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Chapter 21: Economic Development
b.
Many bank depositors withdraw their funds at the first sign of economic problems.
c.
Banks cannot make loans for extended periods because they cannot rely on a continuous supply of deposits.
d.
If financial institutions fail to serve as intermediaries between savers and borrowers, the lack of funds for
investment will make growth rates double.
e.
The credit provided by banks as a percentage of total output is one-fifth of that in high-income countries.
86. One measure of banking presence in a nation is _____.
a.
the amount of credit provided by banks to that nation’s agricultural sector
b.
the amount of savings that the banks set aside to meet its daily withdrawal needs.
c.
the credit given out by banks to that nation’s service sector
d.
the total profit of the banking sector
e.
the credit provided by banks as a percent of that nation’s total output
87. Which of the following group of countries is most likely to have a high number of telephone lines per 1,000 people?
a.
High-income industrial countries
b.
Countries with high birth rates
c.
Countries that import capital from abroad
d.
Low-income countries
e.
Middle-income countries
88. Which of the following resources is necessary to efficiently combine other resources to produce goods and services?
a.
Natural resources
b.
Capital
c.
Labor
d.
Entrepreneurial ability
e.
Financial institutions
89. Dominik Rosen, the finance minister of the country of Glassen, has concluded that entrepreneurs are unable to
generate the kind of growth the country needs. His decision to create state enterprises might be motivated by the desire to:
a.
earn profit.
b.
provide jobs for the friends and relatives of government officials.
c.
take risks.
d.
encourage a free market.
e.
limit government’s role in the economy.
90. Many developing countries were once under colonial rule, a system of government that:
a.
offered the local population large opportunities to develop entrepreneurial skills.
b.
offered the local population fewer opportunities to develop entrepreneurial skills.
c.
did not offer any opportunity to the local population to develop entrepreneurial skills.
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Chapter 21: Economic Development
d.
believed in a free-market economy.
e.
offered immigrants opportunities to become entrepreneurs.
91. Laws, customs, conventions, and other institutional elements that sustain an economy fall under the category of:
a.
the rules of the game.
b.
human capital.
c.
natural resources.
d.
financial institutions.
e.
capital infrastructure.
92. Inequality across households can be measured by looking at the share of national income:
a.
going to the poorest fifth of the population.
b.
going to the richest tenth of the population.
c.
going to the poorest tenth of the population.
d.
received by the richest half of the population.
e.
received by the poorest half of the population.
93. Developing countries need to trade with developed countries because:
a.
developing countries need to adopt the advanced ways of living of the developed countries.
b.
developing countries need the primary products that the developed countries export.
c.
developing countries lack unskilled labor which they get from developed countries.
d.
developing countries need technology and capital to increase productivity on farms, in factories, office, and in
homes.
e.
developing countries export capital to developed countries and increase their foreign exchange reserve.
94. Developing countries:
a.
do not benefit from foreign aid.
b.
do not benefit from private investment.
c.
generate less than half of their annual flow of foreign exchange from exports.
d.
must acquire foreign exchange in order to pay for imports.
e.
need to decrease labor productivity.
95. The bulk of exports from developed countries consists of:
a.
manufactured goods.
b.
education and technology.
c.
agricultural products.
d.
raw materials.
e.
services like banking and insurance.
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96. The bulk of exports from developing countries is:
a.
manufactured goods.
b.
primary products.
c.
services.
d.
intermediate goods only.
e.
capital equipment only.
97. A problem for developing countries is that the prices of primary products fluctuate more widely than the prices of
finished goods because:
a.
crop supply changes very little despite the weather.
b.
crop supply fluctuates with the weather.
c.
weather never varies.
d.
the demand for primary products fluctuates as new diets are developed.
e.
the demand for primary products fluctuates with the weather.
98. In the event of a trade deficit, a developing country will most likely not cut imports of:
a.
defense equipment.
b.
services like insurance.
c.
capital equipment.
d.
food items.
e.
electronic goods.
99. Which of the following is not true about migration?
a.
Migration plays an important role in the economies of developing countries.
b.
A major source of foreign exchange in some countries is the money sent home by migrants.
c.
Migration provides a valuable safety valve for poor countries.
d.
The best and the brightest professionals are very unlikely to migrate to developed countries.
e.
Every year thousands of nurses migrate from countries such as Kenya and the Philippines to the United States.
100. Suppose the best and the brightest professionals of the country of Eronia migrate to Glassen for work. The upside of
this brain drain is:
a.
the remittances sent to Eroniia.
b.
the foreign aid sent to Eronia.
c.
increase in gross domestic product of Eronia.
d.
decreased labor supply in Eronia.
e.
increased income inequality in Eronia.
101. Which of the following is at the end of the production chain that a typical economy moves up along?
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a.
Raw materials
b.
Agriculture
c.
Hunting and gathering
d.
Services
e.
Manufacturing
102. Which of the following is true of import substitution?
a.
The government encourages domestic producers to make products which can compete in the international
market.
b.
The government takes steps to liberate imports and lift restrictions.
c.
The government takes steps to promote exports and subsidizes export-oriented production.
d.
The government insulates domestic producers by imposing strict tariffs and quotas.
e.
The government focuses on service-oriented imports rather than primary imports.
103. Economists favor export promotion over import substitution as a policy for economic growth because:
a.
it provides infant industries with a protected market.
b.
it favors replacing high-cost foreign goods with low-cost domestic goods.
c.
it improves the efficiency of foreign producers.
d.
it emphasizes comparative advantage and trade expansion.
e.
it emphasizes trade restrictions and helps provide a market for domestic goods.
104. One of the reasons that import substitution is popular is that:
a.
it increases the quality of products.
b.
infant industries would have to compete against global rivals.
c.
it benefits suppliers of resources to the favored domestic industries.
d.
it slows down the progression through the production chain.
e.
the emphasis is on comparative advantage and trade expansion.
105. When a developing country relies on export promotion, _____.
a.
it concentrates on producing for its domestic market
b.
it builds its technological and educational base and then makes complex products for export
c.
domestic producers have sufficient protection to afford to become inefficient
d.
its government must intervene more in markets
e.
it begins with relatively simple products
106. When a developing country relies on import substitution, _____.
a.
it capitalizes on the gains from specialization and comparative advantage
b.
it replaces high-cost domestic goods with low-cost foreign goods.
c.
domestic producers, shielded from foreign competition, usually become more efficient.
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d.
other countries often retaliate with their own trade restrictions
e.
it concentrates on producing only for the international market.
107. Which of the following strategies emphasizes free trade?
a.
Nationalization of industries
b.
Promotion of exports
c.
Higher export tariff
d.
Higher import tariff
e.
Higher quota restriction
108. Which of the following groups is likely to lose from free trade?
a.
Producers of an industry that has been protected from foreign competition
b.
Consumers purchasing goods and services
c.
Firms aware of the potential gain from free trade
d.
Foreign producers buying quota rights to sell goods in the domestic market
e.
Domestic producers importing raw materials for the production of manufactured goods
109. One of the drawbacks of implementing an import-substitution policy is that:
a.
it makes other countries impose trade restrictions as a retaliatory measure.
b.
it makes the economy vulnerable to global economic fluctuations.
c.
it leads to brain drain, by which educated and knowledgeable resources are lost.
d.
it increases the dependence on foreign capital goods for economic growth.
e.
it increases the budget deficit of the domestic country.
110. Which of the following correctly identifies the difference between export promotion and import substitution as
approaches to economic growth?
a.
Export promotion is based on the infant industry argument, while import substitution is based on the level
playing field argument.
b.
Export promotion requires more government intervention in the form of tariffs and quotas, while import
substitution requires minimum government intervention.
c.
Export promotion boosts domestic efficiency, while import substitution leads to inferior products being
supplied by domestic producers and lowers efficiency.
d.
Export promotion results in the replacement of low-cost foreign goods with high-cost domestic goods, while
import substitution leads to the replacement of high-cost foreign goods with low-cost domestic goods.
e.
Export promotion results in a decrease in the per capita GDP of a country, while import substitution results in
an increase in the per capita GDP of a country.
111. The _____ argument was put forward as a rationale for protecting emerging domestic industries from foreign
competition.
a.
antidumping
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b.
infant industry
c.
job and income
d.
declining industries
e.
national defense
112. Which of the following creates an obstacle to pursuing freer international trade?
a.
Consumers do not recognize their potential gains.
b.
Losses are widespread.
c.
Domestic producers do not recognize their potential losses.
d.
Government has plenty of political will and support to remove trade barriers.
e.
Consumers can easily organize to demand free trade.
113. Which of the following is a reason for the lack of political will to remove impediments to development from freer
trade?
a.
The potential losers fight reforms that might harm their livelihood.
b.
Domestic producers do not recognize their losses.
c.
Consumers are fully aware of their benefits from freer trade.
d.
Losses from freer trade are widespread.
e.
The government is unstable and therefore incapable of removing the trade barriers.
114. Which of the following is a reason for many developing countries to open their economies to free trade?
a.
Domestic producers do not recognize their potential losses.
b.
Customers do not recognize their potential gains.
c.
The government lacks political will to remove impediments to development.
d.
Consumers and firms are aware of the products and technology available abroad.
e.
The potential winners from free trade remain largely unaware of the gains from trade.
115. A study by the World Bank suggests a strong link in Africa between governments that _____ special-interest groups
and _____ rates of economic growth.
a.
cater to; high
b.
cater to; moderate
c.
cater to; low
d.
ignore; low
e.
ignore; moderate
116. Most developing countries rely on foreign financing because:
a.
their governments are unstable and run on deficits.
b.
foreign financing is more reliable than domestic investments.
c.
these countries do not generate enough savings to fund investments.
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d.
these countries do not generate enough savings to fund investments.
e.
foreign countries are more than willing to invest in developing countries.
117. In some developing countries, different exchange rates apply to different categories of transaction, and therefore,
_____.
a.
the local currency is not easily convertible to foreign currency
b.
the local currency is not easily convertible to foreign currency
c.
the prices of foreign goods fluctuate widely in the domestic markets
d.
the prices of domestic goods fluctuate widely in the foreign markets
e.
domestic investors are more inclined to invest in foreign assets
118. The country of Erbia can discourage foreign investment by:
a.
requiring foreign investors to find a local partner who must be granted controlling interest.
b.
setting the same exchange rates for different categories of transactions.
c.
freely allowing private international borrowing and lending.
d.
reducing government intervention in the market.
e.
making consumers aware of the gains from freer trade.
119. Any international transfer made on concessional terms for the purposes of promoting economic development is
called:
a.
foreign aid.
b.
a unilateral transfer.
c.
a coupon.
d.
private investment.
e.
a remittance.
120. Most U.S. aid has been coordinated by the:
a.
United States Agency for International Development.
b.
United Nations.
c.
United States Treasury.
d.
United States Agency for Foreign Intervention.
e.
World Trade Organization.
121. Which of the following statements is true of foreign aid received by a developing country?
a.
Private international borrowing and lending are highly encouraged by the governments of developing
countries.
b.
Private international borrowing and lending are heavily restricted by the governments of developing countries.
c.
Foreign aid permanently raises the standard of living in developing countries.
d.
Foreign aid can help in eliminating corruption in developing countries.
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e.
Foreign aid to developing countries is coordinated by the United Nations.
122. Over time, more and more foreign aid has begun to flow through _____.
a.
private channels
b.
government organizations
c.
the World Bank
d.
the International Monetary Fund
e.
the United Nations
123. The privatization of foreign aid is usually accompanied by:
a.
the transformation of government enterprises into private enterprises in transitional economies.
b.
the transformation of private enterprises into government enterprises in transitional economies.
c.
an improvement in the standard of living in developed countries.
d.
an increase in the vulnerability of transitional economies to global economic fluctuations.
e.
an increase in the dependence on foreign capital goods for economic growth.
124. Foreign aid includes:
a.
grants and loans extended on more favorable repayment terms than the recipient could normally secure.
b.
only loans with strict repayment terms.
c.
only grants which have to be repaid on some predetermined date.
d.
the transfer of money by an overseas worker to his family.
e.
medical equipment sent by a foreign country during times of need.
125. Foreign aid includes loans that:
a.
have high interest rates and short repayment periods.
b.
have high interest rates and long repayment periods.
c.
have low interest rates and short repayment periods.
d.
have low interest rates and long repayment periods.
e.
require no interest payments at all.
126. Which of the following is an example of multilateral transfer?
a.
The United States providing manufactured goods at low prices to a developing country in Africa
b.
The United States supplying medicines and other healthcare equipment to Botswana
c.
The World Bank providing finance to help build communication networks in a developing country
d.
China helping to finance and build telephone lines in East Africa
e.
England providing educational assistance to a developing country
127. Which of the following is not an example of foreign aid?
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a.
U.S. discount stores purchasing toys from Chinese manufacturers
b.
The International Monetary Fund extending loans to countries that have trouble with their balance of payments
c.
The World Bank providing loans and grants to support health and education programs
d.
The U.S. government providing funds to build an electricity plant in Albania
e.
The Australian government providing funds to repair highways in Tonga
128. Country-to-country aid is called _____.
a.
unilateral assistance
b.
multilateral assistance
c.
bilateral assistance
d.
remittance
e.
government transfer
129. Foreign aid which goes through international bodies such as the World Bank is known as _____.
a.
unilateral transfer
b.
multilateral assistance
c.
bilateral assistance
d.
remittance
e.
government assistance
130. Which of the following is true about foreign aid provided by the United States?
a.
During the last four decades, U.S. has provided less than $400 million in aid.
b.
Most U.S. aid has been coordinated by the Department of Defense.
c.
The U.S. Agency for International Development emphasizes on short-range plans.
d.
The U.S. Agency for International Development focuses on health, education, and agriculture.
e.
Foreign aid is a large part of the U.S. federal budget.
131. Erbia, a small developing country, needs funds to develop their communication networks. Erbia is likely to approach
_____ for assistance.
a.
the World Bank
b.
the International Monetary Fund (IMF)
c.
the United Nations Children’s Fund (UNICEF)
d.
the World Health Organization (WHO)
e.
the World Trade Organization (WTO)
132. Which of the following is a difference between bilateral aid and multilateral aid?
a.
Multilateral aid is a country-to-country aid, whereas bilateral aid comes from organizations using funds from
many countries.
b.
Multilateral aid comes from organizations using funds from many countries, whereas bilateral aid is a country-
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Chapter 21: Economic Development
to-country aid.
c.
Multilateral aid is a country-to-country aid, whereas bilateral aid comes from philanthropic organizations.
d.
Multilateral aid comes from philanthropic organizations, whereas bilateral aid comes from organizations using
funds from many countries.
e.
Multilateral aid comes from established individuals who plan on helping poor countries, whereas bilateral aid
comes from philanthropic organizations.
133. Which of the following is true of bilateral funding?
a.
It is provided by the World Bank only.
b.
It is tied to the purchase of goods and services from donor countries.
c.
It includes grants and loans that are extended at very high interest rates.
d.
It is provided by the International Monetary Fund only.
e.
It is provided by philanthropic organizations.
134. There is a possibility of increased capital imports, investment, and consumption in countries that receive foreign aid
because, in general, foreign aid provides _____.
a.
a surplus in all product markets
b.
additional agricultural output
c.
additional purchasing power
d.
a regular inflow of skilled labor
e.
additional foreign exchange
135. It is clear that foreign aid is a source of discretionary funds that _____.
a.
benefit only the poor people
b.
benefit government leaders
c.
benefit only rich people
d.
benefit institutions like the World Bank and the IMF
e.
benefit all common people irrespective of their economic status
136. In the 1950s, the United States began the Food for Peace program that resulted in _____.
a.
the sale of U.S. farm products abroad
b.
the sale of farm products from Africa in the U.S.
c.
the sale of U.S. industrial products abroad
d.
the sale of U.S. software services in foreign countries
e.
a rise in contribution by the agricultural sector to the gross domestic product of the U.S.
137. Some recipient governments sold the food they received from the U.S. Food for Peace program to _____.
a.
earn more foreign exchange
b.
finance poorly conceived projects
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c.
finance the import of industrial finished products
d.
finance their defense expenses
e.
finance their import of software services
138. Under the U.S. Food for Peace program, the availability of low-priced food from abroad hurt the farmers of
developing countries because _____ in those countries.
a.
industrial goods became cheaper
b.
services became cheaper
c.
farm prices decreased
d.
the demand for farm products decreased
e.
the price of inputs required for agriculture increased
139. A disadvantage of foreign aid is that:
a.
it leads to a decline in the standard of living in donor countries.
b.
it leads to the disinvestment of public sector industries in the recipient countries.
c.
the agricultural sectors of recipient countries experience surplus output.
d.
government officials are insulated from their own incompetence.
e.
it leads to hyperinflation in the recipient countries.
140. International loans extended at favorable repayment terms have temporarily raised the living standard in some
developing countries but:
a.
have not necessarily increased their ability to become self-supporting at that higher standard of living.
b.
have also dislodged corrupt governments from power.
c.
have never become a source of discretionary funding that benefits unintended beneficiaries.
d.
have never insulated public officials from their own incompetence.
e.
have also helped most countries achieve industrial status.
141. Because of disappointment with the results of government aid, the trend is to _____.
a.
stop accepting outside aid altogether
b.
channel funds through profit-making organizations
c.
channel funds through private investors
d.
become the donor country from being the recipient country
e.
channel funds through private non-profit agencies
142. According to _____, developing countries can grow faster than developed countries and should be able to eventually
close the gap between them.
a.
the integration theory
b.
the convergence theory
c.
the confluence theory
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Chapter 21: Economic Development
d.
the merger theory
e.
game theory
143. Countries that are technologically backward can grow faster by _____.
a.
developing new technologies
b.
adopting existing technologies
c.
adopting the policy of import substitution
d.
focusing more on the agricultural sector
e.
not accepting aid from abroad
144. Growth is limited for developed countries like the U.S. because _____.
a.
they have to introduce new knowledge and technology
b.
they have a unionized labor force
c.
they tend to protect their industries by import substitution policy, which makes the domestic producers
inefficient
d.
the contribution of the agriculture sector is larger in their national output
e.
they do not believe in free markets
145. According to economists, developing countries can close the gap with developed countries as:
a.
they have a high fertility rate.
b.
they can easily develop new technology.
c.
they can easily adopt the existing technology.
d.
they have high levels of literacy and education.
e.
they focus more on the agricultural sector.
146. The newly industrialized Asian economies have developed by adopting the latest technology and investing in _____.
a.
human capital
b.
the agricultural sector
c.
defense equipment
d.
public infrastructure like roads, communication, and transport
e.
developing consumer-oriented products.
147. Which of the following is a reason for the very slow growth in per capita income of the poorest economies?
a.
They have focused on developing new technologies rather than adopting the technologies.
b.
Birth rates in these economies are double than those in the richer countries.
c.
They have focused on the production of export-oriented goods.
d.
The manufacturing sector contributes the most to their national income.
e.
They have invested heavily in human capital.
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148. One of the reasons why poor nations have not been able to close the development gap is:
a.
the lack of human capital needed to identify and absorb new technology.
b.
the scarcity of natural resources required to promote economic growth.
c.
the low birth rates that have reduced the size of human capital.
d.
an uneven distribution of income.
e.
the lack of political stability in the nations.
149. Which of the following is likely to facilitate the adoption of new technology across nations?
a.
Consumer preferences
b.
A common heritage
c.
Higher birth rates
d.
A relatively stable price ratio
e.
A high percentage of younger people in the population
150. Erbia is a developing country. Erbia’s neighbor Glassen is also a developing country, which is growing at a fast rate
by adopting existing technology. Unlike Glassen, Erbia is not growing as fast as it should. Which of the following could
be one of the reasons for the slower growth in Erbia?
a.
Erbia lacks a reliable source of electricity to power new technologies.
b.
Erbia has adopted an export-oriented trade policy.
c.
The manufacturing sector is the highest contributor to Erbia’s national income.
d.
Erbia has a low birth rate, and therefore, population growth has slowed in Erbia.
e.
Erbia has invested heavily in consumer products.
