Development Economics
Pre-Test Questions
Course Introduction
Development Economics explores the economic aspects of the development process in low- and middle-income countries. The course examines key issues such as poverty, inequality, population growth, health, education, and the role of institutions in development. Students will analyze theories of economic growth and development, evaluate policy interventions, and interpret empirical data to understand the challenges and opportunities facing developing economies. The course aims to provide a foundational understanding of both the theoretical frameworks and practical policy tools involved in fostering economic development.
Recommended Textbook
Macroeconomics 7th Edition by Olivier Blanchard
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Page 2
Chapter 1: A Tour of the World
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Sample Questions
Q1) In 2010,output per capita in China was approximately equal to
A)$2,100.
B)$7,627.
C)$22,100.
D)$32,100.
Answer: B
Q2) Explain how the financial crisis turned into a major economic crisis.
Answer: Hit by the decrease in housing prices and the collapse in stock prices,and worried that this might be the beginning of another Great Depression,people sharply cut back consumption.Worried about sales and uncertain about the future,firms sharply cut back investment..Decreases in consumption and investment led to decrease in demand,which in turn,led to decrease in output.
Q3) What are the two primary sources of economic growth in China since 1980?
Answer: The relatively high output growth in China has occurred as a result of capital accumulation and technological progress.
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Chapter 2: A Tour of the Book
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Sample Questions
Q1) In a given year,suppose a company spends $100 million on intermediate goods and $200 million on wages,with no other expenses.Also assume that its total sales are $800 million.The value added by this company equals
A)$200 million.
B)$300 million.
C)$500 million.
D)$700 million.
E) $800 million.
Answer: D
Q2) Will the CPI and GDP deflator always move together? Explain. Answer: No they will not.Some of the goods included in the GDP deflator (some investment goods)are not included in the CPI.Some of the goods included in the CPI (foreign goods)are not included in the GDP deflator.
Q3) Explain how inflation can lead to distortions.
Answer: First,not all prices and wages adjust automatically when inflation occurs.Second,variations in relative prices (which occur when there is not pure inflation)can lead to uncertainty.Inflation can also lead to distortions if the tax system is not adjusted when inflation occurs (e.g.nominal income tax brackets).
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Chapter 3: The Goods Market
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Sample Questions
Q1) When a closed economy is in equilibrium,we know with certainty that
A)I = S + (T -G.)
B)I = S.
C)I = S + (G - T).
D) G = T and S = I.
Answer: A
Q2) Which of the following represents total saving for an economy?
A)the sum of private saving and fixed investment
B)the sum of private saving and consumption
C)the sum of taxes and government spending
D)the excess of taxes over government spending
E) none of the above
Answer: E
Q3) Which of the following equals demand in a closed economy?
A)C + I + G + X
B)C + I + G + X - IM
C)C + I + G + IM - X
D)none of the above
Answer: D
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Page 5
Chapter 4: Financial Markets
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Q1) We would expect which of the following to occur when the central bank conducts an open market sale of bonds?
A)a reduction in the monetary base (H)
B)a reduction in the money multiplier
C)an increase in H
D)an increase in the money multiplier
E) both C and D
Q2) At the current interest rate,suppose the supply of money is less than the demand for money.Given this information,we know that
A)the price of bonds will tend increase.
B)the price of bonds will tend to fall.
C)production equals demand.
D)the goods market is also in equilibrium.
E) the supply of bonds also equals the demand for bonds.
Q3) Banks are different from other financial intermediaries because
A)banks receive funds and make loans.
B)some of a bank's deposits are money.
C)banks can conduct open market operations on their own.
D)banks do not need to hold reserves against their deposits.
E) banks are open longer hours.
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Chapter 5: Goods and Financial Marketsthe Is-Lm Model
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Q1) For each interest rate,the LM curve illustrates the level of output where
A)the goods market is in equilibrium.
B)inventory investment equals zero.
C)money supply equals money demand.
D)all of the above
E) none of the above
Q2) The IS curve will shift to the right when which of the following occurs?
A)an increase in the money supply
B)an increase in government spending
C)a reduction in the interest rate
D)all of the above
E) none of the above
Q3) For this question,assume that investment spending depends only on the interest rate and no longer depends on output.Given this information,a reduction in government spending
A)will cause investment to decrease.
B)will cause investment to increase.
C)may cause investment to increase or to decrease.
D)will have no effect on output.
E) will cause a reduction in output and have no effect on the interest rate.
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Chapter 6: Financial Markets Ii: the Extended Is-Lm Model
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Sample Questions
Q1) With a nominal interest rate of 5% per year,the present discounted value of $100 to be received in 10 years is
A)$50.00.
B)$61.39.
C)$95.24.
D)$150.00.
E) $163.89.
Q2) Suppose that the nominal interest rate and expected inflation both decrease by 2%.Given this information,we would expect which of the following to occur?
A)an increase in the real interest rate
B)a reduction in the real interest rate
C)a reduction in investment
D)an increase in money demand
E) both A and C
Q3) Which of the following bonds are considered to be default-risk free?
A)municipal bonds
B)investment-grade bonds
C)U)S. Treasury bonds
D)junk bonds
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Page 8
Chapter 7: The Labor Market
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Q1) Based on wage setting behavior,we know that an increase in the unemployment rate will cause
A)no change in the real wage.
B)a reduction in the real wage.
C)an increase in the real wage.
D)an upward shift of the WS curve.
Q2) Explain what effect a reduction in the unemployment rate will have on the real wage based on: (1)the WS relation; and (2)the PS relation.
Q3) Suppose the aggregate production function is given by the following: Y = AN.Given this information,we know that labor productivity is represented by which of the following?
A)1 / A
B)A
C)1 / N
D)N / Y
Q4) The participation rate in the U.S.has increased steadily over time.First,explain what the participation rate represents.Second,explain why the participation rate has increased.
Q5) Explain why nominal wages are a function of the expected price level.
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Chapter 8: The Phillips Curve, the Natural Rate of Unemployment, and Inflation
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Q1) Why has the U.S.natural rate of unemployment fallen since the early 1990s?
Q2) Which of the following individuals first discovered the relationship between unemployment and inflation for the United States?
A)Solow and Friedman
B)Samuelson and Solow
C)Friedman and Phillips
D)Friedman and Phelps
Q3) For this question,assume that individuals form expectations of inflation according to the following equation t = t .From 1970 on,the value of for this equation
A)increased over time and approached 1.
B)decreased over time and approached zero.
C)remained constant at zero.
D)remained constant at negative one.
E) none of the above
Q4) Explain what is meant by the "wage-price" spiral.
Q5) What is the difference between deflation and disinflation?
Q6) Based on your understanding of the Phillips curve,is it possible for the unemployment rate to increase while inflation increases? Explain.
Page 10
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Sample Questions
Q1) In the IS-LM-PC model,LM curve is A)flat.
B)upward sloping.
C)downward sloping.
D)vertical.
Q2) From 1970 to the mid-1990s,the relative price of crude petroleum
A)steadily increased.
B)steadily decreased.
C)increased dramatically, then decreased dramatically.
D)decreased dramatically, then increased dramatically.
E) remained more or less the same.
Q3) What is the major reason for oil price to go up in the 2000s?
A)formation of the OPEC
B)fast of growth of emerging economies
C)new energy
D)higher demand from the US
Q4) Use the IS-LM-PC model to illustrate how the economy adjusts to an increase in taxes both in the short run and in the medium run.
11
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Chapter 10: The Facts of Growth
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Sample Questions
Q1) In the OECD countries,there is a negative relationship between output per capita in 1950 and
A)growth since 1950.
B)output per capita in the 1990s.
C)distance from the equator.
D)population.
E) none of the above
Q2) Assume that constant returns to scale exists and that N and K both increase by 2%.Given this information,we know that
A)output (Y)will increase by 4%.
B)Y will increase by 2%.
C)Y will increase by less than 2%.
D)Y will increase by less than 4% and more than 2%.
Q3) By 2011,which of the following countries had the highest level of real output per capita?
A)United States
B)France
C)Japan
D)United Kingdom
Q4) Discuss and explain what is meant by the "state of technology."
Page 12
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Chapter 11: Saving, capital Accumulation, and Output
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Q1) Explain the difference between fully funded social security system and pay-as-you-go social security system.
Q2) Which of the following are reasons to suspect spending on education might overestimate human capital investment?
A)Education spending leaves out foregone wages.
B)Part of total spending on education is really consumption.
C)Much human capital investment comes from on-the-job training.
D)all of the above
E) none of the above
Q3) Suppose there are two countries that are identical in every way with the following exception: Country A has a higher saving rate than country B.Given this information,we know with certainty that
A)the growth rate will be higher in A than in B.
B)the growth rate will be the same in the two countries.
C)the level of consumption per worker will be higher in A.
D)the level of consumption per worker will be higher in B.
Q4) Explain the relationship among output,saving,and investment.
Q5) Suppose policy makers wish to increase steady state consumption per worker.Explain what must happen to the saving rate to achieve this objective.
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Chapter 12: Technological Progress and Growth
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Sample Questions
Q1) Refer to the information above.Given this information,the steady state rate of growth of output per worker is
A)0)
B)2%.
C)3%.
D)5%.
E) 16%.
Q2) Which of the following represents a dimension of technological progress?
A)larger quantities of output for given quantities of capital and labor
B)better products
C)a larger variety of products
D)new products
E) all of the above
Q3) Which of the following best describes a situation where research is considered appropriable?
A)research that is well suited to its commercial purpose
B)research that is easily copied by another firm
C)research that translates into many new products
D)all of the above
E) none of the above
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Chapter 13: Technological Progress: the Short, the Medium, and
the Long Run
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Sample Questions
Q1) Suppose an economy is characterized by the equations below:
Price setting: P= (1 + m)(W / A)
Wage setting: W=AP(1 - u)
Solve for the natural rate of unemployment if the markup (m)is equal to 4%.
Q2) A major explanation for the decline in employment projected in textiles is
A)increases in income.
B)social problems in the U.S.
C)shifts in production toward low-wage countries.
D)inaccurate expectations about productivity growth.
E) inaccurate expectations about the price level.
Q3) The evidence suggests that recent technological change
A)permanently increased the natural rate of unemployment.
B)is different from past technological change, in that it has no impact on productivity.
C)has increased productivity in the service sector only.
D)has increased productivity in the manufacturing sector only.
E) has increased the wage gap between skilled and unskilled workers.
Q4) Suppose an economy experiences an increase in productivity.Explain both the short-run and medium-run effects of this increase in productivity on output,employment,and the unemployment rate.
Page 15
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Chapter 14: Financial Markets and Expectations
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Q1) Suppose policy makers implement an unexpected fiscal expansion.Further assume that monetary policy is expected to keep interest rates constant in response to this unexpected fiscal expansion.Given this information,we would expect that
A)stock prices will rise.
B)stock prices will remain constant.
C)this policy will have an ambiguous effect on stock prices.
D)the effect on stock prices will depend on the slope of the IS curve.
Q2) Suppose the Fed implements a monetary expansion that is at least partially unexpected.Explain what effect this will have on stock prices.
Q3) The yield curve is
A)the term structure of interest rates.
B)the relation between maturity and yield of a bond.
C)maturity.
D)both A and B
E) all of the above
Q4) The yield curve indicates that the two-year interest rate will be a function of what variables? Include in your answer an explanation of how changes in these variables will affect the two-year interest rate.
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Chapter 15: Expectations, consumption, and Investment
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Q1) Which of the following will occur when the capital stock falls?
A)profit per unit of capital will increase
B)profit per unit of capital will decrease
C)there will be no change in profit per unit of capital
D)there will be an ambiguous effect on profit per unit of capital
E) none of the above
Q2) Which of the following would cause an increase in human wealth?
A)a permanent increase in salary
B)an increase in the value of one's house
C)an increase in the value of one's stock portfolio
D)all of the above
E) none of the above
Q3) An economist conducts a "natural experiment" by
A)choosing two groups of people - a control group and a test group - and providing special treatment for the test group.
B)using animal behavior to make inferences about human behavior.
C)using his or her own intuition to surmise what people will do in a given situation.
D)polling other economists to see if they believe a theory.
E) taking real-world data as it is given, and using it to test a theory.
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Chapter 16: Expectations, output, and Policy
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Q1) Assume individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose individuals expect future taxes to decrease.Given this information,individuals will expect
A)an increase in the expected future interest rate and no change in expected future output.
B)an increase in the expected future interest rate and an increase in expected future output.
C)an increase in the expected future interest rate and a reduction in expected future output.
D)an increase in the expected future interest rate and an ambiguous effect on expected future output.
Q2) Which of the following individuals was responsible for introducing rational expectations into macroeconomic models?
A)Keynes
B)Tobin
C)Phillips
D)Solow
E) none of the above
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Chapter 17: Openness in Goods and Financial Markets
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Q1) In 2014,which of the following countries had the highest ratio of exports to GDP?
A)United States
B)Germany
C)Japan
D)Netherlands
Q2) The nominal exchange rate (E)as defined in the text represents
A)the number of units of foreign currency you can obtain with one unit of domestic currency.
B)the number of units of domestic goods you can obtain with one unit of foreign goods.
C)the price of domestic currency in terms of foreign currency.
D)none of the above
E) both A and C
Q3) What is uncovered interest parity? Explain.
Q4) Explain the three distinct notions of openness.
Q5) Suppose the interest parity condition holds.Also assume that the one-year interest rate in the United States is 6% and that the one-year interest rate in Canada is 6%.What does this imply about the current versus future expected exchange rate (for the U.S.and Canadian dollars)? Explain.
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Page 19
Chapter 18: The Goods Market in an Open Economy
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Q1) An increase in government spending will have a greater impact on net exports when
A)the marginal propensity to save is smaller.
B)the economy is closed.
C)the sensitivity of investment to income is smaller.
D)all of the above
E) none of the above
Q2) In a small country,the effect of a given change in government spending
A)on output is large and the effect on the trade balance is small.
B)on output is large and the effect on the trade balance is large.
C)on output is small and the effect on the trade balance is small.
D)on output is small and the effect on the trade balance is large.
Q3) The quantity of imports will increase when there is
A)a reduction in the real exchange rate.
B)an increase in domestic output.
C)an increase in foreign output.
D)all of the above
E) none of the above
Q4) Explain why the multiplier in an open economy is different from the multiplier in a closed economy.
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Chapter 19: Output, the Interest Rate, and the Exchange Rate
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Q1) Assume that the interest parity condition holds.Also assume that the U.S.interest rate is 6% while the U.K.interest rate is 8%.Given this information,financial markets expect the pound to
A)depreciate by 14%.
B)depreciate by 2%.
C)appreciate by 2%.
D)appreciate by 6%.
E) appreciate by 14%.
Q2) For this question,assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that a reduction in stock market wealth causes a decrease in consumption.Which of the following will tend to occur in a fixed exchange rate regime?
A)a reduction in Y
B)a reduction in the money supply
C)no change in the domestic interest rate
D)all of the above
Q3) Suppose the domestic and foreign interest rates are both initially equal to 3%.Now suppose the domestic interest rate rises to 5%.Explain what effect this will have on the exchange rate.Also explain what must occur for the interest parity condition to be restored.
Page 21
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Chapter 20: Exchange Rate Regimes
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Q1) Explain why exchange rates are more volatile than is suggested by the relatively simply interest parity condition presented earlier in the course.
Q2) Assume that policy makers are pursuing a fixed exchange rate regime and that the economy is initially operating at the natural level of output.Which of the following will occur as a result of a revaluation?
A)The real exchange rate will be permanently higher in the medium run.
B)The real exchange rate will be permanently lower in the medium run.
C)The effects of this revaluation on the real exchange rate will be ambiguous in the medium run.
D)The real exchange rate will be unchanged in medium run.
E) The nominal exchange will initially fall in the short run and then increase in the medium run.
Q3) According to Mundell,countries to constitute an optimal currency area need to satisfy one of the two conditions.Explain these conditions.
Q4) Assume a country is in a fixed exchange rate regime.Explain what factors might cause individuals to expect that a country will devalue its currency.
Q5) Explain the cases for and against flexible and fixed exchange rate regimes.
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Chapter 21: Should Policy Makers Be Restrained
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Q1) Which of the following is not an example of the issue of time inconsistency?
A)a central bank announced to maintain low inflation and at the same time increased money supply
B)a government stated that they will not negotiate with hostage takers. When someone is taken hostage, it negotiates
C)a mom says to her kids no cookie before meals and she never gives cookies before her kids eat their meals
D)a person on diet eats ice cream for dinner
Q2) What are the new rules of the Euro Plus Pact adopted in 2011?
Q3) During democratic presidential administration since 1948,economic growth was highest in ________ year of the administration?
A)first
B)second
C)third
D)fourth
Q4) Explain what a PAYGO rule is.
Q5) First,what can be done to increase central bank credibility? Second,why is central bank credibility important?
Q6) Explain spending caps set by the Budget Enforcement Act.
Page 23
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Chapter 22: Fiscal Policy: a Summing up
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Q1) Which of the following is an entitlement program?
A)Social Security
B)Medicare
C)Medicaid
D)all of the above
E) none of the above
Q2) Siegnorage is equal to
A)the rate of inflation.
B)one divided by the rate of inflation.
C)real money balances.
D)the percentage growth rate of nominal money.
E) the percentage growth rate of nominal money times real money balances.
Q3) In 2010,the debt-to-GDP ratio for the United States was approximately equal to A)90%.
B)17%.
C)37%.
D)67%.
Q4) Explain what can occur to cause an increase in the debt ratio.
Q5) Explain "haircuts" when a government defaults its debt.
Q6) Explain the economic costs of hyperinflation.
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Chapter 23: Monetary Policy: a Summing up
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Q1) For this question,assume that the Fed sets monetary policy according to the Taylor rule.Suppose current U.S.macroeconomic conditions are represented by the following: < ?* and u > un.Given this information,we would expect that the Fed will
A)implement a monetary contraction.
B)implement a monetary expansion.
C)maintain its current stance of monetary policy.
D)more information is need to answer this question.
Q2) Monetary policy has short-run effects on which of the following?
A)the level of output but not its composition
B)both the level and composition of output
C)only the price level
D)only the nominal interest rate, not the real interest rate
E) none of the above
Q3) What are some of the questions about the macro prudential tools?
Q4) Discuss and explain each of the instruments of monetary policy.
Q5) Discuss the current debate on the optimal inflation target.
Q6) Briefly discuss the organization of the Federal Reserve.Include in your answer a discussion of the individuals / groups who make decisions about monetary policy.
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Chapter 24: Epilogue: the Story of Macroeconomics
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Q1) Discuss research on the role of banks and other financial institutions in the intermediation of funds between lenders and borrowers.
Q2) One of the most important areas of disagreement among macroeconomists today is over
A)the slope of the IS curve.
B)the slope of the LM curve.
C)the definition of consumption spending.
D)the definition of government spending.
E) none of the above
Q3) The IS-LM model was developed by
A)Friedman and Phelps.
B)Hicks and Hansen.
C)Modigliani and Friedman.
D)Lucas and Sargent.
E) none of the above
Q4) Discuss new classical economics and real business cycle theory.
Q5) First,what is the Lucas critique? Second,explain how it might relate to the implementation of monetary policy.
Q6) Discuss what is meant by the neoclassical synthesis and explain how it emerged.
Page 26
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Chapter 25: Appendix
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Q1) If GDP is less than GNP,we know with certainty that
A)a budget deficit exists.
B)a trade surplus exists.
C)a trade deficit exists.
D)none of the above
Q2) "Ordinary least squares" is a technique that can be used to
A)identify the best model.
B)determine which variables in a model are endogenous and which are exogenous.
C)obtain a bar graph showing successive quarterly increases in output.
D)obtain a line describing consumption behavior in the real world.
E) determine the direction of causation between consumption and income.
Q3) Which of the following is not included in investment?
A)the purchase of new equipment by firms
B)nondurable goods
C)the purchase of a new home
D)none of the above
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