File: Chapter 38 Macro Policies in Developing Countries
True/False
[QUESTION]
1. Most of the world’s population lives in developed, rather than developing, countries.
2. When income comparisons are made using purchasing power parity rather than market
exchange rates, the gap in per capita income between developed and developing countries
becomes smaller.
3. Developing countries tend to focus more on the goal of economic growth than developed
countries.
4. Communal property rights and tradition, rather than market institutions, determine economic
relationships in many developing countries.
5. Developing countries, like many developed countries, have a dual economy.
6. A regime change occurs when a government changes one aspect of its actions.
7. The central banks of many developing countries choose to pursue policies that generate high
levels of inflation because the benefits of doing so seem to exceed the costs.
8. If a currency is convertible for the current account, then it is fully convertible.
9. Educational policy in most developing countries focuses too much on primary and secondary
education and not enough on higher education.
10. If political instability and corruption could be eliminated, economic growth would increase
in most developing countries.
11. Using exchange rates based on purchasing power parity to compare per capita incomes in
developing and developed countries might lead one to conclude that people in developing
countries:
A. are no worse off than if market exchange rates are used.
B. are worse off than if market exchange rates are used.
C. are better off than if market exchange rates are used.
D. do not use markets enough to make such a comparison feasible.
12. Ecuador’s GDP per capita in 2008, based on market exchange rates, was $3,100. In that
same year, Ecuador’s GDP per capita based on purchasing power parity was $7,700. The
difference between these two measures of GDP per capita is most likely explained by:
A. Ecuador’s dual economy.
B. differences in relative prices between Ecuador and other countries.
C. Ecuador’s limited capital account convertibility.
D. credentialism.
13. Suppose that a typical basket of goods costs 400 pesos in Mexico and 25 pounds in Britain
and that the market exchange rate is 25 pesos per pound. Using purchasing power parity, the
appropriate exchange rate for comparing the incomes of the two countries is:
A. 0.25 pesos per pound.
B. 10 pesos per pound.
C. 16 pesos per pound.
D. 25 pesos per pound.
14. Infant mortality rates in developing countries:
A. are substantially higher than in developed countries.
B. are about the same as in developed countries.
C. are substantially lower than in developed countries.
D. cannot be computed because the data are not available.
15. Development refers to an increase in:
A. productive capacity with no change in output.
B. output with no change in productive capacity.
C. output brought about by an increase in inputs.
D. output brought about by a change in the production function.
16. In contrast to development, growth refers to an increase in:
A. productive capacity with no change in output.
B. output with no change in productive capacity.
C. output brought about by an increase in inputs.
D. output brought about by a change in the production function.
17. The purchasing power parity (PPP) consists of a method of comparing the:
A. labor force in different countries.
B. daily calories supplied in different countries.
C. income in different countries by looking at the domestic purchasing power of money.
D. life expectancy rates in different countries.
18. Some economists and international organizations use the PPP method in order to compare
the:
A. income among countries.
B. income among citizens of a country.
C. life expectancy rates among countries.
D. labor mobility among countries.
19. Countries such as China and South Korea have increased not only the size of their labor
force but also the quality of their labor force over time. Workers in these countries have higher
levels of education and skills that promote changes in the productivity per worker. If this is the
case, these countries have experienced:
A. growth but not development.
B. development but not growth.
C. both development and growth.
D. neither growth nor development.
20. The United Nations, in its annual publication Human Development Report, computes what it
calls the human development index. If the purpose of this index is to measure development
rather than growth, which of the following factors is most likely to be included in it?
A. Number of workers in the labor force
B. Literacy rate
C. Size of the capital stock
D. Availability of natural resources
21. The normative economic goals of developing countries:
A. are the same as those of developed countries.
B. focus primarily on achieving economic stability.
C. focus primarily on achieving an equitable distribution of income.
D. focus primarily on meeting basic needs.
22. Developing countries have:
A. the same normative economic goals as developed countries even though they have much
lower per capita incomes.
B. different normative economic goals than developed countries because they have much lower
per capita incomes.
C. different normative economic goals than developed countries because they have less
unemployment.
D. different normative economic goals than developed countries because they have lower
inflation.
23. Developing countries place:
A. greater emphasis on both development and growth than developed countries.
B. greater emphasis on development and less emphasis on growth than developed countries.
C. greater emphasis on growth and less emphasis on development than developed countries.
D. less emphasis on both growth and development than developed countries.
24. The difference in terms of economic goals between developing countries and developed
countries is that:
A. developing countries focus primarily on achieving an equitable distribution of income while
developed countries focus on higher economic growth rates.
B. developing countries focus primarily on achieving economic stability while developed
countries focus on an acceptable growth rate.
C. developing countries focus primarily on meeting basic needs while developed countries focus
on economic stability.
D. there are no differences between the economic goals of developing and developed countries.
25. The macroeconomic policy choices of developing countries like Zambia and Namibia:
A. are similar to those of developed countries because their institutions are similar.
B. differ from those of developed countries even though their institutions are similar.
C. are similar to those of developed countries even though their institutions differ.
D. are different from those of developed countries because their institutions are different.
26. Because the political institutions of many developing countries are weak:
A. it is easier for them to conduct activist economic policies that foster development.
B. it is harder for them to conduct activist economic policies that foster development.
C. it is no more difficult for them to adopt activist economic policies than it is for developed
countries.
D. a laissez-faire policy is counterproductive.
27. Developing countries have different institutional priorities than developed countries for all
of the following reasons except that they:
A. have dual economies, unlike developed countries.
B. have more socially-minded leaders than developed countries.
C. have weaker financial institutions than developed countries.
D. lack the institutional ability to collect taxes, unlike developed countries.
28. In most developing countries, an effective fiscal policy is:
A. easier to conduct than in developed economies because there are fewer institutional checks
and balances.
B. easier to conduct than in developed economies because politicians tend to be more socially-
minded.
C. harder to conduct because taxes are difficult to collect.
D. harder to conduct because fiscal policy is discretionary in developing countries, unlike
developed countries.
29. Which form of taxation do many developing countries rely on the most?
A. Import taxes or tariffs
B. Income taxes
C. Sales taxes
D. Corporate taxes
30. Relative to developed economies, budget deficits are:
A. more likely in developing economies.
B. less likely in developing economies.
C. equally likely developing economies.
D. politically less acceptable in developing countries.
31. When considering activist fiscal policy in developing countries, these governments:
A. usually have greater flexibility in determining expenditures than governments in developed
countries.
B. have about the same degree of flexibility in determining expenditures as governments in
developed countries.
C. usually have less flexibility in determining expenditures than governments in developed
countries.
D. do not have to worry about their expenditures because they have no taxes with which to
finance them.
32. The dual nature of financial markets in developing countries—traditional and modern—
implies that central banks in developing countries:
A. play essentially the same role as they do in developed economies.
B. find it more difficult to conduct monetary policy than central banks in developed economies.
C. find it easier to conduct monetary policy than central banks in developed economies.
D. have effectively no role to play in the conduct of monetary policy.
33. In countries such as El Salvador or Ghana, the tax revenue is extremely limited due to the
lack of an adequate tax-collection agency. These countries most likely will issue bonds and sell
them to the central bank in order to cover government expenditures. Thus, the lack of:
A. government intervention may lead these economies to inflation and poor economic
performance.
B. property rights and laws may lead these economies to inflation and poor economic
performance.
C. a banking system may lead these economies to inflation and poor economic performance.
D. well-developed bond markets may lead these economies to inflation and poor economic
performance.
34. In developing countries, government expenditure levels are most closely related to:
A. what is necessary to achieve long-term macroeconomic objectives.
B. what activist fiscal policy is necessary to achieve potential output.
C. considerations about what will keep the existing government in power.
D. what will bring about regime change.
35. In a dual economy, it is generally the case that the majority of the population works in the:
A. manufacturing sector.
B. international sector.
C. market economy.
D. traditional (barter) economy.
36. Which of the following economies is most likely to be a dual economy?
A. Bangladesh
B. Canada
C. Norway
D. Japan
37. Which of the following countries is least likely to have a dual economy?
A. Brazil
B. India
C. South Africa
D. Austria
38. Suppose an economy consists of two sectors: a sophisticated manufacturing sector and
modern agricultural sector in which most of the crops that are grown are sold for cash. Such an
economy:
A. would be considered a dual economy.
B. would not be considered a dual economy.
C. might be considered a dual economy if its institutions are underdeveloped.
D. might be considered a dual economy if its political system lacks institutional checks and
balances.
39. Developing economies are generally characterized by a dual economy, which means that
they have:
A. a public sector and a private sector.
B. a market sector and a traditional sector.
C. a manufacturing sector and an agricultural sector.
D. an international sector and a domestic sector.
40. The dual nature of most developing countries implies that:
A. their financial sectors are not integrated into Western financial markets.
B. their financial sectors are fully integrated into Western financial markets.
C. only a portion of their financial sectors are integrated into Western financial markets.
D. their financial sectors are similar to Western financial markets.
41. 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.
42. 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.
43. 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.
44. 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.
45. 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.
46. 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.
47. 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.
48. 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.
49. 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.
50. 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.
51. 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.
52. 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.
53. 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.
54. 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.
55. 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.
56. 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.
57. 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.
58. 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.