1995-2009.
c.
achieved impressive growth rates of real GDP per person during 1995-2009.
d.
have grown less rapidly than high income industrial economies.
10. In the absence of an even-handed legal system, high transaction costs will eliminate many potential
mutually advantageous trades and the accompanying gains from
a.
division of labor and specialization.
b.
expansion in the size of the market.
c.
economies of scale resulting from use of mass production methods.
d.
all of the above.
11. When making income comparisons across countries, economists generally prefer to use
a.
the exchange rate conversion method.
b.
the consumer price index ratio method.
c.
the purchasing power parity method.
d.
the interest rate differential conversion method.
12. Which of the following countries have the highest per person income levels?
a.
Argentina, Brazil, and Mexico
b.
China and India
c.
France and Germany
d.
Ireland, Norway, and the United States
13. Compared to high-income developed countries, the per person income levels of poorer less developed
countries are somewhat understated because
a.
the GDP figures omit the production within the household sector, which is generally larger
in the high-income countries.
b.
the GDP figures omit the production within the household sector, which is generally larger
in the poorer countries.
c.
the GDP figures omit net exports, which are generally larger in the high income countries.
d.
the GDP figures omit net exports, which are generally larger in the poorer countries.
14. Which of the following calculates the cost of purchasing a specific bundle of goods and services in
each country and uses this measure to convert the incomes of different countries to a common
currency so they may be more accurately compared?
a.
the consumer price parity (CPP) method
b.
the purchasing power parity (PPP) method
c.
the GDP deflator exchange (GDPDE) method
d.
the inflation conversion factor (ICF) method
15. The purchasing power parity (PPP) method
a.
calculates the cost of purchasing a specific bundle of goods and services in each country
and uses this measure to convert the incomes of different countries to a common currency.
b.
calculates how much the general price level has increased within one specific country
through time.
c.
calculates how much the average standard of living across all countries has changed
through time.
d.
is used when one wants to compare dollar values from today with those from more than
100 years ago.
16. Income per person in the United States is approximately ____ that of Sierra Leone, Malawi, and Niger,
three of the world’s poorest countries.
a.
the same as
b.
double
c.
ten times
d.
fifty times
17. The GDP figures fail to count labor services and other household production. Once this omission is
taken into account,
a.
the income differences between the high and low income countries are small.
b.
the differences in living standards between the high and low income countries are small.
c.
the income differences between the high and low income countries are still huge.
d.
the life expectancy in the high and low income countries is approximately the same.
18. Which of the following about economic growth is true?
a.
The fastest growing economies in the world are mostly less developed countries.
b.
The fastest growing economies in the world (those with annual real growth rates of 3.5
percent or more) are mostly high-income industrial countries.
c.
The slowest growing countries in the world, many of which are experiencing declines in
per capita GDP, are less developed countries.
d.
Both a and c are true.
19. Which of the following is true concerning the growth record of less developed countries (LDCs)
during the last several decades?
a.
The per capita GDP of several poverty stricken African countries was lower in 2009 than
in 1980.
b.
None of the LDCs have been able to match the per capita income growth rate of the
United States.
c.
During the last two decades, the fastest growing countries in the world (those with annual
real growth rates of 3.5 percent or more) have been LDCs.
d.
Both a and c are correct.
e.
All of the above are correct.
20. During 1980 through 2010,
a.
the per capita income of high-income industrial countries declined.
b.
the fastest growing economies in the world were LDCs.
c.
almost all LDCs grew more rapidly than the high-income industrial economies.
d.
most of the countries with rapid growth rates during the last two decades were located in
South America.
21. One-third of the world’s population live in China and India. How did the growth rate of these two
countries compare with the growth of high income industrial countries during 1980-2009?
a.
Per capita GDP increased less rapidly in China and India than in the high income
industrial countries.
b.
Per capita GDP increased more rapidly in China and India than in the high income
industrial countries.
c.
China grew more rapidly than the high income industrial countries, but India grew less
rapidly.
d.
India grew more rapidly than the high income industrial countries, but China grew less.
22. Which of the following is true regarding the growth record of less-developed countries (LDC‘s) during
the past quarter of a century?
a.
Some are among the fastest growing countries in the world.
b.
Some are among the slowest growing countries in the world.
c.
The most populous, less-developed countries have experienced declining per capita
income levels.
d.
All of the above are true.
23. During the past quarter of a century, which of the following has contributed to the economic growth of
China?
a.
agricultural reforms adopted in the late 1970s
b.
low taxes and deregulation in the special economic zones that were established during the
1980s
c.
the relaxation of restraints on foreign trade and joint ventures
d.
all of the above
24. Which of the following has contributed to China’s economic growth since 1980?
a.
the rapid growth of foreign aid from European countries
b.
nationalization of many private industries
c.
increased restrictions on international trade
d.
increased privatization of the agricultural and small-business sectors
25. According to data on GDP growth between 1980 and 2010,
a.
poor nations stagnated, while the rich nations continued to grow.
b.
poor nations grew rapidly, while the rich nations stagnated.
c.
most of the world’s rapidly growing countries were located in Africa.
d.
many poor nations grew more rapidly than wealthy nations, while others continued to
stagnate.
26. Which of the following about economic growth is true?
a.
The developed nations are growing rapidly and the less-developed nations are stagnating.
b.
Most of the countries that have achieved the highest growth rates in the world during the
last quarter of a century were classified as LDCs in 1980.
c.
It is an oversimplification to divide the world into the growing, developed nations and the
stagnating, less-developed nations.
d.
Both b and c are true.
e.
All of the above are true.
27. During 1980-2010, the per-capita incomes of less-developed countries (LDCs)
a.
grew rapidly.
b.
declined.
c.
were virtually unchanged.
d.
registered a mixed growth record; some grew rapidly while others stagnated.
28. Which of the following about economic growth is true?
a.
The rich countries are consistently getting richer, while the poor countries are getting
poorer.
b.
No LDC was able to achieve a more rapid growth rate than the United States during the
1980 through 2009 period.
c.
The growth picture of LDCs is clearly one of diversity; some LDCs are growing rapidly,
while others continue to stagnate.
d.
The fastest growing countries in the world are all high-income industrial economies.
29. The Economic Freedom of the World index is a measure of the consistency of a nation’s institutions
and policies with
a.
political democracy.
b.
economic freedom.
c.
an Egalitarian distribution of income.
d.
economic nationalism.
30. In order to achieve a high rating on the Economic Freedom of the World index, a country must
a.
provide for the even-handed protection of private property and rely primarily on open
markets and voluntary exchange to coordinate economic activity.
b.
use central planning to direct investment and resolve the three basic economic problems of
what, how, and for whom goods will be produced.
c.
protect domestic businesses from foreign rivals who generally provide shoddy products.
d.
protect domestic workers from businesses that are unwilling to pay high wages and
provide quality working conditions.
31. Realization of gains from trade, entrepreneurial discovery, and investment are largely dependent on
a.
competitive elections and political democracy.
b.
the presence of institutions and policies consistent with economic freedom.
c.
the use of tariffs and quotas to protect domestic businesses from competition with
foreigners.
d.
the use of government planning to direct investments into worthwhile projects.
32. If a country is going to achieve a high economic freedom rating, it must
a.
follow rule of law principles and create a stable monetary environment.
b.
be a political democracy.
c.
refrain from the imposition of barriers that limit voluntary exchange.
d.
rely primarily on government expenditures and regulations (rather than markets) to
allocate goods and resources.
e.
both a and c are true.
33. In order to achieve a high economic freedom rating, a country must
a.
provide secure protection of privately owned property and evenhanded enforcement of
contracts.
b.
refrain from creating barriers that limit domestic and international trade.
c.
rely more fully on markets rather than governments to allocate goods and resources.
d.
all of the above.
34. Which of the following is a key characteristic of economic freedom?
a.
institutions and policies supportive of voluntary exchange
b.
freedom to compete
c.
protection of people and their property from aggressors
d.
all of the above
35. Which of the following will increase economic freedom?
a.
institutions and policies supportive of voluntary exchange
b.
high tariff rates
c.
high taxes
d.
rapid and unpredictable inflation
e.
all of the above
36. Which of the following will increase economic freedom?
a.
low rates of inflation and easy access to money that maintains its purchasing power
b.
high tariff rates
c.
government spending that comprises a large share of the economy
d.
rapid and unpredictable inflation
37. Which of the following will increase economic freedom?
a.
freedom to enter and compete in markets
b.
high tariff rates
c.
high taxes
d.
rapid and unpredictable inflation
38. Which of the following is a key characteristic of economic freedom?
a.
subsidies and regulations that favor business
b.
central planning
c.
reliance on open markets
d.
import quotas that protect domestic businesses from rivals
39. Which of the following will increase economic freedom?
a.
subsidies and regulations that favor business
b.
high tariff rates
c.
high marginal tax rates
d.
protection of persons and their property from aggression
40. Which of the following will increase economic freedom?
a.
an increase in tariff rates imposed on imported goods
b.
an increase in government spending as a share of the economy
c.
elimination of regulations that make it difficult to start a business
d.
an increase in the rate of inflation and its variability
41. Which of the following about economic freedom is true?
a.
In 1960, the per capita income levels of Hong Kong and Singapore were greater than those
of the United States and Canada.
b.
The economies of Hong Kong and Singapore have grown slowly in recent decades.
c.
Economic freedom ratings indicate that both Hong Kong and Singapore rank among the
world’s freest economies.
d.
Economic freedom ratings indicate that Nigeria and Venezuela rank among the world’s
freest economies.
42. On average, countries that have a larger degree of economic freedom tend to have
a.
higher per capita income levels, but slower rates of economic growth, than countries with
less economic freedom.
b.
lower per capita income levels, but more rapid rates of economic growth, than countries
with less economic freedom.
c.
both higher per capita income levels and more rapid growth rates than countries with less
economic freedom.
d.
both lower income levels and slower growth rates than countries with less economic
freedom.
43. Countries with more economic freedom have levels of economic growth that
a.
are generally higher than those of nations with less economic freedom.
b.
are similar to those of nations with less economic freedom since the level of investment,
not economic freedom, determines the growth rate.
c.
cannot continue at high levels because too little government planning is being done.
d.
are generally lower than the growth rates of countries with less economic freedom.
44. Compared to those with less economic freedom, countries with more economic freedom generally
have ____ per capita GDP levels and ____ growth rates.
a.
lower; less rapid
b.
lower; more rapid
c.
higher; less rapid
d.
higher; more rapid
45. (I) Countries with more economic freedom during the past quarter of a century had a lower average
per capita GDP.
(II) Countries with more economic freedom during the past quarter of a century generally achieved
higher rates of economic growth.
a.
Both I and II are true.
b.
Both I and II are false.
c.
I is true; II is false.
d.
I is false; II is true.
46. The per capita incomes of countries in the quartile with the most economic freedom during 1980-2010
were
a.
slightly lower than those of the quartile of countries with the least economic freedom.
b.
about the same as the quartile of countries with the least economic freedom.
c.
about twice those of the countries with the least economic freedom.
d.
about eight times those of the quartile of countries with the least economic freedom.
47. Countries with more economic freedom during 1980-2010 tended to
a.
grow more rapidly, but the 2010 income levels of the freer economies were still lower than
those that were less free.
b.
achieve higher levels of income but the growth rates of the less free economies have been
more rapid in recent years.
c.
achieve both more rapid growth and higher income levels than those that were less free.
d.
grow less rapidly and the 2010 income levels of the freer economies were lower than those
that were less free.
48. Countries with lower levels of economic freedom tend to have
a.
lower levels of economic growth
b.
higher levels of per person income
c.
higher levels of investment
d.
all of the above
49. When considering the impact of institutions and policies on economic performance, it is most
important to focus on
a.
long-term economic growth.
b.
short-term economic growth.
c.
business cycle fluctuations.
d.
the labor force participation rate of married women.
50. Dividing data into quartiles means that you are dividing data into
a.
two groups.
b.
three groups.
c.
four groups.
d.
twenty-five groups.
51. The income per person in the quartile of countries with the most economic freedom was approximately
____ times the figure for the least free group of countries.
a.
2
b.
4
c.
5
d.
8
52. Compared to countries with less economic freedom, countries with more economic freedom
a.
achieve higher per person income levels, but they also have higher poverty rates.
b.
grow more rapidly, but the income levels of the poor are largely unaffected by the higher
growth rates of the freer economies.
c.
achieve both higher income levels per person and lower rates of poverty.
d.
grow less rapidly and experience higher poverty rates.
53. During 1980-2005, the developing countries that moved most rapidly toward economic freedom
a.
achieved higher rates of economic growth, but the reductions in their poverty rates were
smaller than those for countries that were less free.
b.
grew less rapidly, but the reductions in the poverty rates were greater than those achieved
in countries that were less free.
c.
experienced both slower rates of economic growth and smaller reductions in poverty
rates than countries that were less free.
d.
experienced both more rapid rates of economic growth and larger reductions in poverty
rates than countries that were less free.
54. The empirical evidence indicates that compared to economies that are less free, countries with
institutions and policies more consistent with economic freedom
a.
grow more rapidly, but experience higher poverty rates.
b.
achieve higher income levels per person but experience higher poverty rates.
c.
grow more rapidly and achieve larger poverty rate reductions.
d.
Experience less rapid rates of economic growth and higher overall poverty rates.
55. Countries with more economic freedom tend to invest a ____ share of their GDP and the productivity
of that investment is ____ than for countries that are less free. (Fill in the blanks.)
a.
larger; higher
b.
larger; lower
c.
smaller; higher
d.
smaller; lower
56. Other things constant, countries that invest more will grow
a.
more rapidly.
b.
less rapidly.
c.
at the same rate.
d.
at exactly 2% per year.
57. Private investment as a share of the economy tends to be higher in countries
a.
with low levels of economic freedom.
b.
with high levels of economic freedom.
c.
with economic freedom ratings near zero.
d.
that have experienced a sharp reduction in economic freedom during the most recent
decade.
58. (I) Other things constant, countries that invest more will grow more rapidly.
(II) The private investment rate of the most economically free countries is nearly twice as much as
that of the least free countries.
a.
I is true; II is false.
b.
I is false, II is true.
c.
Both I and II are true.
d.
Both I and II are false.
59. Which of the following provides the fuel for growth and achievement of high income levels?
a.
gains from trade
b.
entrepreneurial discovery
c.
capital formation
d.
all of the above
60. Government policies that heavily tax some activities while subsidizing others and that fix or control
interest rates will result in
a.
higher productivity of investment.
b.
lower productivity of investment.
c.
no change in the productivity of investment.
d.
a greater level of investment.
61. Which of the following countries have instituted liberal reforms and substantially improved their
economic freedom rating since 1990?