Development Economics Theory, Empirical Research, and Policy Analysis Test Bank

Type:

Test Bank

Development Economics Theory, Resource: Empirical Research, and Policy Analysis Edition:

1st Edition

Author(s):

Julie Schaffner

Test Bank, Chapter 1: What is Development Economics good for?

1. According to World Bank classification, many African and Asian countries qualify as ________, while most Latin American countries qualify as ________. a. b. c. d.

High income countries, Middle income countries Low income countries, High income countries Low income countries, Middle income countries Middle income countries, Low income countries

Answer: c Heading: Assessing global poverty and prosperity Level: Medium

2. The average income statistics is a useful measure, however, they fall short of fully describing prosperity and deprivation for the following reasons: a. Income is not distributed equally. b. Among people with the same income, some may have better access to clean water and good education. c. Among people with the same income, some may face lower risk of going hungry. d. All of the above.

Answer: d Heading: Assessing global poverty and prosperity Level: Medium

3. What is the official poverty threshold in the United States? a. b. c. d.

$1 per person per day $2 per person per day $13 per person per day $100 per person per day

Answer: c Heading: Assessing global poverty and prosperity Level: Easy

4. If we were to employ a poverty threshold of $10 per day rather than $2 per day, what would happen to the number of poor people in the world? a. increase

b. decrease c. stay the same d. all possible Answer: a Heading: Assessing global poverty and prosperity Level: Easy

5. Which of the following is NOT true about rural Ethiopia? a. b. c. d.

Most people live on less than $2 a day Most people do not have access to clean water Most people have one or two children Most people have never been enrolled in school

Answer: c Heading: Assessing global poverty and prosperity Level: Medium 6. What is the objective in development? a. Sustained improvement in the well-being of rich people only b. Sustained improvement in the well-being of poor people only c. Sustained improvement in the well-being of a country’s many people, with special emphasis on improvements for the rich. d. Sustained improvement in the well-being of a country’s many people, with special emphasis on improvements for the poor.

Answer: d Heading: Defining the Development Objective Level: Medium

7. What is the ultimate aim in development? a. b. c. d.

To generate higher income per capita To achieve faster economic growth To make people’s lives better To make sure that everyone in the world is not hungry

Answer: c Heading: Defining the Development Objective Level: Easy

8. Which is the following statement is true? a. b. c. d.

The objective in development is merely to generate higher income per capita.

The objective in development is to make people’s lives better.

Development can happen over night Income and well-being are exactly same concept

Answer: b Heading: Defining the Development Objective Level: Difficult

9. All the development actors should treat a. b. c. d.

Income and well-being as the exactly same thing Income as priority Non-income measures as priority all of the above

Answer: d Heading: Defining the Development Objective Level: Easy

10. For different development actors, what do their development objective definitions share in common? a. The objective in development is to make people’s lives better, not merely to generate great economic statistics b. The objective in development is improvements for many people, especially for the poor c. The objective in development is to have sustained improvement over many years d. All of the above Answer: c Heading: Defining the Development Objective Level: Easy

11. How many Millennium Development Goals are there? a. 6 b. 8 c. 10

d. 15 Answer: b Heading: The Millennium Development Goals Level: Easy

12. The Millennium Development Goals include a. b. c. d.

achieving universal primary education eliminating the proportion of people living on less than $1 per day. eliminating HIV/Aids, malaria and other diseases all of above

Answer: a Heading: The Millennium Development Goals Level: Medium 13. The accumulation of assets is central to understanding development, assets can be broadly grouped into the following categories EXCEPT: a. b. c. d.

Business assets Infrastructure assets Inflation assets Human assets

Answer: C Heading: 1.3 Understanding the Development process Level: Easy

14. Development is most successful when a. The assets that are distributed and employed in ways that limit their benefit to society as a whole b. The assets are of high quality and durability c. An economy creates a small quantity of assets for a select few d. All of the above Answer: b Heading: Defining the Development Objective Level: Easy

15. The quantity, quality and types of assets that an economy creates in any period of time and the way the value generated by the assets is distributed across diverse groups are determined in a country’s _____________ system? a. b. c. d.

network command socioeconomic infrastructure

Answer: c Heading: 1.3 Understanding the Development Process Level: Medium

16. High quantity, institutions can do all of the following for a developing country except: a. b. c. d.

discourage theft encourage trade and cooperation minimize fraud minimize competition

Answer: d Heading: 1.3 Understanding the Development Process Level: Medium

17. The Public Sector refers to all of the following except: a. b. c. d.

governments NGOs any development actor private market transactions

Answer: d Heading: 1.4 Analyzing Development Policy Level: Medium

18. The term policies can refer to all of the following except: a. b. c. d.

governments strategies programs projects

Answer: a Heading: 1.4 Analyzing Development Policy Level: Medium

19. Development policies can be broken down into three main categories, they are: a. b. c. d.

asset creation policies, safety net policies, and intervention policies asset creation policies, growth policies, and inflation policies growth policies, price control policies, and investment policies safety policies, financial policies, and income growth policies

Answer: a Heading: 1.4 Analyzing Development Policy Level: Medium

20. Asset creation policies include: a. b. c. d.

the government hiring a contractor to build a road social assistance programs providing food to the poor government taxation and subsidies tariffs and other polices aimed at encouraging or discouraging international trade

Answer: a Heading: 1.4 Analyzing Development Policy Level: Medium

21. Safety net policies include: a. b. c. d.

the government subsiding low income housing making credit more available to stimulate investment by firms Social Insurance and assistance tariffs and other polices aimed at encouraging or discouraging international trade

Answer: c Heading: 1.4 Analyzing Development Policy Level: Medium

22. Policies that intervene in the market include: a. the government hires a contractor to build a road

b. making credit more available to stimulate investment by firms c. Social Insurance and assistance d. tariffs and other polices aimed at encouraging or discouraging international trade Answer: d Heading: 1.4 Analyzing Development Policy Level: Medium

23. Reinikka and Svennson in their 2004 paper identify which country as an example of bureaucratic corruption where only 13% of central government transfers to school actually made it to the schools? a. b. c. d.

Nigeria Indonesia Vietnam Uganda

Answer: d Heading: 1.4 Analyzing Development Policy Level: Medium

24. Agricultural research to improve corn yield will increase corn farmer’s income, which group is most like to be hurt by this research?

a. b. c. d.

Consumers who now have to pay higher prices for corn Consumer who now have to pay higher prices for wheat Wheat farmers who now receive a lower price for the same amount of wheat Dairy farmers who feed their cattle a mix of corn and wheat

Answer: c Heading: 1.4 Analyzing Development Policy Level: Medium

25. All of the following are examples of development indicators except:

a. b. c. d.

Economic growth rates Poverty Interest rates Income

Answer: c

Heading: 1.2 Level: Medium

Test Bank, Chapter 2: Well-being 1. There are many factors that limit households' success in their pursuit of well-being. We group these “Determinants of well-being” into following categories except: a. b. c. d.

assets needs family market conditions and institutions

Answer: c Heading: Well-being – introduction Level: Easy 2. In studying the well-being, it is most common to focus on: a. b. c. d.

households individuals entrepreneurs the Macro economy

Answer: a Heading: Well-being – introduction Level: Easy 3. What is the normal interest rate charged on a howlats loan? a. b. c. d.

0% 3.5% 5% 10%

Answer: a Heading: Life among the Poor in Bangladesh Level: Medium 4. Howlats loans are loans that citizens borrow from: a. b. c. d.

the federal and local government friends, relatives and neighbors the central bank private companies

Answer: b Heading: Life among the Poor in Bangladesh Level: Medium

5. The textbook’s definition of well-being is a summary assessment of all of the following except: a. how good or bad her life circumstances are, quantities and quality of goods and services she consumes b. how happy she is c. the activities to which she allocates her time d. hopes and fears regarding the future Answer: b Heading: a Working Definition of Well-being Level: Difficult 6. Amanda and Bill consume the exact same quantities of every consumption item, but Amanda gets to make her consumption choice decisions on how to spend her income while Bill’s consumption levels are dictated by the government. According to economist-philosophers like Amartya Sen, which of the following statement is true? a. Amanda has a higher well-being b. Bill has a higher well-being c. Amanda and Bill have the same well-being since the utility from the consumption choices is the same for both of them. d. There is no way we can compare Amanda and Bill’s well-being.

Answer: a Heading: A working definition of well-being Level: Difficult 7. To identify the features of life circumstances that matter to developing country households, and then to identify the factors that constrain their pursuit of well-being, the author suggests it is useful to describe four sets of activities which are: a. Increasing wealth, improving life expectancy, decreasing infant mortality and gaining freedom b. Increasing wealth, fetching fresh water, improving environmental quality and building future through savings c. Earning Income, gaining access to stable healthcare, Increasing wealth, improving life expectancy d. Earning income, coping with fluctuations, building future through investment and acquiring goods and services Answer: d Heading: How Households in Developing Countries Pursue Well-being Level: Medium

8. By the World Bank definition, with income per capita of $350, Malawi is classified as a ______. a. b. c. d.

Low Income Country Lower Middle Income Country Upper Middle Income Country High Income Country

Answer: a Heading: How households in developing countries earn income Level: Medium 9. By the World Bank definition, with income per capita of $8,890, Mexico is example of ______. a. b. c. d.

Low Income Country Lower Middle Income Country Upper Middle Income Country High Income Country

Answer: c Heading: How households in developing countries earn income Level: Easy 10. Typically, which of the following sectors has a much larger share of the labor force in developing countries compared to developed countries? a. b. c. d.

Manufacturing, Construction and Utilities Wholesale and Retail Trade and Transport Agriculture and Mining sector Business and Personal Services

Answer: c Heading: How households in developing countries earn income Level: Medium 11. Among these four countries, one would expect that the percentage of workers who are self employed, employers and family workers is: a. b. c. d.

highest in Indonesia highest in Malawi highest in Mexico highest in the United States

Answer: b

Heading: How households in developing countries earn income Level: Medium 12. Basic foods are very important in the budgets of low income households. According to the study of Banerjee and Duflo (2007), it is common for the low income households to spend _____ of their total consumption budget on food. a. b. c. d.

<10% 10% - 50% 50% - 90% >90%

Answer: c Heading: How households in developing countries spend income and acquire goods and services Level: Easy 13. As income levels rise, per capita food expenditure tends to_________ while the percentage of total expenditure on food tends to ________. a. b. c. d.

rise; rise rise; fall fall; rise fall; fall

Answer: b Heading: How households in developing countries spend income and acquire goods and services Level: Medium 14. An empirical pattern known as Engel’s Law states that as income levels rise, per person food expenditure a. b. c. d.

falls, but its share in total consumption expenditure rises falls, and its share in total consumption expenditure falls rises, but its share in total consumption expenditure falls rises, and its share in total consumption expenditure rises

Answer: c Heading: How households in developing countries spend income and acquire goods and services Level: Medium 15. From the study of Filmer, et al. (2000), in Zimbabwe, among women who had given birth in a rural health center, what percentage reported being hit by a nurse during delivery?

a. b. c. d.

1% 5% 13% 50%

Answer: c Heading: How households in developing countries spend income and acquire goods and services Level: Medium 16. Households in developing countries face lots of fluctuations and shocks. Seasonal fluctuations in agriculture means that in off-seasons farmers tend to demand less labor and supply less food which _________ wages and __________ food prices. a. b. c. d.

raises ; increases raises; decreases reduces; decreases reduces; increases

Answer: d Heading: How households in developing countries cope with fluctuations and shocks Level: Difficult 17. In countries like Gambia, seasonal fluctuations are so profound that the last few months before the new harvest are called the: a. b. c. d.

“dead season” “hungry season” “famished season” “starving season”

Answer: b Heading: How households in developing countries cope with fluctuations and shocks Level: Easy

18. One of the issue facing households in developing countries is how they cope with fluctuations or shocks which can arise from all of the following except: a. b. c. d.

seasonal changes in weather life cycle event such as marriage and old age market Prices consumption smoothing

Answer: d Heading: How households in developing countries cope with fluctuations and shocks Level: Medium

19. All of the following are considered as consumption smoothing except: a. eating two good meals every day rather than having several three-meal days followed by several one-meal days b. spending less on daily basis to save for dowries for daughters or bride prices for sons c. if households have fewer or smaller fluctuations, they are willing to accept lower average consumption d. households take out a loan to spend more than their current income even if it means they have to consume much less in the future Answer: d Heading: How households in developing countries cope with fluctuations and shocks Level: difficult 20. Which of the following cost saving activities is referred to as ex post responses to fluctuations? a. b. c. d.

Households spend less than earnings in an effort to “Save up” Keep extra money in a mud bank Take out a loan, promising to repay it with interest out of future income Purchase a formal insurance

Answer: c Heading: How households in developing countries cope with fluctuations and shocks Level: Medium 21. The following are examples of income smoothing except: a. b. c. d.

Farmers producing crops that harvest at different times during the year Farmers working for neighbor’s farm producing the same crops as at home Famers working part time in a non agriculture job Farmers using different soil qualities or farming plots of land at different latitudes

Answer: b Heading: How households in developing countries cope with fluctuations and shocks Level: Medium

22. The magnitude of household’s needs can be affected by all of the following except: a. b. c. d.

Households with members that are disabled or sick Cultural norms regarding celebrations and other obligations Income Number of dependants in the household

Answer: c Heading: How households in developing countries cope with fluctuations and shocks Level: Easy 23. Developing country households make many kinds of investment. All of the following are considered as investment except: a. purchase physical assets such as farm land, wells for clean drinking water, or tools for repairing rickshaws. b. purchase stocks or government bonds c. purchase working capital such as fertilizer d. spend money or time to acquire human assets such as acquiring education or training Answer: b Heading: How households in developing countries build better futures through investment Level: Medium 24. Households' well-being levels are determined not only by the assets, but also by the nature and magnitude of their needs. Households' needs depend on all of the following except: a. b. c. d.

the number of dependents the incidence of illness, injury and disability cultural norms households' income

Answer: d Heading: Needs Level: Medium

25. Changing market conditions can alter a household’s well-being, __________prices for output and ________prices for inputs raises potential profits. a. higher; lower b. higher; higher c. lower; higher

d. lower; lower Answer: a Heading: Market conditions Level: Medium 26. What is the ultimate goal in development policy making? a. b. c. d.

Higher Incomes Higher GDP Higher Well Being More consumption choices

Answer: c Heading: Empirical Study of Well-being Level: Medium

27. Since we cannot measure well-being directly, people often turn to the most common measure of standards living which is: a. b. c. d.

nominal income real income nominal income per capita real income per capita

Answer: d Heading: Real household per capita income Level: Easy

28. Other than income, what is the next most common measure of a household’s living standard? a. b. c. d.

Land Real per capita consumption expenditure Investment opportunities Level of education of the head of the household

Answer: b Heading: Real per capita consumption expenditure Level: Easy

29. Which is the following shows the impact of road improvement projects on well-being in Bangladesh? a. These projects raised per capita consumption expenditure on average 7.5 and 10.8 percent. b. These projects raised consumption expenditure at the bottom of the income distribution by more than they raised incomes higher up the distribution. c. Estimates show that these projects reduced the time it takes for people to get to market and raised enrollment in secondary schools. d. All of the above.

Answer: d Heading: Empirical Study of Well-being Level: Medium

30. Changing market conditions can affect household’s well-being in many ways, if money is not available in financial markets for example, small firms may not be able to invest in key parts causing a ______ of goods and the price of goods to ________. a. b. c. d.

Surplus; increase Surplus; decrease Shortage; Increase Shortage; decrease

Answer: c Heading: Market conditions Level: Medium

31. Which of the following constitutes a non-market interaction? a. b. c. d.

Jim Borrows money from a bank to purchase a plow Shuman buys rice for his family Jane works for Rob at his farm and earns a wage Jim and Shuman cooperate to build a road together

Answer: d Heading: Institutions Level: Medium

Test Bank, Chapter 3: Economic Growth 1. Economic growth is defined as: a. b. c. d.

the rate of increase in an economy's nominal GDP. the rate of increase in an economy's real GDP. the rate of increase in an economy's average income. the rate of increase in an economy's price level.

Answer: c Heading: 3.1 Meaning and measurement of economic growth Level: Easy 2. Economic growth takes place when total income grows ______ the population. a. b. c. d.

faster than slower than at the same speed as independently of

Answer: a Heading: 3.1 Meaning and measurement of economic growth Level: Medium 3. The per capita value of income earned by everyone in an economy is equal to the per capita value of ____. a. b. c. d.

government expenditure expenditure of all businesses in the economy goods produced in the economy goods and services produced in the economy

Answer: d Heading: 3.1 Meaning and measurement of economic growth Level: Medium

4. Gross Domestic Product (GDP) is defined as the total value of ____ goods and services produced within a country's borders over a year. a. b. c. d.

intermediate final consumption capital

Answer: b Heading: 3.1 Meaning and measurement of economic growth Level: Easy 5. The value added of a production activity is: a. the profit this production activity generates. b. the value of the final goods produced minus the value of intermediate goods used in this activity. c. the value of intermediate goods used in this activity. d. the value of the final goods produced minus the costs of this production.

Answer: b Heading: 3.1 Meaning and measurement of economic growth Level: Medium

6. If a Brazilian works in U.S, the value of final goods and services he produced is counted in Brazil’s ____ and U.S.’s ____. a. b. c. d.

GDP; GDP GDP; GNP GNP; GDP GNP; GNP

Answer: c Heading: 3.1 Meaning and measurement of economic growth Level: Medium

7. If Nike, an American corporation, produces shoes in China. This would: a. b. c. d.

count as part of U.S. GDP since it is a American corporation. count for both U.S. GDP and Chinese GDP. count for U.S. GDP but not for Chinese GDP. count for Chinese GDP but not for U.S. GDP.

Answer: d Heading: 3.1 Meaning and measurement of economic growth Level: Medium

8. A loaf of bread purchased by your professor would be described as a. b. c. d.

an intermediate good. a final good. a financial good. a used good.

Answer: b Heading: 3.1 Meaning and measurement of economic growth Level: Medium 9. When the World Bank use the “Atlas” conversion factors in comparing GDP per capita across countries, the developing countries tend to look ____ relative to the developed countries than when the comparison employs PPP exchange rates. a. b. c. d.

poorer richer the same these two methods cannot be compared

Answer: a Heading: 3.1 Meaning and measurement of economic growth Level: Medium 10. Nominal GDP growth is calculated as the growth rate of the value of goods and services using ____ prices while real GDP growth is calculated as the growth rate of the value of goods and services using ____ prices. a. b. c. d.

current; real current; constant constant; current constant; real

Answer: b Heading: 3.1 Meaning and measurement of economic growth Level: Medium

11. For three years, Dreamland has been growing at a steady annually compounded rate of 10 percent, if Dreamland’s GDP per capita starts with $20,000, what will be the GDP per capita after three years?

a. b. c. d.

$20,000 $26,000 $26,620 $200,000

Answer: c Heading: 3.1 Meaning and measurement of economic growth Level: Medium

12. If one country is growing at a growth rate of 2 percent per year, how many years would you expect for it to double income per capita? a. b. c. d.

36 years 72 years 14 years 100 years

Answer: a Heading: 3.2 Global Diversity in Growth Rates Level: Easy

13. The following graph shows: No Systematic Tendency for Poorer Countries to “Catch Up” 8

Growth Rate 1960-2010 (%)

6

4

2

0 0

500

1000

1500

2000

2500

3000

3500

4000

-2

-4

GDP Per Capita, 1960

Source: Heston, et al. (2012). a. lower income countries consistently grew faster than higher income countries. b. the average income of lower income countries eventually will catch up with developed country levels. c. no tendency that lower income countries are growing faster than higher income countries. d. the growth rates of many lower income countries are similar Answer: c Heading: 3.2 Global Diversity in Growth Rates Level: Difficult

14. Which of the following best describes a production function? a. b. c. d.

The maximum profit generated from given levels of factors of production.

The maximum level of output generated from given levels of factors of production.

All levels of factors of production that could produce a given level of output.

All levels of output that can be generated from given levels of factors of production.

Answer: b Heading: 3.3 The Proximate Sources of Economic Growth Level: Easy

15. The marginal product of labor ( MPL ) is the increase in total output associated with a a. one unit increase in the quantity of labor, while holding the quantity of capital and technology constant. b. one unit increase in the quantity of labor, while also increasing the quantity of capital by one unit and technology constant. c. one unit increase in the quantity of labor, while also increasing the quantity of capital and technology by the same proportion. d. one dollar increase in the price of labor, while holding the price of capital constant.

Answer: a Heading: 3.3 The Proximate Sources of Economic Growth Level: Medium

16. The average product of labor ( APL ) is the equal to a. b. c. d.

total quantity of labor employed divided by the total output. total amount of output produced divided by price of the output. the increase in total output. total amount of output produced divided by the quantity of labor employed.

Answer: d Heading: 3.3 The Proximate Sources of Economic Growth Level: Medium

17. Diminishing marginal product of labor refers to as the quantity of labor increases, a. b. c. d.

average product of labor reaches a maximum. marginal product of labor decreases. total product of labor reaches a maximum. average product of labor decreases.

Answer: b Heading: 3.3 The Proximate Sources of Economic Growth Level: Medium

18. If we graph the average product of labor as a function of the quantity of capital employed by a firm operating along its production function. When the capital per worker increases, the average product of labor curve is a. b. c. d.

upward sloping shifts upwards downward sloping shifts downwards

Answer: a Heading: 3.3 The Proximate Sources of Economic Growth Level: Medium

19. Constant returns to scale refers to a situation that when capital and labor both double, a. b. c. d.

output more than doubles output less than doubles output just doubles output does not change

Answer: c Heading: 3.3 The Proximate Sources of Economic Growth Level: Medium

20. Increasing returns to scale refers to a situation that when capital and labor both double, a. b. c. d.

output more than doubles output less than doubles output just doubles output does not change

Answer: a Heading: 3.3 The Proximate Sources of Economic Growth Level: Medium

21. Decreasing returns to scale refers to a situation that when capital and labor both double, a. b. c. d.

output more than doubles output less than doubles output just doubles output does not change

Answer: b Heading: 3.3 The Proximate Sources of Economic Growth Level: Medium

22. If we graph the average product of labor as a function of the quantity of capital employed by a firm operating along its production function, when the technology improves while holding both labor and capital constant, the average product of labor curve is a. b. c. d.

upward sloping shifts upwards downward sloping shifts downwards

Answer: b Heading: 3.3 The Proximate Sources of Economic Growth Level: Medium

23. Which of the following may increase labor productivity for a firm? a. b. c. d.

increasing capital per worker improving technology increasing its technical efficiency all of the above

Answer: d Heading: 3.3 The Proximate Sources of Economic Growth Level: Medium

24. Which of the following does not contribute in the growth in total factor productivity? a. b. c. d.

increasing capital per worker technology improvement reductions in unemployment reductions in rent-seeking and other wasteful activities

Answer: a Heading: 3.3 The Proximate Sources of Economic Growth Level: Medium

25. The purpose of growth accounting exercises is to identify a. how fast the capital per worker grows. b. how much of GDP per capita growth can be attributed to factor accumulation versus TFP growth. c. how fast technology improves d. how fast GDP per capita grows Answer: b Heading: 3.3 The Proximate Sources of Economic Growth Level: Medium

26. An economy is growing at 5%, suppose physical capital per worker grows at 4%, human capital per worker grows at 3% and assume that physical capital share of output is 0.3, how much does total factor productivity grow? a. b. c. d.

0.7 percentage points 1 percentage points 1.2 percentage points 1.7 percentage points

Answer: d Heading: 3.3 The Proximate Sources of Economic Growth Level: Difficult

27. An economy is growing at 5%, suppose physical capital per worker grows at 4%, human capital per worker grows at 3% and assume that physical capital share of output is 0.3, how much growth does it contribute to the growth in physical capital per worker? a. b. c. d.

0.7 percentage points 1 percentage points 1.2 percentage points 1.7 percentage points

Answer: c Heading: 3.3 The Proximate Sources of Economic Growth Level: Difficult

28. ________ provides a method to examine the differences in GDP per capita across countries at the same time. a. b. c. d.

Growth accounting Development accounting Total factor productivity Growth theory

Answer: b Heading: 3.3 The Proximate Sources of Economic Growth Level: Medium

29. ________ provides a method to examine the differences determinants in GDP per capita growth over time within individual countries. a. b. c. d.

Growth accounting Development accounting Total factor productivity Growth theory

Answer: a Heading: 3.3 The Proximate Sources of Economic Growth Level: Medium

30. Does success in economic growth guarantee success in development?

Answer: Development with the potential to raise well-being for all members of society and to erase vast differences in living standards across countries must involve economic growth.

However, success in economic growth does not guarantee broader development success for two reasons. First, average income can grow rapidly even when the income of many individuals stagnate or decline. Second, increases in a household’s income do not guarantee that the household’s well-being rises, because the improved income may be counter-balanced by deterioration in non-income dimensions of living stands, such as health or fears regarding the future.

31. Why is understanding growth in aggregate labor productivity important for understanding economic growth?

Answer: Aggregate labor productivity is the average value of output produced per worker in the economy’s farms, family enterprises, firms and other operations. Economic growth is defined as increase in real per capita income which increases when the total value of goods and services produced in the economy rises faster than the number of people available to produce it.

Therefore, if we want to identify the proximate sources of growth, we must identify the factors that increase aggregate labor productivity.

32. Provide a list of proximate sources of economic growth.

Answer: the following processes are capable of raising aggregate labor productivity and are thus potential “proximate sources” of economic growth.

• • • • • • •

increases in physical capital per worker increases in human capital per worker technical change increases in technical efficiency within firms increases in the efficiency of allocation of labor across firms reductions in unemployment reductions in rent-seeking and other wasteful activities

Test Bank, Chapter 4: Economic Growth Theory in Historical Perspective 1. In an economic model: a. exogenous variables and endogenous variables are both given from outside the model. b. exogenous variables and endogenous variables are both determined by solving the system of equations. c. endogenous variables influence exogenous variables. d. exogenous variables influence endogenous variables.

Answer: d Heading: 4.1 An Introduction to Theoretical Growth Models Level: Easy 2. Endogenous variables are: a. b. c. d.

given from outside the model. determined by solving the system of equations. assumptions of the model. fixed.

Answer: b Heading: 4.1 An Introduction to Theoretical Growth Models Level: Easy 3. Capital fundamentalism refers to the belief that the most important proximate source of economic growth is the accumulation of ________. a. b. c. d.

physical capital human capital labor. technology.

Answer: a Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Easy 4. Dualism refers to the belief that developing economies must be understood as having two sectors, traditional and modern, each with peculiar characteristics and very different growth prospects. Which sector has more potential for improving their productivity? a. The traditional sector. b. The modern sector. c. Both sectors have equal potential.

d. We cannot compare these two sectors.

Answer: b Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Easy 5. In the Harrod-Domar growth model, if the saving rate s increases, what will happen to the long-run growth rate of GDP? a. b. c. d.

it increases it decreases it stays constant we cannot determine the long-run growth rate of GDP without more information

Answer: a Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium 6. In the Harrod-Domar growth model, if the depreciation rate d increases, what will happen to the long-run growth rate of GDP? a. b. c. d.

it increases. it decreases. it stays constant. we cannot determine the long-run growth rate of GDP without more information.

Answer: b Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium 7. According to the Harrod-Domar growth model, suppose that the saving rate is 12 percent, the capital-output ratio is 2, and the depreciation rate d is 4 percent, what is the expected long-run growth rate of GDP? a. b. c. d.

0 percent.

1 percent.

2 percent.

3 percent.

Answer: c Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium

8. Using the Harrod-Domar growth model, suppose one economy has to maintain a growth rate of GDP of 10 percent per year in order to avoid a decline in the average standard of living.

Assume in this economy, the capital-output ratio v is 3 and the depreciation rate d is 5%, what is the required saving rate? a. b. c. d.

5 percent.

15 percent.

30 percent.

45 percent.

Answer: d Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium 9. Using the Harrod-Domar growth model, suppose the saving rate for an economy is given. If the aggregate production becomes more capital intensive, the capital-output ratio v will ________ and the long-run growth rate of GDP will ________. a. b. c. d.

increase; increase decrease; increase increase; decrease decrease; decrease

Answer: c Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Difficult

10. Using the Harrod-Domar growth model, suppose one economy has to maintain a growth rate of GDP of 10 percent per year in order to avoid a decline in the average standard of living.

Assume in this economy, the saving rate s is fixed at 15%, the capital-output ratio v is 3 and the depreciation rate d is 5%, the gap of ________ in the growth rate of GDP can be provided by foreign aid. a. b. c. d.

5 percent.

10 percent.

15 percent.

Foreign aid has no help in this situation.

Answer: b Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Difficult

11. In the Harrod-Domar growth model, suppose the model is in stable status, which means s / v − d is just equal to n, total GDP would ________ and GDP per capita would ________. a. b. c. d.

increase; remain constant increase; increase remain constant; increase remain constant; remain constant

Answer: a Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Difficult

12. The structural change that accompanies growth in the Lewis model is a shifting of labor from ________ to ________. a. b. c. d.

subsistence sector; capitalist sector capitalist sector; subsistence sector The structural change does not mean labor will shift. it depends on the market supply of labor.

Answer: a Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Easy

13. According to the Lewis model, workers are paid a wage that is ________ in the subsistence sector. a. b. c. d.

determined in the labor market by labor demand and supply equal to the marginal product of labor fixed by tradition near the subsistence level they do not get paid in terms of wages

Answer: c Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium

14. According to the Lewis model, workers are paid a wage that is ________ in the capitalist sector. a. determined in the labor market by labor demand and supply

b. equal to the subsistence wage c. equal to the subsistence wage plus a premium to compensate workers for moving. d. they do not get paid in terms of wages Answer: c Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium

15. In the Lewis model, in the subsistence sector, the value of marginal product of labor is a. b. c. d.

zero. positive. negative. determined in the labor market.

Answer: a Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium 16. In the Lewis model, in the capitalist sector, worker are paid the value of marginal product of labor is a. b. c. d.

zero. positive. negative. determined in the labor market.

Answer: a Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium 17. In the Lewis model, after the structural change, the output from the subsistence sector will ________ and the output from the capitalist sector will ________. a. b. c. d.

decrease; increase remain the same; increase increase; increase increase; decrease

Answer: b Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium

18. What is the main difference between the Harrod-Domar growth model and the Lewis growth model? a. b. c. d.

emphasizing on saving and investment. physical capital is the key to promote economic growth. how to promote saving and investment. empirical support.

Answer: c Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium

19. What is the main difference between the Harrod-Domar growth model and the Neoclassical growth model? a. b. c. d.

emphasizing on saving and investment. population growth. endogenous technological improvement. fixed proportions production technology.

Answer: d Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium

20. The Neoclassical growth model assumes: a. b. c. d.

diminishing marginal returns. population is constant. endogenous technological improvement. labor is in surplus.

Answer: a Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium

21. In the Neoclassical growth model, if the saving rate s increases, what will happen to the longrun growth rate of GDP? a. it increases. b. it decreases.

c. it stays constant. d. we cannot determine the long-run growth rate of GDP without more information.

Answer: c Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Difficult

22. In the Neoclassical growth model, if the saving rate s increases, what will happen to the longrun steady state equilibrium level of capital per worker? a. b. c. d.

it increases. it decreases. it stays constant. we cannot determine it without more information.

Answer: a Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium

23. In the Neoclassical growth model, the steady state equilibrium level of capital per worker is: a. b. c. d.

growing at a constant rate. decreasing constant. we cannot determine it without more information.

Answer: c Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium 24. "Unconditional convergence" indicates a. b. c. d.

poor countries will grow faster than rich countries. rich countries will grow faster than poor countries. poor countries and rich countries will grow at the same growth rate. poor countries will reach a lower level of steady state level of per capita income.

Answer: a Heading: 4.2 The 1940s and 1950s: Capital fundamentalism, structuralism and dualism Level: Medium 25. What is the knife-edge problem in the Harrod-Domar Growth Model?

Answer: In this model, the growth of K (and thus the rate of growth in the number of productive jobs) is governed by the saving rate, while growth in the number of workers (L) is governed by unrelated forces. It can be shown that K (like Y) grows at the rate (s/v)-d, while the labor force grows at the rate n, which need not equal (s/v)-d. If K grows more rapidly than L then the number of jobs in the economy grows more rapidly than the number of workers, and unemployment falls. Under such circumstances, GDP per capita rises, even though the productivity of each employed worker remains fixed, simply because the share of workers who are in unproductive unemployment falls. If capital continues to grow more rapidly than the labor force, production might eventually “use up” all available labor. In this case further capital accumulation bids up wages and prices, generating inflation without increasing output per capita, and growth in GDP per capita ceases. If, however, K grows less rapidly than L, then unemployment must rise and GDP per capita falls. Unless s/v-d just happens to equal n, the economy will be marked by rising or falling unemployment.

26. What is the significance of possible increasing returns to scale for our understanding of economic growth?

Answer: the assumption of increasing returns to scale might imply that the sf(k*) curve is straight or even convex, rather than concave. Such modifications eliminate the Solow model’s prediction that growth based on physical or human capital accumulation must evolve toward a steady state in which growth ceases. It also eliminates the implication that poor countries should grow faster than rich countries. Because the modification is built on the assumption of important externalities, it also raises the possibility that private human capital investors, who do not take the external benefits of their choices into account, will invest less than is socially desirable, and that intervention by governments and other development actors might be useful for improving growth performance.

Test Bank, Chapter 5: Poverty, Inequality and Vulnerability 1. The share of population living on less than $2 per day is nearly identical in Côte d’Ivoire and Indonesia. This indicates that a. b. c. d.

poverty situations are about the same in these two countries. income gaps are about the same in these two countries. children mortality rates for age under five are about the same in these two countries. none of the above

Answer: d Heading: 5.1 Definitions and Measures Level: Easy 2. If we use $10 per day as the global poverty line compared to use $2 per day, the global poverty would be a. b. c. d.

greater. smaller. the same. all of the above are possible.

Answer: a Heading: 5.1 Definitions and Measures Level: Medium 3. Which of the following is not a poverty measure? a. b. c. d.

Headcount Ratio.

Total Income Gap. Gini coefficient.

Poverty Gap Index.

Answer: c Heading: 5.1 Definitions and Measures Level: Easy

4. From the World Development Indicators 2012, the Headcount Ratio using $2 per day poverty line in Bangladesh was 76.5 and in Ethiopia was 77.6. It means: a. In Ethiopia, poverty is slightly more widespread. b. In Bangladesh, poverty is slightly more widespread.

c. In Ethiopia, poverty is slightly deeper. d. In Bangladesh, poverty is slightly deeper.

Answer: a Heading: 5.1 Definitions and Measures Level: Medium

5. From the World Development Indicators 2012, the Poverty Gap Index using $2 per day poverty line in Ethiopia was 28.9 and in Haiti was 46.7. It means: a. b. c. d.

In Ethiopia, poverty is more widespread.

In Haiti, poverty is more widespread.

In Ethiopia, poverty is deeper.

In Haiti, poverty is deeper.

Answer: d Heading: 5.1 Definitions and Measures Level: Medium

6. If everyone in an economy had the exactly same level of income, where would the Lorenz curve for this economy locate? e. f. g. h.

45 degree line.

L-shaped curve following the bottom and right sides of the Lorenz curve box.

L-shaped curve following the left and top sides of the Lorenz curve box. a curve starts off with a lope lower than 1 then it becomes steeper.

Answer: a Heading: 5.1 Definitions and Measures Level: Medium 7. If one person in an economy had all the income and the rest of the population had zero income, where would the Lorenz curve for this economy locate? a. b. c. d.

45 degree line.

L-shaped curve following the bottom and right sides of the Lorenz curve box.

L-shaped curve following the left and top sides of the Lorenz curve box. a curve starts off with a lope lower than 1 then it becomes steeper.

Answer: b Heading: 5.1 Definitions and Measures

Level: Medium 8. To construct a Lorenz curve measuring the distribution of per capital household income, we order everyone in the population by: a. b. c. d.

consumption expenditure. the number of children in the household. age of head in the household. income per capita

Answer: d Heading: 5.1 Definitions and Measures Level: Easy 9. If country A's Lorenz curve dominates country B's, it means: a. b. c. d.

inequality is worse in country A than in country B. inequality is worse in country B than in country A. country B's Lorenz curve is above country A's. country A is richer than country B on average.

Answer: b Heading: 5.1 Definitions and Measures Level: Difficult 10. If country A and country B have identical Lorenz curves, it means: a. b. c. d.

country A and country B have the same income per capita. country A and country B have the same population. country A and country B have the same distribution of income. country A and country B have the same poverty gap.

Answer: c Heading: 5.1 Definitions and Measures Level: Medium

11. If everyone in an economy had the exactly same level of income, what would the value of the Gini coefficient? a. 0.0 b. 0.5 c. 1.0

d. infinity.

Answer: a Heading: 5.1 Definitions and Measures Level: Medium 12. If one person in an economy had all the income and the rest of the population had zero income, what would the value of the Gini coefficient? a. b. c. d.

0.0 0.5 1.0 infinity.

Answer: c Heading: 5.1 Definitions and Measures Level: Medium 13. According to World Bank (2012), the Gini coefficient of .30 for Ethiopia was almost the same as the Gini coefficient of .31 for Hungary. From these two numbers, what can we conclude? a. b. c. d.

Ethiopia and Hungary have the same headcount ratios.

Ethiopia and Hungary have the same Lorenz curves.

Ethiopia and Hungary have the same levels of inequality. none of the above.

Answer: d Heading: 5.1 Definitions and Measures Level: Medium 14. Poverty reduction efforts reduce inequality at the same time if a. b. c. d.

the incomes of non-poor remain unaffected. the financing for the poverty reduction efforts is derived by taxing the non-poor. the incomes of poor grow faster than the incomes of non-poor. all of the above.

Answer: d Heading: 5.1 Definitions and Measures Level: Medium

15. If all incomes in an economy were rising, but the incomes of the richest people were rising faster than the incomes of the poorest, this would be a success by the criterion of a. b. c. d.

absolute poverty reduction. inequality reduction. both a and b. neither a nor b.

Answer: a Heading: 5.1 Definitions and Measures Level: Medium 16. According to World Bank (2012), in Ethiopia, the poorest 20 percent of population received 9.3 percent of income or consumption and the richest 20 percent of population received 39.4 percent of income or consumption; in South Africa, the poorest 20 percent of population received 2.7 percent of income or consumption and the richest 20 percent of population received 68.2 percent of income or consumption. What conclusion can we reach based on the above statistics? a. b. c. d.

absolute poverty in South Africa is more widespread. the income distribution is more unequal in South Africa. relative poverty in South Africa is more widespread.

South Africa is growing faster than Ethiopia.

Answer: b Heading: 5.1 Definitions and Measures Level: Difficult

17. All of the following is examples of Ex ante coping mechanisms except: a. b. c. d.

precautionary saving. participation in informal insurance arrangements. take out loans to smooth consumption. use of insecticide-treated bed nets.

Answer: c Heading: 5.1 Definitions and Measures Level: Easy

18. Among income poor people, if they have few assets and are likely to remain poor for a long time, they are in ________ poverty. a. b. c. d.

absolute relative persistent transitory

Answer: c Heading: 5.1 Definitions and Measures Level: Medium

19. Which one should the priority of policymakers among economic growth, poverty reduction and inequality reduction? a. b. c. d.

growth. poverty reduction inequality reduction. none of the above, it is complicated.

Answer: d Heading: 5.2 Links between Poverty, Inequality, Vulnerability and Economic Growth Level: Easy

20. Which one should the priority of policymakers among economic growth, poverty reduction and inequality reduction? a. b. c. d.

growth. poverty reduction inequality reduction. none of the above, it is complicated.

Answer: d Heading: 5.2 Links between Poverty, Inequality, Vulnerability and Economic Growth Level: Easy

21. Mathematically, all of the following statements are correct except a. If we could increase economic growth while holding the distribution of income constant, we would speed the rate of poverty reduction.

b. If we could increase both economic growth and inequality, we would speed the rate of poverty reduction. c. If we could speed reductions in inequality while holding economic growth constant, we would speed the rate of poverty reduction. d. If we could increase economic growth while reducing the inequality, we would speed the rate of poverty reduction.

Answer: b Heading: 5.2 Links between Poverty, Inequality, Vulnerability and Economic Growth Level: Medium

22. Policies promoting asset creation and growth may improve well-being of the poor through a. the policies give the poor new assets directly or they encourage the poor to undertake their own investments. b. the policies drive up wages for low-skill workers or drive down the prices of goods consumed by the poor. c. the policies can generate more assets for non-poor and their assets can be transferred to the poor through public or private safety nets. d. All of the above.

Answer: d Heading: 5.2 Links between Poverty, Inequality, Vulnerability and Economic Growth Level: Medium

23. Empirical studies show that with economic growth, inequality ________ and absolute poverty ________. a. b. c. d.

decreases; decreases increases; decreases change is unknown; decreases increases; increases

Answer: c Heading: 5.2 Links between Poverty, Inequality, Vulnerability and Economic Growth Level: Medium

24. Empirical studies show that with economic growth, the poorest 20 percent of population gain ________ the average members of the population.

a. b. c. d.

more than less than the same as we cannot compare them

Answer: c Heading: 5.2 Links between Poverty, Inequality, Vulnerability and Economic Growth Level: Medium

25. When the income of the poorest 20 percent of population grow at the same percentage rate as the incomes of the rich, we can conclude that the poor benefit ________ compared to the nonpoor in terms of absolute benefits. a. b. c. d.

more than less than the same as we cannot compare them

Answer: b Heading: 5.2 Links between Poverty, Inequality, Vulnerability and Economic Growth Level: Difficult

26. Growth policies are more likely to reduce vulnerability in the following situations except a. b. c. d.

raising the incomes of the poor creating immunization programs people moving in response to new opportunities. facilitate the development of market relationships

Answer: b Heading: 5.2 Links between Poverty, Inequality, Vulnerability and Economic Growth Level: Medium

27. What is involved in constructing a measure of poverty?

Answer: Constructing a measure of poverty requires answering three questions: • •

What indicator of people’s living standards should be considered when evaluating whether their well-being is above or below a minimally acceptable level?

What constitutes the “minimally acceptable level” of this indicator?

•

What formula should be used to summarize information about the poverty levels of many individuals when constructing an aggregate poverty statistic, keeping in mind that each formula emphasizes distinct features of the distribution of poverty across people?

28. What is involved in constructing a measure of inequality?

Answer: Constructing a specific measure of inequality requires answering two questions: • •

What dimensions of living standards should be considered when comparing wellbeing across members of the group?

What formula should be used for summarizing the relevant features of the distribution of living standards in the group?

Test Bank, Chapter 6: Consumption, Time Allocation and Production Choices 1. All of the following statements are true except: a. b. c. d.

People can make choices that help determine development outcomes.

Decision makers possess accurate and complete information.

Information is costly and difficult to obtain, especially in developing countries.

People cannot take advantage of new investment opportunities

Answer: b Heading: 6.1 Choices, Development and Development Economics Level: Easy 2. Utility is a measure of a. b. c. d.

the satisfaction from consuming goods and services. the amount of money value people are willing to pay for goods and services. the usefulness of goods and services. the prices of goods and services.

Answer: a Heading: 6.2B Basic consumer theory: allocating budgets Level: Easy 3. Which of the following statements is true? a. As we consume more of a good, utility will increase even if the good is subject to diminishing marginal utility. b. As we consume more of a good, utility will increase unless the good is subject to diminishing marginal utility. c. Marginal utility is just another name for utility. d. We cannot rank utility from two different consumption bundles.

Answer: a Heading: 6.2B Basic consumer theory: allocating budgets Level: Medium

4. According to the assumption of the basic consumer theory, which of the following is true? a. If April consumes more pizza, her marginal utility of consuming pizza is decreasing. b. If April consumes more pizza, her marginal utility of consuming pizza is increasing. c. If April consumes more pizza, her marginal utility of consuming pizza is constant.

d. Eating more pizza does not increase April' utility.

Answer: a Heading: 6.2B Basic consumer theory: allocating budgets Level: Medium

5. Joshua has income endowment of $1,000, the price of food is $2 per unit and the price of nonfood is $4 per unit. Which of the following is his budget constraint? a. 2F + 4N  1,000 b. F  500 − 2 N c. N  250 − 1/ 2 F d. All of the above Answer: d Heading: 6.2B Basic consumer theory: allocating budgets Level: Medium

6. Joshua has income endowment of $1,000, the price of food is $2 per unit and the price of nonfood is $4 per unit. If he spent all of his income on food, how many units of food can he buy? a. b. c. d.

1,000 units.

250 units.

500 units.

0 unit.

Answer: c Heading: 6.2B Basic consumer theory: allocating budgets Level: Easy 7. Consumers' preference are described by a. b. c. d.

indifference curves. budget lines. their wealth. price level in the economy.

Answer: a Heading: 6.2B Basic consumer theory: allocating budgets Level: Easy

8. An indifference curve is ________. a. b. c. d.

all the combinations of food and non-food that consumers are able to afford. all the combinations of food and non-food that consumers prefer equally. a straight line. downward sloping and concave (bowed out from the origin).

Answer: b Heading: 6.2B Basic consumer theory: allocating budgets Level: Medium 9. If the prices of food and non-food stay constant and consumers income doubles, what will happen to the budget line? a. b. c. d.

The budget line will stay unchanged.

The budget line will shift in toward the origin in a parallel fashion.

The budget line will shift out from the origin in a parallel fashion.

The budget line will change but we need more information to know how.

Answer: c Heading: 6.2B Basic consumer theory: allocating budgets Level: Medium 10. Which of the following will increase consumption for a normal good? a. b. c. d.

an increase in income. a decrease in income. an increase in the price of a complement. a decrease in the price of a substitute.

Answer: a Heading: 6.2B Basic consumer theory: allocating budgets Level: Medium

11. If consumers' income increases and the consumption for food decreases, then we can conclude: a. b. c. d.

food is a normal good. food is an inferior good. consumers are not rational. this situation does not happen in developing countries.

Answer: b Heading: 6.2B Basic consumer theory: allocating budgets Level: Medium

12. If consumers' income increases by one dollar and consumers consume both food and nonfood, ________. a. spending on food consumption will always increase. b. spending on food consumption will increase but by less than one dollar if both food and non-food are normal goods. c. spending on food consumption will increase only if non-food is inferior good. d. spending on food consumption will increase only if non-food is normal good.

Answer: b Heading: 6.2B Basic consumer theory: allocating budgets Level: Difficult

13. Suppose there is a reduction in the price of food while consumers' income and the price of non-food stay the same, which of the following statement is true? a. b. c. d.

spending on food consumption will always increase. budget line will rotate out from the endpoint on the axis of food. budget line will rotate out from the endpoint on the axis of non-food. the slope of the budget line will stay the same.

Answer: c Heading: 6.2B Basic consumer theory: allocating budgets Level: Medium

14. The substitution effect can be measured by holding ________constant. a. b. c. d.

income price of food price of non-food utility

Answer: d Heading: 6.2B Basic consumer theory: allocating budgets Level: Difficult

15. A reduction in the price of good A reduces the consumption of good B, then ________. a. b. c. d.

A and B are substitutes.

A and B are complements.

A is a normal good.

A is an inferior good.

Answer: a Heading: 6.2B Basic consumer theory: allocating budgets Level: Medium

16. The income elasticity of demand is________. a. b. c. d.

always positive. always negative. positive for a normal good and negative for an inferior good. negative for a normal good and positive for an inferior good.

Answer: c Heading: 6.2B Basic consumer theory: allocating budgets Level: Medium

17. When consumers receive distributions of free rise, the quantities of rise they consume are likely to ________ and by ________ the quantity of rice received in the distribution. a. b. c. d.

rise; more than rise; the same amount as rise, less than the quantities of rise they consume are not going to change

Answer: c Heading: 6.2C Nutrition policy Level: Easy

18. When labor suppliers choose how much time to allocate to wage labor and to other activities seeking to maximize utility , their utility is often assumed to be a function of ________. a. consumption of goods and services b. time spent in non-labor activities. c. both consumption of goods and services and time spent in non-labor activities.

d. neither consumption of goods and services nor time spent in non-labor activities.

Answer: c Heading: 6.3B Basic labor supply theory: allocating time Level: Easy 19. When labor suppliers choose how much time to allocate to wage labor and to other activities seeking to maximize utility , their constraint is given by a. b. c. d.

the time constraint S + H ≤ T the cash constraint that C ≤ wS + M. C + wH ≤ wT + M. all of the above.

Answer: d Heading: 6.3B Basic labor supply theory: allocating time Level: Medium

20. The price of home time is ________. a. b. c. d.

not measurable the opportunity cost of time increasing with higher income depends on how many hours the labor supplier works

Answer: b Heading: 6.3B Basic labor supply theory: allocating time Level: Medium

21. If one worker suppliers more hours of labor when wage increases, we can conclude that ________. a. b. c. d.

the substitution effect is greater than the income effect the income effect is greater than the substitution effect the income effect is the same as the substitution effect this worker is not efficient.

Answer: a Heading: 6.3B Basic labor supply theory: allocating time Level: Medium

22. If one worker suppliers fewer hours of labor when wage increases, we can conclude that ________. a. b. c. d.

the substitution effect is greater than the income effect the income effect is greater than the substitution effect the income effect is the same as the substitution effect this worker is not efficient.

Answer: b Heading: 6.3B Basic labor supply theory: allocating time Level: Medium

23. If George treats home time as normal good and he receives gift money of $10,000 from his family, suppose his hourly wage working as a electrician stays the same, what will mostly likely to happen? a. b. c. d.

George will work less hours.

George will work more hours.

George will work the same amount.

We cannot predict George's reaction.

Answer: a Heading: 6.3B Basic labor supply theory: allocating time Level: Medium

24. An increase in p will ________ the VMPL schedule and will lead to ________in the quantity of low-skill labor demanded. a. b. c. d.

shift up; an increase shift up; a decrease shift down; an increase shift down; a decrease

Answer: a Heading: 6.4B Basic producer theory: maximizing profits Level: Medium 25. An increase in hourly wage will ________ the wage line and will lead to ________in the quantity of low-skill labor demanded. a. shift up; an increase

b. shift up; a decrease c. shift down; an increase d. shift down; a decrease Answer: b Heading: 6.4B Basic producer theory: maximizing profits Level: Medium

26. Most analysts agree that if prices and wages had held constant, adoption of Green Revolution seed varieties would have increased the quantity of labor demanded in agriculture. Discuss.

Answer: The yields of the new varieties were much more responsive to increases in fertilizer use and weed control. By increasing yields, use of the new varieties increased the work that needed to be done at harvest time. The technology thus increased the marginal productivity of labor time devoted to production of rice and other GR crops, tending to raise VMPL schedules, reduce MC schedules and increase the quantity of labor demanded at any wage. In most cases GR seed usage was adopted on land previously devoted to cultivation of traditional varieties of the same crops, tending to increase annual per-acre labor requirements by 20 or 30 percent (Lipton and Longhurst, 1989). In a few cases the greater profitability of GR seeds led to crop substitution, in which GR crops were planted on land previously devoted to crops employing more labor per acre, and might thus have reduced the average per-acre demand for labor (see Bayri and Furtan, 1989, on Turkey), but such cases were rare.

Heading: 6.4C The Green Revolution’s impact on rural labor Level: Medium 27. Why is labor demand a derived demand? Explain. What is a linkage between markets?

Answer: Basic producer theory highlights that labor demand is a derived demand: producers’ demand for labor is derived from consumers’ demand for the goods and services that producers sell. When increases in the demand for goods and services raise the prices at which producers may sell their outputs, they also tend to increase producers’ demands for labor (as well as other inputs). This is the source of an important linkages among markets. When policies or circumstances increase the demand for agricultural goods, driving up prices in agricultural output markets, they also induce increases in the demand for labor, which may increase wages in labor markets.

Heading: 6.4B Basic producer theory: maximizing profits Level: Medium

Test Bank, Chapter 7: Houesholds 1. The unitary households is referred so because a. b. c. d.

there is one person in the household. every household is exactly the same. households follow a unitary distribution. it treats an entire household as if it were a unitary decision maker, maximizing a single utility function

Answer: d Heading: 7.2A A motivation Level: Easy 2. Which of the following is true about the wage labor households? a. b. c. d.

Wages are their only income.

Wage labor households all live in urban areas.

Wage labor households earn wages in high-skill work.

Wage labor households function simultaneously as both labor suppliers and consumers.

Answer: d Heading: 7.2B Wage labor households Level: Medium 3. Which of the following is the endowment of the wage labor household? a. b. c. d.

Non-labor income.

Total time available.

Both a and b.

Labor income.

Answer: c Heading: 7.2B Wage labor households Level: Easy

4. Wage labor households maximize their utility by choosing ________. a. b. c. d.

consumption of food. consumption of non-food. enjoyment of home time.

All of the above.

Answer: d Heading: 7.2B Wage labor households Level: Easy

5. In the Wage labor households model, if the household has more time available, assuming food, non-food and home time are normal goods, which of the following statement is true? a. b. c. d.

Labor supply will decrease.

Labor supply will increase.

Food consumption will decrease.

None of the above.

Answer: a Heading: 7.2B Wage labor households Level: Medium

6. In the Wage labor households model, if the household has a higher hourly wage, labor supply will ________. a. b. c. d.

increase decrease not change ambiguous

Answer: d Heading: 7.2B Wage labor households Level: Medium

7. In the Wage labor households model, if there are simultaneous increases in food prices and wages, what will happen to the household's purchasing power? a. b. c. d.

increase decrease not change ambiguous

Answer: d Heading: 7.2B Wage labor households Level: Medium

8. Subsistence farm households refer to households a. b. c. d.

consumer what they produce in their own farms. do not need to work. hire other people to work in their farms. produce certain products and sell some of them in the market to but other products.

Answer: a Heading: 7.2C Farm households Level: Easy

9. If a farm household's net marketed surplus of food is negative, it means ________. a. b. c. d.

the household sells food in the market the household buy food in the market the household is losing money in the market this household is a subsistence farm household

Answer: b Heading: 7.2C Farm households Level: Medium

10. If a farm household's net market labor supply is positive, it means ________. a. b. c. d.

some family labor is hired out through labor markets non-family labor is hired in through labor markets all of the family labor is working for other farms this household is a subsistence farm household

Answer: a Heading: 7.2C Farm households Level: Medium

11. In the Farm households model, good's price ________ a household's purchasing power if it is a ________ of that good. a. b. c. d.

increase; net buyer increase; net seller decrease; net buyer both b and c are correct.

Answer: d Heading: 7.2C Farm households Level: Medium

12. In the Farm households model, Autarky labor quantity is determined when ________. a. b. c. d.

a household has no access to labor markets the quantity of labor it employs on its own farm equals to the quantity of labor it supplies the farm labor demand schedule and the household labor supply schedule intersect all of the above

Answer: d Heading: 7.2C Farm households Level: Easy

13. In the Farm households model, value of the marginal product of labor schedule is ________. a. b. c. d.

the farm household's supply for labor the farm household's demand for labor the marginal cost to the household of an additional day of his time. upward sloping

Answer: b Heading: 7.2C Farm households Level: Medium

14. In the Farm households model, when transfer costs prevent farm households from participating in labor markets, what will happen with increases in crop prices? a. b. c. d.

VMPL will shift up HLS will shift up total farm output will always increase. both a and b

Answer: d Heading: 7.2C Farm households Level: Medium

15. In the Farm households model, when transfer costs prevent farm households from participating in labor markets, what will happen to the supply of agricultural goods with increases in crop prices? a. b. c. d.

it will increase. it will decrease. it will stay the same. it depends on how cheap the farmers have access to labor markets

Answer: d Heading: 7.2C Farm households Level: Medium

16. Which of the following is true about non-farm households? a. Non-farm households are less likely than food crop farmers to consume large quantities of the goods or services they produce. b. Non-farm households are more likely than food crop farmers to consume large quantities of the goods or services they produce. c. Non-farm households are more likely to be net sellers in output markets d. Increasing in food prices tend to increase the non-farm households' purchasing power.

Answer: a Heading: 7.2D Non-farm business households Level: Medium

17. Which of the following will always benefit the incapacitated households? a. b. c. d.

Increases in food prices. increases in wages. economic growth. transfer of income from the rest of society.

Answer: a Heading: 7.2E Incapacitated households Level: Easy

18. Unitary models of household suggest that rising incomes may ________ gender gaps in consumption if households treat female consumption as a ________ normal good than male consumption.

a. b. c. d.

increase; more strongly reduce; more strongly increase; same reduce; same

Answer: b Heading: 7.3B Gender in unitary household models Level: Medium

19. If the price of wheat rises by 10 percent and the ratio of a household’s net marketed surplus in wheat to total income is m, then its real purchasing power rises by approximately how much? a. b. c. d.

10m percent 5m percent 2m percent m percent

Answer: a Heading: 7.3B Gender in unitary household models Level: Medium

20. Unitary household models predict that households will put resources to __________ use.

This means that households allocate land, non-labor income and other resources across uses in such a way that it is impossible to raise one member’s well-being without reducing the wellbeing of another. ? a. b. c. d.

equitable efficient fair maximum

Answer: b Heading: 7.3B Gender in unitary household models Level: Easy

21. _______________ theories thus assume that household decisions are reached through a bargaining process, in which each spouse seeks to get his or her way in allocating household resources and threatens to break up the household (causing the benefits of cooperation to disappear) if household allocations are not satisfactory?

a. b. c. d.

Collective bargaining Unitary Voting Cooperative bargaining

Answer: d Heading: 7.3B Gender in unitary household models Level: Easy

22. In Nash bargaining models, any change in circumstance that increases the wife’s fall-back utility shifts the bargaining outcome in the favor of______________. Having a stronger fallback position this translates into _____________ bargaining power. a. b. c. d.

The wife; greater The Husband; greater The Wife; less The husband; less

Answer: a Heading: 7.3C Cooperative bargaining and other models of efficient collective decision-making Level: Easy

23. An _________ in the price of food (holding income and other prices constant) _______ a wage labor household’s well-being by reducing its purchasing power or real income. a. b. c. d.

Increase; increases Decrease; decreases Increase; reduces Decrease; does not change

Answer: c Heading: 7.2B Wage labor households Level: Easy

24. The variables that determine a household’s budget line are e. f. g. h.

Its preferences and income Its preferences and prices Prices and income None of the above

Answer: c Heading: 7.2B Wage labor households Level: Easy

25. How can rising incomes reduce gender gaps in consumption?

Answer: Unitary models suggest, for example, that rising incomes may reduce gender gaps in consumption if households treat female consumption as a more strongly normal good than male consumption. Some evidence suggests that this is the case. For example, women and girls in southern India receive less nourishment than men and boys in the dry season when income is especially low, but their consumption rises enough to equal men and boys’ consumption in the harvest season when incomes are higher.

26. Nash sets out axioms describing characteristics that we might reasonably expect to see in bargaining outcomes, when the parties to the bargain are rational. He supposes these axioms are fulfilled and examines their implications. More specifically, Nash suggests that a cooperative bargaining outcome should satisfy what five axioms?

Answer: First, it should be efficient, because rational parties to a bargain would not wish to overlook ways of improving the bargaining outcome for one party without worsening it for the other. Second, the solution should leave each party better off than he would be if they failed to cooperate, because each party must have a rational reason to participate in the bargain. This suggests that each party’s fallback position, or the utility he would derive if household cooperation broke down, should play an important role in shaping the ultimate bargain. Third, interest in fairness suggests that if the parties to the bargain are identical in preferences and opportunities, then they should be treated equally by the ultimate bargain. The last two axioms proposed by Nash are more technical and subtle: that changing the scale in which utility is measured (without changing the way the parties rank order outcomes) should not change the real nature of the ultimate bargain, and that eliminating an un-chosen option (for how to allocate the household’s joint resources) should not change the bargaining outcome.

Test Bank, Chapter 8: Domestic Markets for Goods and Services 1. When buyers, sellers and intermediaries undertake costly efforts to locate trading partners, reach agreements regarding transaction details and monitor partners’ compliance with agreements, and when they suffer losses to partners who fail to fulfill agreements they are paying ____________. We use the term ______________ to encompass all the transport, storage, financing and transaction costs associated with the transfer of goods from their producers to their ultimate users through markets. a. b. c. d.

Transaction costs; transportation prices Transaction costs; transfer costs Transfer costs; transaction costs Intermediary cost; transportation costs

Answer: b Heading: 8.1A Market exchange and the costly transfer of goods Level: Medium

2. The ________ of Jamaica, women who carry agricultural produce to town in baskets on their heads a. b. c. d.

“Higglers” “Wigglers” “Smugglers” “Carriers”

Answer: a Heading: 8.2C Market intermediation and transfer costs Level: Medium

3. Firms that specialize in marketing services are called __________ and often benefit from specialization just as producers of tradition goods and services. a. b. c. d.

Wholesalers Transportation specialists Middle-men Market intermediaries

Answer: d Heading: 8.2C Market intermediation and transfer costs Level: Medium

4. The difference between the selling price and the buying price is called the ___________. a. b. c. d.

Profit Consumer surplus Marketing margin Producer surplus

Answer: c Heading: 8.2C Market intermediation and transfer costs Level: Medium

5. When middlemen lack competition it is possible that they may command significant ____________, or excess profits derived by exploiting their privileged positions. a. b. c. d.

Marketing rents Consumer surplus Marketing margin Producer surplus

Answer: a Heading: 8.2C Market intermediation and transfer costs Level: Medium

6. Private producers will only choose to sell their output when the benefit outweighs the cost.

Which of the following could prevent a market from developing? a. b. c. d.

High transportation costs High transfer costs Poor legal system All of the above could prevent a market from developing.

Answer: d Heading: 8.2D Transfer and market limitations Level: Medium

Figure 8.1 Market for Traditional Beans in Small Village Price of beans (Pesos per kg.)

LS LIP EP AP

a

LEP

LD

Beans (kg.)

7. According to Figure 8.1 the local demand schedule (LD) slopes downward because_____________. a. As the bean price falls, some buyers choose to purchase fewer beans, and some choose to leave the local bean market altogether b. As the bean price rises, some sellers choose to sell more beans, and some choose to enter the local bean market c. As the bean price falls, some sellers choose to sell fewer beans, and some choose to leave the local bean market altogether d. As the bean price rises, some buyers choose to purchase fewer beans, and some choose to leave the local bean market altogether Answer: d Heading: 8.3B Competitive equilibrium in a single market Level: Medium

8. According to Figure 8.1 the local supply schedule (LD) slopes upward because_____________. a. As the bean price falls, some buyers choose to purchase fewer beans, and some choose to leave the local bean market altogether b. As the bean price rises, some sellers choose to sell more beans, and some choose to enter the local bean market

c. As the bean price rises, some sellers choose to sell fewer beans, and some choose to leave the local bean market altogether d. As the bean price rises, some buyers choose to purchase fewer beans, and some choose to leave the local bean market altogether Answer: b Heading: 8.3B Competitive equilibrium in a single market Level: Medium

9. According to Figure 8.1, if we define LIP as the local import price, EP as the external market price, LEP as the local export price, and AP as the autarky price, which distance represents the transfer costs of purchasing beans from the big city? a. b. c. d.

LIP minus LEP LIP minus AP LIP minus EP LIP minus 0

Answer: c Heading: 8.3B Competitive equilibrium in a single market Level: Medium

10. According to Figure 8.1, if we define LIP as the local import price, EP as the external market price, LEP as the local export price, and AP as the autarky price, which distance represents the transfer costs of selling beans to the big city? a. b. c. d.

EP minus LEP EP minus AP LIP minus EP LIP minus LEP

Answer: a Heading: 8.3B Competitive equilibrium in a single market Level: Medium

11. According to Figure 8.1, if we define LIP as the local import price, EP as the external market price, LEP as the local export price, and AP as the autarky price, and if trade with big city were possible, at what price would the local market eventually settle on?

a. b. c. d.

EP AP LIP LEP

Answer: b Heading: 8.3B Competitive equilibrium in a single market Level: Medium Figure 8.2 Exporting, Importing and Autarky Equilibrium in the Small Village Bean Market Panel (a) Panel (b) Panel (c) Price of Beans (Pesos per kg.)

Price of Beans (Pesos per kg.)

Price of Beans (Pesos per kg.)

LS

LS

LS

LIP LIP

LEP AP

AP LIP

AP LEP

LEP

LD D

S

Beans (Kg.)

LD S

D

Beans (Kg.)

LD S=D

Beans (Kg.)

12. According to Figure 8.2, if we define LIP as the local import price, EP as the external market price, LEP as the local export price, and AP as the autarky price, and if trade with big city were possible, which panel describes a situation where buyers and sellers will chose not trade at all with big city? a. b. c. d.

Panel a Panel b Panel c That situation is not described by any of the panels

Answer: c Heading: 8.3B Competitive equilibrium in a single market Level: Medium

13. According to Figure 8.2, if we define LIP as the local import price, EP as the external market price, LEP as the local export price, and AP as the autarky price, and if trade with big city were possible, which panel describes a situation where sellers are exporting beans to big city?

a. b. c. d.

Panel a Panel b Panel c That situation is not described by any of the panels

Answer: a Heading: 8.3B Competitive equilibrium in a single market Level: Medium

14. According to Figure 8.2, if we define LIP as the local import price, EP as the external market price, LEP as the local export price, and AP as the autarky price, and if trade with big city were possible, which panel describes a situation where buyers are importing beans from big city? a. b. c. d.

Panel a Panel b Panel c That situation is not described by any of the panels

Answer: b Heading: 8.3B Competitive equilibrium in a single market Level: Medium

15. Which of the following changes would shift the supply schedule to the right? a. b. c. d.

Increase in the price of inputs Increase in the price of the output Decrease in the price of an alternative product produced with similar resources Improvements in technology

Answer: d Heading: 8.3B Competitive equilibrium in a single market Level: Medium

16. If a market is in importing equilibrium, an increase in demand will: a. b. c. d.

Increase consumption but leave the local price unchanged Increase consumption and the local price Decrease consumption and the local price Increase consumption and decrease the local price

Answer: a Heading: 8.3B Competitive equilibrium in a single market Level: Hard

17. If a market is in exporting equilibrium, an increase in supply will: a. b. c. d.

Increase local production but leave the local price unchanged Increase local production and the local price Decrease local production and the local price Increase local consumption and decrease the local price

Answer: a Heading: 8.3B Competitive equilibrium in a single market Level: Difficult

18. If a market is in autarky equilibrium, an increase in supply will: a. b. c. d.

Increase local production but leave the local price unchanged Increase local production and the local price Decrease local production and the local price Increase local production and decrease the local price

Answer: d Heading: 8.3B Competitive equilibrium in a single market Level: Difficult

19. Why should governments and NGOs consider switching from food transfers to cash transfers? a. Corruption b. Distributing food discourages development by driving down local food prices and discouraging local agricultural production c. Distributing food discourages development by driving up local food prices and discouraging local agricultural production d. Governments should never switch from food to cash transfer programs Answer: b Heading: 8.3D Policy analysis applications Level: Medium

20. If local food supply is highly _________, cash distributions raise local food prices only a little while encouraging significant _______ in local food production. a. b. c. d.

Elastic; decreases Elastic; increases Inelastic; decreases Inelastic; increases

Answer: b Heading: 8.3D Policy analysis applications Level: Difficult

21. If local food supply is highly _________, food distributions encourage significant _______ in local food production. a. b. c. d.

Elastic; decreases Elastic; increases Inelastic; decreases Inelastic; increases

Answer: a Heading: 8.3D Policy analysis applications Level: Difficult 22. The logic of ____________ indicates that new opportunities for exchange between people with diverse production capabilities increase productivity and expand consumption opportunities by allowing people to specialize in the types of production they do relatively well. a. b. c. d.

Proportionate advantage Relative advantage Comparative advantage Absolute advantage

Answer: c Heading: 8.4A Market expansion and growth: the big picture Level: Easy

23. If production is characterized by __________, then expansion of trade that allows individual producers to serve consumers spread out over larger areas may also increase productivity. a. Economies of scale b. Economies of scope c. Comparative advantage

d. Agglomeration economies Answer: a Heading: 8.4A Market expansion and growth: the big picture Level: Medium

24. Which type of industry renders a firm more productive when located near each other than when separated from each other geographically? a. b. c. d.

Economies of scale Economies of scope Comparative advantage Agglomeration economies

Answer: d Heading: 8.4A Market expansion and growth: the big picture Level: Medium

25. A person has a comparative advantage in producing a good if that person: a. b. c. d.

Has higher productivity in producing it than anyone else has Can produce it at a lower opportunity cost than anyone else can Has less desire to consume that good than anyone else has Has more human capital related to that good than anyone else has

Answer: b Heading: 8.4A Market expansion and growth: the big picture Level: Medium

26. It is sometimes thought that the mere existence of marketing margins implies exploitation of small farmers and businessmen, who are cheated out of receiving the full retail price for their produce by middlemen. Can there be a benefit from marketing margins?

Answer: Middlemen perform services that are costly to produce. Even when marketers are perfectly competitive, and thus charge marketing margins equal to their costs of producing marketing services, marketing margins may remain high because the costs of transfer activities are high. In fact, the existence of specialized market intermediaries probably reduces marketing costs in many cases. If intermediaries benefit from specialization or larger scale, their costs of producing marketing services may be much lower than the costs producers would incur if they marketed produce on their own. If intermediaries charge competitive fees for their services, therefore, their existence reduces marketing costs.

27. Governments and humanitarian aid organizations have a long history of distributing free food to needy people. Why are some humanitarian organizations increasingly experimenting, with distributing cash rather than food?

Answer: One frequently-voiced motivation for the shift from food to cash distributions is the belief that distributing food discourages development by driving down local food prices and discouraging local agricultural production, while distributing cash encourages development by raising local food prices and encouraging local agricultural production

28. Why might private actors fail to undertake critical transfer cost-reducing investments despite the wide-ranging benefits that might emerge from transfer cost reductions?

Answer: Private actors may lack the incentive or the means to undertake critical transfer cost-reducing investments, as a result of public goods problems, institutional failures, financial market failures and other problems.

Test Bank, Chapter 9: Labor Markets 1. Successful economic growth requires structural changes or a. b. c. d.

Changing the natural rate of unemployment Shifts in the nature and location of economic activity Increasing structural unemployment Building new machines or factories

Answer: b Heading: 9.1 Labor Markets and Development Level: Easy

2. The wage premiums required leaving workers indifferent about working in dangerous conditions instead of a lower paying, but better condition job is referred to as: a. b. c. d.

Compensation packages Fringe benefits Wage premium Compensating differentials

Answer: d Heading: 9.2A Diversity in work and working conditions Level: Easy

3. When workers receive a specified pay per acre weeded, or per kilogram harvested they earn: a. b. c. d.

Piece rates Fringe benefits Wage premiums Compensating differentials

Answer: a Heading: 9.2B Diversity in employment contracts Level: Easy

4. Agrarian employment arrangements use: a. b. c. d.

Higher paid permanent labor Higher paid temporary workers Lower paid permanent labor Lower paid temporary workers

Answer: c Heading: 9.2B Diversity in employment contracts Level: Easy

5. If employers are perfectly competitive profit maximizers then they hire labor until: a. b. c. d.

The VMPL equals the average total cost The VMPL equals the average variable cost The VMPL equals the wage The VMPL is greater than the average fixed cost

Answer: c Heading: 9.3A A simple model of Labor Mobility in development Level: Easy

6. If labor use is ___________ then there is no way to make one person better off, without making any other person worse off, simply by _____________. a. b. c. d.

Equitable; paying everyone a higher wage Inefficient; reallocating resources across different uses Efficient; paying workers a higher wage Efficient; reallocating labor across different uses

Answer: d Heading: 9.3A A simple model of Labor Mobility in development Level: Easy

Figure 9.1 The Effects of an Employer-Specific Labor Demand Increase when Labor is Perfectly Mobile (a)

(b)

Pesos per day

(c)

Pesos per day

Pesos per day S

W’ D’

W* VMPL1’

D

VMPL1

L1

L1’

Producer 1’s Labor Days

VMPL2

L2’ L2

Producer 2’s Labor Days

Total Market Labor Days

7. According to Figure 9.1 which of the panels depicts a firm who invested in a technological innovation that is labor using, in the sense that it improves the Value of the marginal product of labor? a. b. c. d.

Panel a Panel b Panel c Panel and a and b.

Answer: a Heading: 9.3A A simple model of Labor Mobility in development Level: Easy

8. According to Figure 9.1 which of the panels depicts, when producer 1 increases wages to attract workers from producer 2, what happens to total labor in the market? a. b. c. d.

Producer 1 increases labor, producer 2 decreases labor the total labor used stays the same Producer 1 decreases labor, producer 2 decreases labor the total labor used increased Producer 1 decreases labor, producer 2 increases labor the total labor increased Producer 1 increases labor, producer 2 decreases labor the total labor increased

Answer: d Heading: 9.3A A simple model of Labor Mobility in development Level: Easy

9. As long as labor markets are perfectly competitive and workers are mobile, __________ in the demand for low-skill labor in any one sector or location bring _________ for _________workers. a. b. c. d.

Increases; decreases in prices; unskilled Increases; rising wages; all Increases; rising prices; all Decreases; increased income; skilled

Answer: b Heading: 9.3A A simple model of Labor Mobility in development Level: Medium

10. In order for economic growth from an investment or innovation to lead to increases in the standards of living for _______, it should cause the _______schedule to rise, causing a ________for labor and an increase in wages. a. b. c. d.

Skilled laborers; demand; increase in demand Unskilled laborers; supply; decrease in supply Unskilled laborers; VMPL; increase in demand Skilled laborers; supply; increase in supply

Answer: c Heading: 9.3A A simple model of Labor Mobility in development Level: Medium

11. When labor supply is _______, asset growth that increases the demand for low-skill labor _________ and well-being __________ for the low-skill workers already in the market. a. b. c. d.

Elastic; reduces wages; significantly Elastic; raises wages; insignificantly Inelastic; decreases wages; insignificantly Inelastic; raises wages, significantly

Answer: d Heading: 9.3A A simple model of Labor Mobility in development Level: Medium

12. When the supply of labor is highly _______, the increased demand for labor generates _______ benefits for low-skill workers.

a. b. c. d.

Elastic; many Elastic; few Inelastic; few Inelastic; many

Answer: b Heading: 9.3A A simple model of Labor Mobility in development Level: Medium

13. Over the course of development, the shares of manufacturing and service sectors in GDP tend to _______, while the agricultural sector _______. a. b. c. d.

Fall; rises Fall; also falls Rise; also rises Rise; declines

Answer: d Heading: 9.3B Geographic mobility concerns Level: Easy

14. Empirical studies have revealed a process called ___________, involving the birth of innovative firms and the death of other firms, can be responsible for a large fraction of ______________ in developing and developed countries a. b. c. d.

Technological advancement; wage growth Technological advancement; productivity growth Creative destruction; productivity growth Creative destruction; wage growth

Answer: c Heading: 9.3B Geographic mobility concerns Level: Medium

15. Employment in jobs that make poor use of their skills or employ only a fraction of the labor time they are willing to offer is referred to as: a. b. c. d.

Underemployment Unemployment Is not counted as employed or unemployed Is a discouraged worker phenomenon

Answer: a Heading: 9.3C Inter-firm mobility and related costs Level: Easy

16. Rather than implementing _________ where governments provide cash transfers to workers who have recently become unemployed, many developing country governments attempt instead to reduce workers’ vulnerability to unemployment through_______________, which require employers to give workers advance notice of firing, to make large lump sum severance payments to workers they dismiss, or to obtain government approval before laying off workers. a. b. c. d.

Underemployment benefits; private institutions Unemployment insurance; job security regulations Job security regulations; unemployment benefits Unemployment insurance; unemployment benefits

Answer: b Heading: 9.3C Inter-firm mobility and related costs Level: Easy

17. All of the following are reasons why a labor market may remain segmented rather than eventually settling into a competitive labor market except: a. b. c. d.

A minimum wage above the competitive equilibrium wage A minimum wage below the competitive equilibrium wage Labor unions It may be profitable for firm to maintain higher pay rather than facing a high search cost and high training costs

Answer: b Heading: 9.3D Sectoral mobility and labor market segmentation Level: Medium

18. When a firm offers a wage higher than the competitive equilibrium due to high search and training costs of replacing employees they are paying___________. a. b. c. d.

Minimum wages Efficiency wages Competitive wages Premium wages

Answer: b

Heading: 9.3D Sectoral mobility and labor market segmentation Level: Easy

19. Which of the following is not an investment in human capital? a. b. c. d.

acquisition of skills through primary and secondary schools Job Training Learning by doing tasks on the job Purchasing a tool to improve labor productivity

Answer: d Heading: 9.4 Skill Acquisition in developing Country Labor Markets Level: Easy Figure 9.2 Equilibrium in Markets for Low- and High-Skill Labor (a)

(b)

Low-Skill Wage

High-Skill Wage

SH

SL

WH

WL

DL

Days of Low-Skill Labor Employed

DH

Days of High-Skill Labor Employed

20. According to figure 9.2 the wage for high skilled labor WH is higher than the wage for unskilled WL workers because: a. Unskilled workers are less productive and more scarce b. High skilled workers are less productive and more abundant

c. High skill workers are more productive and more scarce d. Unskilled workers are more productive and more scarce Answer: c Heading: 9.4A A Benchmark Model of Skills in Labor Markets Level: Easy

21. When workers acquire skills, they transform themselves from low-skill to high-skill workers.

This shifts the supply schedule for low-skill workers to the _______ (in Figure 9.6a) and shifts the supply schedule for high-skill workers to the ______ (in Figure 9.6b), tending to _______ wages for low-skill workers and ________ wages for high-skill workers. a. b. c. d.

Left; right; raise; reduce Right; right; reduce; raise Left; left ; raise; reduce Right; left; reduce; raise

Answer: a Heading: 9.4A A Benchmark Model of Skills in Labor Markets Level: Medium

22. Workers reap _________ productivity benefit of general training in the form of __________. a. b. c. d.

Most of the; increased wages The full; increased leisure hours The full; increased wages A small fraction of the; increased leisure hours

Answer: c Heading: 9.4B Skill Types and the economics of skill investments Level: Medium

23. What costs are associated with migration of workers? a. b. c. d.

If migration is temporary workers will take with them any training they received It can cause private safety net institutions to break-down Tends to raise transmission of infectious diseases All of the above are costs of migration

Answer: d Heading: 9.3B Geographic mobility concerns

Level: Easy

24. If firms have to _______ of the workers they train to keep them from being poached the firm’s costs may increase by _________ as the increase in revenue, which gives employers _______ to invest in training of their workers. a. b. c. d.

Raise wages; the same amount; no incentive Raise wages; less than; a strong incentive Lower wages; more than; no incentive Raise prices; more than; a strong incentive

Answer: a Heading: 9.4B Skill types and the economics of investments Level: Easy

25. How can governments expand private sector training activities a. b. c. d.

They can provide training services They can offer employee loans to us in purchasing job training They can tax private employers All of the above

Answer: b Heading: 9.4C Education, job training and policy Level: Easy

26. What is the effect of a technological improvement that only affects some firms in the market?

Answer: It will cause some firms who have invested in the labor using technology to see that it is profitable to increase production by hiring more labor. The increase in wages will mean that firms who did not choose to the use labor using technology will be forced to pay the higher wage and will have to lay off workers. The end results however is an increase in total labor and at a now higher wage.

27. Under which conditions can investments and innovations that lead to the same rate of economic growth make it more likely to channel benefits to low-wage workers than others?

Answer: First, among the investments and innovations that lead to the same rate of economic growth, some are more likely to channel benefits to low-wage workers than others. Only if they are labor using – causing VMPL schedules to rise – will they raise the demand for labor and drive

up the wages earned by low-skill workers. Growth is thus more likely to raise the earnings of low-skill workers when based on the accumulation of physical and human capital that are complements in production with low-skill labor, or on the adoption of new technologies that increase the productivity of low-skill labor. Such investments give rise to pro-poor growth.

28. What has empirical research pointed to as the most important determinants of migration decisions? Include four or more conditions that could lead to increased migration.

Answer: Working age adults are more likely to migrate when the earnings gap between destination and origin is larger, suggesting that migration flows respond at least in part to labor market signals. Second, people are much more likely to migrate over very short distances (holding potential income gains constant) than over longer distances. Third, most migrants are young people. Young people can expect to reap those returns for longer, and, as a result, are more likely to find that the benefits of migration outweigh the costs. Fourth, often migration rates are higher among people with more education. Migrants consider the “amenities” that a location has to offer, such as access to clean water, sanitation, education and other social services, as well as labor market conditions. They take into account potential impacts on the well-being of those left behind that are made possible when migrants send back remittances, or private money transfers.

Test Bank, Chapter 10: Investment and Financial Markets 1. When people invest they are a. b. c. d.

Buying stocks Undertaking costly activities today with the hopes of returns in the future Buying bonds Selling bonds

Answer: b Heading: 10.1 Investment, Financial Markets and Development Level: Easy

2. Investment decisions require inter-temporal comparisons of costs and benefits, which means: a. b. c. d.

Comparing marginal costs and benefits Comparing future costs with current benefits Comparing future benefits with future costs Comparing future benefits with current costs

Answer: d Heading: 10.1 Investment, Financial Markets and Development Level: Easy

3. Why do farmers in Sub-Saharan Africa use over 10 times less fertilizer than the rest of the world? a. b. c. d.

The costs outweigh the befits It contributes to the high yields of crops these farmers experience Because of inter-temporal comparison and risk Comparing future benefits with current costs shows minimal difference

Answer: c Heading: 10.2A A motivation Level: Easy

4. What is the net return of an investment? a. b. c. d.

The total benefit from the investment asset The total improvements in the investor’s life circumstances from the investment The difference between gross return and the operating and maintenance costs The difference between the gross return and the interest rate

Answer: c Heading: 10.2B Investors and investment projects Level: Easy

5. In standard economic models of inter-temporal choice, people are assumed to evaluate the overall utility they would derive from any choice by first evaluating the single-period utility? a. b. c. d.

Multi-stage utility Single-period utility 2 period utility Inter-temporal utility

Answer: b Heading: 10.2C Inter-temporal comparisons and investment choices Level: Easy

6. If Susan multiplies by the discount factor β once to utility experienced in period 1, twice to utility in period two, and t times to utility experienced t periods into the future. She is said to employ _________ when assessing the value of future consumption and utility. a. b. c. d.

Constant discounting Decreasing discounting Zero discounting Increasing discounting

Answer: a Heading: 10.2C Inter-temporal comparisons and investment choices Level: Medium

7. When considered how to finance an investment which requires an indivisible up-front cost, Fred has all of the following options except? a. b. c. d.

Saving Paying in installments borrowing liquidating other assets

Answer: b Heading: 10.2C Inter-temporal comparisons and investment choices Level: Medium

8. Investment will be more likely by those who have __________, can borrow at ______interest rates, have more ________ to liquidate, or are more willing to delay___________ a. b. c. d.

Better and more access to credit; lower; assets; consumption Better access to credit; higher; assets; income Better and more access to credit; lower; liabilities; investment Better and more access to credit; lower; debts; consumption

Answer: a Heading: 10.2C Inter-temporal comparisons and investment choices Level: Medium

9. Someone is said to be time consistent if_____. a. b. c. d.

They plan to invest in the next period but when the next period comes they do not They plan to invest in the next period and indeed undertake the investment They evaluate investments at the same time They undertake investments so the returns cover the financing costs.

Answer: b Heading: 10.2C Inter-temporal comparisons and investment choices Level: Medium

10. Behavioral economist point to empirical evidence what shows people exhibit ___________ which sometimes leads them not to follow through on saving and investment plans. a. b. c. d.

Timing preferences Present bias Time consistent preferences Time inconsistent preferences

Answer: d Heading: 10.2C Inter-temporal comparisons and investment choices Level: Medium

11. A person subject to present bias finds it ____________ to delay ___________ from the present to one period into the future than it is to delay __________ from the future to later in the future. a. b. c. d.

Less difficult; income; consumption More difficult; consumption; income More difficult; consumption; consumption Less difficult; income; income

Answer: c Heading: 10.2C Inter-temporal comparisons and investment choices Level: Medium 12. Modeling investment decisions with diverse possible states of the world when the return is realize allows economists to consider___________. a. Risk b. Possible unknowns in the outcomes c. uncertainty

d. all of the above Answer: d Heading: 10.2D Risk and insurance Level: Medium 13. Using standard economic models of investment choices in the presence of uncertainty, the investor knows: a. b. c. d.

The exact return on investment Probability of a positive return on investment Nothing about the expected return The distribution of the investment’s returns

Answer: d Heading: 10.2D Risk and insurance Level: Easy 14. The weighted average of the returns across all possible states of the world, where the weights are equal to the probabilities with which the different states occur is called _________. The ________ indicates how great the return is expected to be “on average.” a. b. c. d.

Distribution; variance The expected value; expected return Rate of return; expected value Variance; distribution

Answer: b Heading: 10.2D Risk and insurance Level: Easy 15. The _________ of an investment’s return is a measure of how much the possible returns vary above and below the expected return across states of the world. Among projects with the same expected return, those with higher variance are ___________. a. b. c. d.

Variance; less risky The expected value; less risky Expected value; more risky Variance; more risky

Answer: d Heading: 10.2D Risk and insurance Level: medium

Table 10.1 Returns for investment projects under different states of the world

Project 1 Project 2

Rb 80 50

Rn 100 100

Rg 120 150

16. Suppose that only three states of the world – bad (b), normal (n) and good (g) – are possible, and suppose that the normal state occurs with probability 0.5, while the bad and good states each occur with probability 0.25. Consider two investment projects for which the returns in the three states are given in Table 10.1.What is the expected return for Project 1? a. b. c. d.

200 150 100 120

Answer: c Heading: 10.2D Risk and insurance Level: medium 17. Suppose that only three states of the world – bad (b), normal (n) and good (g) – are possible, and suppose that the normal state occurs with probability 0.5, while the bad and good states each occur with probability 0.25. Consider two investment projects for which the returns in the three states are given in Table 10.1.What is the expected return for Project 2? a. b. c. d.

50 100 150 200

Answer: b Heading: 10.2D Risk and insurance Level: medium 17. Suppose that only three states of the world – bad (b), normal (n) and good (g) – are possible, and suppose that the normal state occurs with probability 0.5, while the bad and good states each occur with probability 0.25. Consider two investment projects for which the returns in the three states are given in Table 10.1.The expected returns ______________. The variance for project 2 is ________making ___________ the better investment. a. Are equal; larger; project 1 b. Are equal; smaller; project 1

c. Are close but not equal; larger; project 2 d. Are close but not equal; smaller; project 2 Answer: a Heading: 10.2D Risk and insurance Level: medium 18. Some risks are correlated across projects, other tend to be highly covariate tending to hit investors in a community at _________, other risks such as road traffic accidents, theft, or fire tend to be _______ a. b. c. d.

The same time; idiosyncratic Different times; idiosyncratic The same times; inter-related Different times; inter-related

Answer: a Heading: 10.2D Risk and insurance Level: Easy 19. Under an insurance contract, an investor pays a fee, called a ___________, to purchase a contract that promised payments, called _________, in specified bad states of the world. a. b. c. d.

Discount rate; payouts Premium; indemnities Insurance rate; indemnities Premium; payouts

Answer: b Heading: 10.2D Risk and insurance Level: Easy 20. If bad credit risks are the ones who most actively seek out loans to finance investments, and therefore receive them from financial intermediaries, then financial intermediaries face the problem of: a. b. c. d.

Free-riding Costly state verification Adverse selection Moral hazard

Answer: c Heading: 10.2D Risk and insurance Level: Easy

21. The problem created by asymmetric information before the transaction occurs is called _______, while the problem created after the transaction occurs is called__________. a. b. c. d.

Free-riding; costly state verification Adverse selection; moral hazard Costly state verification; free-riding Moral hazard; adverse selection

Answer: b Heading: 10.2D Risk and insurance Level: Easy 22. Financial markets promote greater economic efficiency by channeling funds from ________ to _____. a. b. c. d.

Investors; savers Borrowers; savers Savers; borrowers Savers; lenders

Answer: c Heading: 10.2D Risk and insurance Level: Easy 23. A key factor in promoting economic growth is: a. b. c. d.

Eliminating foreign trade Well-functioning financial markets High interest rates Stock market volatility

Answer: b Heading: 10.2D Risk and insurance Level: Easy 24. The price paid for the rental of borrowed funds is commonly referred to as: a. b. c. d.

Inflation rate Exchange rate Interest rate Aggregate price level

Answer: c Heading: 10.2D Risk and insurance

Level: Easy 25. __________ are the time and resources spent conducting a trade: a. b. c. d.

Bargaining costs Transaction costs Contracting costs Barter costs

Answer: b Heading: 10.2D Risk and insurance Level: Easy 26. How do well-functioning markets for loanable funds encourage economic growth and allow a

larger set of investors to participate in growth?

Answer: By offering savers better returns, they encourage saving and encourage savers to channel their savings into investment projects (rather than holding savings as cash under a mattress). By shifting financing away from savers’ own lower-return investment projects toward higher-return projects managed by others, they raise the average return on investment. By increasing the volume and average quality of investments, they increase the rate of economic growth. In addition, by facilitating the flow of funds from wealthy savers with poor investment prospects to poor entrepreneurs with high-return investment projects, well-functioning markets for loanable funds may also render growth more inclusive. By helping households cope with fluctuations in income and needs, they reduce vulnerability.

27. Consider an investor with a certain income of 20 contemplating an investment project with a 50 percent chance of delivering a “good” return of 40, and a 50 percent chance of delivering a “bad” return of -20.

The investor consumes the sum of her certain income and her investment return in any state.

Thus she consumes 20 in either state if she does not invest, and consumes 60 and 0 in the good and bad states if she does invest. Suppose further that her utility function is given by: (10.22)

u(c)

= c if < 20 = 20 +0.4(c-20) if c ≥ 20.

What is the expected return for this project? What type f utility function are theses?

Answer: The project’s expected return is 0.5*40+0.5*(-20) =10. This utility function incorporates the diminishing marginal utility of consumption in a crude way, with each one-unit increase in consumption below 20 increasing utility by 1 full unit, and each one-unit increase in consumption above 20 increasing utility by only 0.4 units. If the potential investor does not

invest, her expected utility is 0.5*u(20) + 0.5*u(20)=20. If she undertook the project without insurance, her expected utility would be 0.5u(0)+0.5u(60)=0.5(0)+0.5(36)=18, which is less than 20. Thus, though the project’s expected return is positive, she does not undertake the project, because this would reduce her expected utility. She is deterred by risk, because the utility cost associated with reduced consumption in the bad state more than outweighs the utility benefit of increased consumption in the good state.

28. How do financial markets help economic growth?

Answer: Well-functioning markets for loanable funds encourage economic growth and allow a larger set of investors to participate in growth. By offering savers better returns, they encourage saving and encourage savers to channel their savings into investment projects (rather than holding savings as cash under a mattress). By shifting financing away from savers’ own lowerreturn investment projects toward higher-return projects managed by others, they raise the average return on investment. By increasing the volume and average quality of investments, they increase the rate of economic growth. In addition, by facilitating the flow of funds from wealthy savers with poor investment prospects to poor entrepreneurs with high-return investment projects, well-functioning markets for loanable funds may also render growth more inclusive.

By helping households cope with fluctuations in income and needs, they reduce vulnerability.

Test Bank, Chapter 11: International Markets and General Equilibrium 1. Which of the following is not the driving force behind globalization? a. b. c. d.

reductions in air cargo rates. spread of cell phones, internet and other technologies. global warming. many countries have liberalized their trade policies.

Answer: c Heading:11.1 Globalization and Development Level: Easy

2. Taxes imposed on imports are called ________. a. b. c. d.

excise tax luxury tax trade tax tariff

Answer: d Heading:11.1 Globalization and Development Level: Easy

3. Which of the following is true describing the change in the nature of international trade in recent decades? a. Developing countries have increased the share of manufactures in exports. b. Many developed county firms have outsources their productions. c. Developing countries have been increasingly trading with each other, in addition to trading with the developed countries. d. All of the above.

Answer: d Heading:11.1 Globalization and Development Level: Easy

4. Suppose Indonesia is a shoe exporter, then in the graph for Indonesian market for shoes, the Local Export Price (LEP) is ________ the autarky price. a. above b. below

c. equal to d. they cannot be compared without more information.

Answer: a Heading:11.2A Partial equilibrium model of international trade Level: Medium 5. In the world market for shoes, recovery from economic crisis in Europe will shift the global ________ schedule for shoes to the ________. a. b. c. d.

demand; right demand; left supply; right supply; left

Answer: a Heading:11.2A Partial equilibrium model of international trade Level: Medium 6. Which of the following would be an exchange rate? a. b. c. d.

one dollar can be exchanged for four quarters. one dollar can be exchanged for one candy bar. one dollar can be exchanged for 100 yens. one textbook can be exchanged for 10 large pizzas.

Answer: c Heading:11.2A Partial equilibrium model of international trade Level: Easy

7. If the world price of coffee table in dollars is $100 and the Indian nominal exchange rate is 500 rupees per dollar, then the world price of coffee table as measured in Indian rupees will be ________. a. b. c. d.

5 rupees.

50,000 rupees 500 rupees 100 dollars

Answer: b Heading:11.2A Partial equilibrium model of international trade Level: Medium

8. When the dollar declines in the value against the rupiah, dollars are experiencing ________. a. b. c. d.

depreciation appreciation inflation deflation

Answer: a Heading:11.2A Partial equilibrium model of international trade Level: Easy

9. When the Indonesian exchange rate decreases from 10,000 rupiahs per dollar to 9,500 rupiahs per dollar, the rupiahs is said to ________. a. b. c. d.

depreciate appreciate inflate deflate

Answer: b Heading:11.2A Partial equilibrium model of international trade Level: Medium

10. The real exchange rate between two currencies measures: a. the relative price levels in these two countries. b. how many units of one currency can be exchanged for one unit of the other currency. c. how many units of representative baskets of goods and services in one country can be exchanged for one unit of the representative baskets of goods and services in the other country. d. how much appreciation of one currency against the other currency.

Answer: c Heading:11.2A Partial equilibrium model of international trade Level: Medium

11. When purchasing power parity holds, it implies that the real exchange rate equal to ________. a. 1

b. 0 c. 100 d. nominal exchange rate.

Answer: a Heading:11.2B Determinants of Export Volume Level: Medium

12. When the real exchange rate is above the purchasing power parity level, this country's currency is said to be ________. a. b. c. d.

over-valued under-valued appreciated depreciated

Answer: b Heading:11.2B Determinants of Export Volume Level: Medium

13. ________ exchange rates tend to discourage ________. a. b. c. d.

over-valued; imports under-valued; imports over-valued; exports under-valued; exports

Answer: c Heading:11.2B Determinants of Export Volume Level: Medium

14. What resources is specific in the textile sector in the specific factors model? a. b. c. d.

labor land capital entrepreneurial ability

Answer: c Heading:11.3A The Specific Factors Model

Level: Medium

15. The specific factors model is considered as a model of general equilibrium in the "short-run" because ________. a. b. c. d.

labor cannot move from one sector to another labor can move from one sector to another capital can move from one sector to another capital and land are each specific to one sector

Answer: d Heading:11.3B Interpretation and Extension of the Specific Factors Model Level: Medium 16. In the specific factors model, because of the diminishing returns to labor, which of the following statement is true? a. b. c. d.

Production possibilities frontier is a straight line.

Production possibilities frontier is bowed out from the origin.

Production possibilities frontier is bowed in toward the origin.

Production possibilities frontier can have any shape.

Answer: b Heading:11.3A The Specific Factors Model Level: Easy

17. In the specific factors model, at the general equilibrium, the slope of the Production possibilities frontier (PPF) is a. b. c. d.

equal to the ratio between the marginal products of labor in each sector. equal to the ratio between the prices for textiles and food. tangent of an iso-value line. all of the above.

Answer: d Heading:11.3A The Specific Factors Model Level: Difficult

18. In the specific factors model, at the general equilibrium, if the wage per worker is $10 an hour and the price of food is $2,000 per ton, the marginal product of labor of food production is ________. a. b. c. d.

20,000 0.005 1 200

Answer: b Heading:11.3A The Specific Factors Model Level: Medium

19. In the specific factors model, an increase in the world price of food will lead to: a. b. c. d.

an increase in the real earnings of land. a decrease in the real earnings of land. no change in the real earnings of land. a decrease in the nominal wage in the food sector.

Answer: a Heading:11.3A The Specific Factors Model Level: Medium

20. In the specific factors model, with trade, the owners of factors specific to the importing sector are ________, while the owners of factors specific to the exporting sector are ________. a. b. c. d.

benefited; harmed harmed; benefited harmed; not affected not affected; benefited

Answer: b Heading:11.3A The Specific Factors Model Level: Medium

21. In the specific factors model, suppose that Home country has a comparative advantage in textile industry. With trade, which of the following statement is true? a. the real earnings of capital will not change.

b. the real earnings of capital will first increase, then decrease eventually. c. the real earnings of capital will increase. d. the real earnings of capital will decrease.

Answer: c Heading:11.3A The Specific Factors Model Level: Difficult

22. A country’s terms of trade is defined as the ratio of ________ to ________. a. b. c. d.

its currency; foreign country's currency its tariff rate; foreign country's tariff rate price of its importing product; price of its exporting product price of its exporting product; price of its importing product

Answer: d Heading:11.3A The Specific Factors Model Level: Easy

23. In the Factor Proportions Model, the opening to trade will ________ the real return to the country's relatively abundant factor and ________the real return to the country's relatively scarce factor. a. b. c. d.

increase; increase increase; decrease decrease; increase decrease; decrease

Answer: b Heading:11.3C The Factor Proportions Model Level: Medium

24. In the Factor Proportions Model, if the world relative price of textiles increases and Home country is a textile exporter, ________. a. b. c. d.

Home country will produce more textiles and less chemicals Home country will produce less textiles and more chemicals Home country will produce more textiles and more chemicals all of the above are possible

Answer: a Heading:11.3C The Factor Proportions Model Level: Medium

25. In the Factor Proportions Model, suppose Home country is a labor-abundant country and Foreign country is a capital-abundant country, when trade between these two countries happens, the Factor Proportions Model indicates that ________. a. b. c. d.

the price of capital-intensive good will rise in Home country the price of labor-intensive good will rise in Home country the price of capital-intensive good will fall in Foreign country the price of labor-intensive good will rise in Foreign country

Answer: b Heading:11.3C The Factor Proportions Model Level: Difficult

Test Bank, Chapter 12: Institutions and Cooperation 1. People’s interactions with each other in market and non-market setting are governed by ________. a. b. c. d.

laws economics institutions history

Answer: c Heading:12 Introduction Level: Easy

2. ________ is/are any set of formal rules, informal norms and related enforcement mechanisms that constrain people’s choices. a. b. c. d.

Institutions Economics The rule of law Politics

Answer: a Heading:12.1 Institutions, Cooperation and Development Level: Easy

3. When people harvest fish, wood or water from sources held in common, they enjoy the full benefit of what they harvest ________, much of which falls on others as harvesting becomes more difficult or conflict breaks out. a. b. c. d.

and bear the full cost and bear most of the cost and bear only a fraction of the cost and bear none of the cost

Answer: c Heading: 12.1 Institutions, Cooperation and Development Level: Easy

4. Decisions are ________ when the objective benefits that any one person enjoys after making specified choices depend on the choices made by other people.

a. b. c. d.

incremental costly strategic formal

Answer: c Heading: 12.2 Cooperation and Institutions: Key Concepts from Game Theory and Behavioral Economics Level: Easy

5. The field of ________, in which researchers construct and test specific hypotheses regarding departures from neoclassical rationality. a. b. c. d.

behavioral economics game theory classical economics neo-classical economics

Answer: a Heading: 12.2 Cooperation and Institutions: Key Concepts from Game Theory and Behavioral Economics Level: Easy

6. In standard games theory each player is assumed to derive utility only from current or future consumption with no concern for the impacts of their choice on others. This is called ________ preferences. a. b. c. d.

classical neoclassical behavioral Lexicographic

Answer: b Heading: 12.2A Cooperation in standard game theory Level: Easy 7. A situation in which each player has chosen a strategy that is the best possible response to the strategies chosen by other players is called: a. strategic equilibrium b. steady state equilibrium c. competitive equilibrium

d. Nash equilibrium Answer: d Heading: 12.2 A Cooperation in standard game theory Level: Easy 8. In Nash equilibrium: a. b. c. d.

Only one player can change his payoffs by changing strategies Both players can change strategies but neither can improve their payout Neither player can change their strategy Both player can change their strategy but only player can improve their payout

Answer: b Heading: 12.2A Cooperation in standard game theory Level: Easy Table 12.1 Utility Payoffs to Thief 1 and Thief 2 in a Classic Prisoners’ Dilemma Game Payoffs are given as utility where U = 10-years in Jail

If Thief 1: Confesses Remains Silent

If Thief 2: Confesses Remains Silent 3,3 10,0 0,10 8,8

9. According to table 12.1, if Thief 1 and Thief 2 both confess to the crime, how many years in jail will each thief serve? a. b. c. d.

Thief 1 – 2 years; Thief 2 – 2 years Thief 1 – 7 years; Thief 2 – 7 years Thief 1 – 3 years; Thief 2 – 3 years Thief 1 – 10 years; Thief 2 – 0 years

Answer: b Heading: 12.2A Cooperation in standard game theory Level: Medium

10. According to table 12.1, if Thief 1 confesses and Thief 2 remains silent to the crime, how many years in jail will each thief serve?

a. b. c. d.

Thief 1 – 2 years; Thief 2 – 2 years Thief 1 – 7 years; Thief 2 – 7 years Thief 1 – 0 years; Thief 2 – 10 years Thief 1 – 10 years; Thief 2 – 0 years

Answer: c Heading: 12.2A Cooperation in standard game theory Level: Medium

11. According to table 12.1, what is the Nash equilibrium of this game? a. b. c. d.

Both players remain silent Both players confess There is no equilibrium in this game There isn’t enough information to solve this game

Answer: b Heading: 12.2A Cooperation in standard game theory Level: Medium

12. According to table 12.1, which statement is true? a. b. c. d.

Thief 1 has a dominant strategy.

Thief 1 has a dominant strategy.

This game can be referred as Prisoners' Dilemma game.

All of the above

Answer: d Heading: 12.2A Cooperation in standard game theory Level: Medium 13. According to table 12.1, if the two players can cooperate with each other, how many years in jail will each thief serve? a. b. c. d.

Thief 1 – 2 years; Thief 2 – 2 years Thief 1 – 7 years; Thief 2 – 7 years Thief 1 – 0 years; Thief 2 – 10 years Thief 1 – 10 years; Thief 2 – 0 years

Answer: a Heading: 12.2A Cooperation in standard game theory Level: Medium

14. A player is said to have a _________, or a plan of action that yields the highest payoff no matter what he expects the other player to do. a. b. c. d.

dominant strategy semi-dominant strategy dominated strategy Nash equilibrium

Answer: a Heading: 12.2A Cooperation in standard game theory Level: Easy 15. In a two player non-cooperative game where both players have a dominant strategy, a. b. c. d.

there is never a Nash equilibrium. there can be multiple Nash equilibria. there is only one Nash equilibrium. the actual outcome is unpredictable.

Answer: c Heading: 12.2A Cooperation in standard game theory Level: Medium

16. In a two player non-cooperative game where neither player has a dominant strategy, a. b. c. d.

there is never a Nash equilibrium. there can be multiple Nash equilibria. there is only one Nash equilibrium. the actual outcome is unpredictable.

Answer: d Heading: 12.2A Cooperation in standard game theory Level: Medium 17. In a common prisoners dilemma type game where participants decide whether to cooperate or shirk their responsibility there is often an incentive to ________, or enjoy the benefits of the ________ without contributing to its creation. a. b. c. d.

cooperate; private good free ride; private good cooperate; common resource free-ride; public good

Answer: d Heading: 12.2A Cooperation in standard game theory Level: Medium

18. People exhibit ________ when they choose actions that are more beneficial to other people (and more costly to themselves) after they witness the others acting in a manner they perceive as fair or generous. They exhibit ________ when they choose actions that are more costly to other people (even if extracting these penalties is costly to themselves) after they witness the others acting in a manner they perceive as unfair or selfish. a. b. c. d.

positive consumption; negative consumption positive externalities; negative externalities positive reciprocity; negative reciprocity good choices; bad choices

Answer: c Heading: 12.2B Behavioral economics, reciprocity and cooperation Level: Easy

19. Players with ________ preferences experience a utility ________ when they punish players who have defected. If this change in utility is big enough to outweigh the direct cost to a punisher of inflicting a punishment, then threats of decentralized punishment become credible. a. b. c. d.

neoclassical; boost Lexicographic; drain negative reciprocal; boost positive reciprocal; drain

Answer: c Heading: 12.2B Behavioral economics, reciprocity and cooperation Level: Easy

Table 12.2 Payoffs to Fisher 1 and Fisher 2 in a Common Property Resource Prisoners’ Dilemma ($ of profit) If Fisher 1: No restraint Restraint

If Fisher 2: No Restraint Restraint 5,5 12,4 4,12 10,10

20. Refer to table 12.2, suppose that two people, Fisher 1 and Fisher 2, have access to a fishing ground, and that each may choose to harvest fish in either a restrained or unrestrained fashion.

What is the Nash equilibrium? a. b. c. d.

Fisher 1 and Fisher 2 both choose: no restraint Fisher 1 and Fisher 2 both choose: restraint Fisher 1 chooses restraint and Fisher 2 chooses no restraint Fisher 1 chooses no restraint and Fisher 2 chooses restraint

Answer: a Heading: 12.3B Institutions governing local common property resources Level: Medium

21. Table 12.2 shows an example of: a. b. c. d.

the free rider problem the public good problem tragedy of the Commons efficiency problem

Answer: a Heading: 12.3B Institutions governing local common property resources Level: Easy

22. Norms dictating that any community member earning unusually high income give transfers to members with lower incomes ________ individuals’ incentives to invest and innovate, because individuals must bear ________ of innovation while expecting to enjoy ________ the returns. a. reduce; a fraction of the cost; all of

b. increase; a fraction of the cost; only a fraction c. reduce; the full cost; only a fraction of d. increase; the full cost; all of Answer: c Heading: 12.3C Informal Insurance Institutions Level: Easy

Table 12.3 Payoffs to Villager 1 and Villager 2 in a Road Maintenance Game (R is the benefits of a maintained road and the project requires a total of L hours of labor, therefore R-L/2>0 is the net utility payoff) If Villager 1: Shirks Participates

Shirks 0,0 -L/2, 0

If Villager 2: Participates 0,-L/2 R-L/2,R-L/2

23. According to table 12.3, what is the Nash equilibrium if this game is non-cooperative? a. b. c. d.

Villager 1 chooses shirking, Villager 2 chooses shirking.

Villager 1 chooses shirking, Villager 2 chooses participating.

Villager 1 chooses participating, Villager 2 chooses shirking.

Villager 1 chooses participating, Villager 2 chooses participating.

Answer: a Heading: 12.2A Cooperation in standard game theory Level: Medium

24. According to table 12.3, if it is an assurance game, which of the following statement is true? a. The Nash equilibrium outcome is Villager 1 chooses shirking, Villager 2 chooses shirking. b. Villager 1 will choose to participate if she expected Villager 2 to participate and Villager 2 will choose to participate if she expected Villager 1 to participate. c. When both villagers cooperate in maintaining the road by participating, they both are better off. d. All of the above.

Answer: d Heading: 12.2A Cooperation in standard game theory

Level: Medium 25. Canal-based irrigation systems are a. b. c. d.

non-excludable and rival. excludable and rival. excludable and non-rival. non-excludable and non-rival.

Answer: a Heading: 12.3B Institutions governing local common property resources Level: Medium 26. What is the important lesson that the prisoners’ dilemma game show us?

Answer: Rational individuals may choose not to cooperative, even when all parties involved would benefit from cooperation. They may face such strong incentives to defect that they would fail to cooperative even if they expected others to cooperate.

27. Consider an ultimatum bargaining game, in which two players are asked to divide a fixed sum of money. The first person is given the role of Proposer. She must make a proposal to a second player, called the Responder, regarding how to split the sum between them. If the Responder accepts, the players receive the agreed amounts, but if the Responder rejects the proposal, neither player gets anything.

What would the results look like if both players had strictly neoclassical preferences? When this experiment is conducted in practice to do people exhibit neoclassical preferences? Explain.

Answer: If both players in an ultimatum game had strictly neoclassical utility functions, the Responder would accept any positive amount offered, because he would always consider obtaining something better than nothing. Anticipating this, the Proposer would offer only the smallest possible amount, so as to keep as much as possible for herself. In many experimental studies with this game, in which real people are placed in the roles of Proposer and Responder, however, Proposers offer sums significantly larger than the minimum possible; and when they offer the Responders less than 30 percent of the total sum, the Responders often reject the proposals. Such results have been demonstrated in many countries, even when the sums of money involved are substantial. In post-experiment interviews participants report choosing to reject low offers (despite the personal loss) because they consider them “unfair”. Studies suggest that between 40 and 66 percent of subjects behave in this reciprocal manner, though at least 20 percent behave in the purely self-interested manner suggested by neoclassical game theory.

28. Why do community-level institutions in developing countries merit close study? Provide three reasons.

Answer: The first relates to practical policy analysis: community-level institutional rules and norms constrain people’s choices and may, therefore, alter the way they respond to policy. If we want to understand and predict the possible direct and indirect impacts of policy, therefore, we must understand the nature of the institutional rules that govern people’s choices.

The second reason for studying community-level institutions relates to contemporary debates about program governance: policymakers increasingly wish to harness or replicate successful community-level institutions for improving the implementation of development programs. Study of indigenous local-level institutions may yield insights into how to make the most of reforms that render development programs more “community based.

The final reason relates to the development community’s larger interest in certain institutions.

The study of specific healthy institutions at the local level might yield lessons about how to create the broader array of large-scale healthy institutions required for successful development.

Test Bank, Chapter 13: Policy Governance and Political Economy 1. Government policies have the potential to overcome private market barriers and improve development outcomes; all of the following are reasons why many policies observed in practice fail to achieve their potential except: a. b. c. d.

They are poorly designed Policy makers pursue selfish interests They are poorly implemented They distort private market outcomes

Answer: d Heading:13 Introduction Level: Medium

2. Even in the absence of intervention by governments, people make many choices that contribute to development. Which of the following examples will not contribute to development? a. b. c. d.

Household save and invest to build a better future for their children Households specialize and engage in mutually beneficial trade Public good problems give way to free riders in infrastructure projects Households use financial markets to cope with risk and vulnerability

Answer: c Heading:13.1 Policy, Governance, Politics and Development Level: Medium

3. A rationale for intervention is a reason why ______________, guided only by markets and private institutions, might make ____________ choices. This means that, compared to some societal ideal, they choose to __________________ of some activity. a. b. c. d.

Private actors; socially suboptimal; do either too little or too much Public actors; socially optimal; do too much Private actors; privately suboptimal; do too little Public actors; socially suboptimal; do too little

Answer: a Heading:13.2 Intervention Rationales and Policy Design Level: Medium

4. When choosing whether or not to undertake a _________________, such as adopting a new technology or vaccinating a child, a private decision-maker chooses to undertake the activity if he is aware of the opportunity and if he judges that the ______________ outweigh the _________. a. Non-discrete activity; private benefits; private costs

b. Non-discrete activity; marginal social benefits; marginal social costs c. Discrete activity; private benefits; private costs d. Discrete activity; marginal private benefits; marginal private costs Answer: c Heading:13.2A Private versus Social Decisions Level: Medium

5. When choosing how much of an activity to undertake, such as how much corn to produce, a private decision-maker assesses the marginal private benefit (MPB) and the marginal private cost (MPC) of each additional unit, and chooses the quantity of activity at which the ____________. a. b. c. d.

MPS just exceed the MPC The MPC just exceed the MPS The MPC and the MPS are equal The private benefits outweigh the private costs

Answer: c Heading:13.2A Private versus Social Decisions Level: Medium Figure 13.1 Private Choices Regarding How Much of an Activity to Undertake (a)

(b)

Pesos

(c)

Pesos

Pesos MPC

MPC

MPB MPC

MPB

MPB

Q*

Q

Q*

Q

Q*

Q

6. According to figure 13.1 which of the figures depict a household that face perfectly competitive markets to that the Marginal private benefit is just the price. a. b. c. d.

Figure a Figures a and b Figures b and c Figure c

Answer: a Heading:13.2A Private versus Social Decisions Level: Medium

7. How can we explain the increasing MPC curve in figure 13.1 a?. a. b. c. d.

Increasing marginal returns to labor Increasing marginal returns to production Diminishing marginal returns to production Diminishing marginal returns to consumption

Answer: c Heading:13.2A Private versus Social Decisions Level: Medium

8. The decision-maker maximizes the activity’s net contribution to his ________ by choosing the quantity Q* at which the MPB just _____ the MPC. a. b. c. d.

Net worth; equals Well-being; equals Total surplus; exceeds Consumer surplus; exceeds

Answer: b Heading:13.2A Private versus Social Decisions Level: Medium

9. The marginal social cost (MSC) is: a. b. c. d.

The private cost of producing one more unit The benefit from producing one more unit Total cost to society from producing one more unit The reduction in the decision makers living standards when one more unit is produced

Answer: c Heading:13.2A Private versus Social Decisions Level: Easy

10. When the social decision-maker perceives benefits to each unit of an activity that the private decision-maker does not (in addition to the benefits the private decision-maker perceives), the __________________. a. b. c. d.

The marginal social benefit (MSB) lies above the marginal private benefit (MPB) The marginal private cost (MPC) lies above the marginal social cost (MSC) The marginal private benefit (MPB) lies above the marginal social benefit (MSB) The marginal private benefit (MPB) lies above the marginal private cost (MPC)

Answer: a Heading:13.2A Private versus Social Decisions Level: Medium Figure 13.2 Private and Socially Ideal Choices when Marginal Social Benefit Exceeds Marginal Private Benefit

Pesos

MSB MPB MPC=MSC

QP

QS

Q

11. According to figure 13.2: a. The private decision-maker perceives benefits to each unit of an activity that the social decision-maker does not b. The private decision-maker perceives costs to each unit of an activity that the social decision-maker does not c. The social decision-maker perceives costs to each unit of an activity that the private decision maker does not d. The social decision-maker perceives benefits to each unit of an activity that the private decision-maker does not Answer: d Heading:13.2A Private versus Social Decisions Level: Medium

12. According to figure 13.2 if the market is unregulated: a. The private decision-maker only considers his marginal private benefit and the quantity consumed will be QP b. The private decision-maker only considers his marginal private benefit and the quantity consumed will be Qs

c. The social decision-maker considers the marginal social benefit and the quantity consumed will be QP d. The private decision-maker considers his marginal social benefit and the quantity consumed will be QP Answer: a Heading:13.2A Private versus Social Decisions Level: Medium

13. The benefits a private decision-maker can appropriate are the: a. b. c. d.

Efficient amount of benefits a policy can bring Benefits at the socially optimal quantity Benefits he can claim for himself and dispose of as he wishes.

Benefits a social planner assigns to a participant in a program

Answer: c Heading:13.2A Private versus Social Decisions Level: Medium

14. Public goods are: a. b. c. d.

Rival and non-excludable Rival and excludable Non-rival and non-excludable Non-rival and excludable

Answer: c Heading:13.2B Rationales for intervention and their Implications for Policy Design Level: Easy

15. When consumption by one person does not reduce the potential for consumption by others good is said to be ___________. a. b. c. d.

Rival Non-rival Excludable Non-excludable

Answer: a Heading:13.2B Rationales for intervention and their Implications for Policy Design Level: Easy

16. Positive externalities imply _________by others, that private actors cannot appropriate, and result in a tendency for private actors to undertake _______ of the activity. a. Costs experienced; too much

b. Benefits enjoyed; too much c. Benefits enjoyed; too little d. Costs experienced; too little Answer: c Heading:13.2B Rationales for intervention and their Implications for Policy Design Level: Medium

17. Negative externalities imply _________by others, that private actors do not bear, and result in a tendency for private actors to undertake _______ of the activity. a. b. c. d.

Costs experienced; too much Benefits enjoyed; too much Benefits enjoyed; too little Costs experienced; too little

Answer: a Heading:13.2B Rationales for intervention and their Implications for Policy Design Level: Medium

18. Common property resources are: a. b. c. d.

Non-rival and non-excludable Rival and non-excludable Rival and excludable Non-rival and excludable

Answer: b Heading:13.2B Rationales for intervention and their Implications for Policy Design Level: Easy

19. Under which of the following market structures do producers take the price as given? a. b. c. d.

Monopoly Oligopoly Perfect competition Monopolistic competition

Answer: c Heading:13.2B Rationales for intervention and their Implications for Policy Design Level: Easy

20. Policymakers would like to create institutions that provide good governance, that is: a. They want to divert as many resources as possible toward their policy b. They want to ensure success of their policy c. They would like to eliminate agents who rarely offer anything beneficial

d. They would like to guide agents into productive exercise of their discretion Answer: d Heading:13.3A Introduction Level: Medium

21. How can an agent be held accountable for their choices? a. By hiring agents under a performance contract with superiors to monitor performance b. By hiring agents under a performance contract with only self-supervision to monitor performance c. Through competition when clients have no say in their agents choices d. All of the above Answer: a Heading:13.3D Governance structure design choices Level: Easy

22. Under demand-side financing arrangements, the government provides citizens with financial means to ______ services or goods (e.g. education services or food) _________, rather than providing the services or goods ______.? a. b. c. d.

Sell; to competitive private buyers; directly Sell; to government buyers; indirectly Purchase; from competitive private sellers; directly Purchase; from government suppliers; indirectly

Answer: c Heading:13.3D Governance structure design choices Level: Medium

23. How can foreign aid do more harm than good, from a development standpoint? a. b. c. d.

When it adds to corruption When the majority of the aid does not reach its target population By financing investment in the wrong types areas.

By weakening society’s capacity to hold policy makers accountable

Answer: d Heading: 13.4 The Political Economy of Development Level: Medium

24. Interest groups derive their ________ from their economic power and from the ________of their organization? a. Political power; efficiency b. Political power; effectiveness

c. Political institutions; efficiency d. Political institutions; effectiveness Answer: b Heading:13.4 The Political Economy of Development Level: Medium

25. Why is the consolidation of power likely to reduce development outcomes? a. There is a strong temptation to pursue person interests b. It requires strong character to avoid corruption c. Healthy political institutions find a way to constrain the policymakers’ use of consolidated power d. All of the above Answer: d Heading:13.4 The Political Economy of Development Level: Medium

26. How might private institutions succeed in providing public goods where markets fail? Is this likely to succeed?

Answer: If investment in a public good would truly be socially beneficial, then the society-wide benefits it would produce must exceed the total cost. This means that if the cost of production were shared by all consumers in proportion to the benefits they enjoy, each consumer’s private benefit would exceed his share of the cost. An institution that encourages cooperation among a public good’s consumers, then, may facilitate collective investment in creating the public good.

Unfortunately, such institutions tend to arise only in small, close-knit communities, and they often fail to arise even in such contexts. Markets and private institutions thus frequently fail to support investment even in community-level public goods, and they almost always fail to support the socially optimal quantity of investment in larger-scale public goods.

27. How can agents be held accountable for their choices and under what conditions will various schemes work to ensure feasible accountability?

Answer: An agent’s superiors may hold him accountable by hiring him under a performance contract, through which his pay, promotion or continued employment is tied to high quality and honest performance.

This is possible only if his superiors monitor his performance.

Policymakers might encourage increased accountability to superiors by requiring the use of performance contracting.

An agent may instead be held accountable by his clients. This is only possible when the clients are able to monitor and evaluate his performance and to administer rewards and punishments based on their evaluations. Because the collection and reporting of such performance information involves an investment with public goods qualities, policymakers may have a role to

play in coordinating or assisting the clients in such monitoring activities. Policymakers may also provide clients with information on the agent’s budget or on comparable agents’ performance in other places, thereby increasing the clients’ capacity to evaluate the agent’s performance. If clients have social relationships with the agent, they may be able to administer social rewards for honest and effective service, and to administer social punishments for poor performance. If the agent is a local democratically elected official, then clients may punish poor performance by voting him out of office. Policymakers may also strengthen clients’ ability to punish the agent by tying his pay or promotion to some measure of client satisfaction.

A final mechanism through which agents may be held accountable involves competition. When clients are free to choose among competing agents, and when agents are rewarded in some way for attracting more clients, then clients may hold agents accountable for providing good service by threatening to take their business elsewhere.

28. Good policy implementation choices require varying combinations of what five key “inputs”?

Answer: 1. Motivation – The objectives that agents seek to maximize must be closely related to the objectives policymakers’ would like them to maximize.

2. Local-information - If policy designs are to be tailored to local circumstances and if services are to be delivered in ways that meet individual needs, agents must have access to local information and must be allowed the discretion to make use of it.

3. Resources - The resources they require may include textbooks, chalk, thermometers, medicines, computers, vehicles and fuel.

4. Capacity - The capacity individuals require may be a function of their innate skills, as well as the education, training and experience they have acquired.

5. Coordinating oversight - Expenditure decisions made in many localities must be rendered consistent with central-level budget constraints if policymakers are to avoid large budget deficits.

Test Bank, Chapter 14: Policy Analysis 1. How do policy analysts encourage and support good policy choices? a. b. c. d.

By illuminating the benefits and costs that are likely to emerge from any policy By correctly predicting the best policy outcomes By keeping costs as low as possible By explaining only the most basic elements of a policy and ignoring any future changes in design to keep things simple and easy to understand

Answer: a Heading:14 Introduction Level: Medium

2. A policy can include all of the following except? a. b. c. d.

Taxes on imports Projects to build wells for drinking water Creation of a microfinance institution All of the above are potential policies

Answer: d Heading:14.1 Policy Analysis Concepts and Objectives Level: Medium

3. A policy’s direct effect includes___________. a. b. c. d.

The effects of a policy on third parties Changes in market prices resulting from a policy Changes in behavior in people directly affected by policy Includes all of the effects from a policy including the spillovers

Answer: c Heading:14.1 Policy Analysis Concepts and Objectives Level: Medium

4. Which of the following effects from a policy would be considered a spillover effect? a. After a famer adopts a new technology food supply increases, which lowers the price he charges for selling his crop b. A farmer adopts a new technology and enjoys better profits c. Any effect on the well-being of groups other than the directly affected d. All of the above are spillover effects Answer: c Heading:14.1 Policy Analysis Concepts and Objectives Level: Medium

5. Which of the following effects from a policy would be considered a feedback effect? a. After a famer adopts a new technology food supply increases, which lowers the price he charges for selling his crop b. A farmer adopts a new technology and enjoys better profits c. Any effect on the well-being of groups other than the directly affected d. All of the above are feedback effects Answer: a Heading:14.1 Policy Analysis Concepts and Objectives Level: Medium

6. All of the changes in living conditions experienced by anyone in society as a result of a policies introduction are called__________. a. b. c. d.

Social benefit Impacts Social costs Policy value

Answer: b Heading:14.1 Policy Analysis Concepts and Objectives Level: Medium

7. The social cost of a policy includes_________. a. b. c. d.

The currency value of any resources used in policy implementation Any deterioration of well-being as a result of a policy Explicit costs to the user form the policy Negative externalities and does not include changes to the directly affected

Answer: b Heading:14.1 Policy Analysis Concepts and Objectives Level: Medium

8. The budgetary cost of a policy includes_________. a. The currency value of any resources used in policy implementation b. The currency value of any resources used in policy implementation, less any fees or taxes collected c. The social costs from a policy d. Spillover and feedback effects Answer: b Heading:14.1 Policy Analysis Concepts and Objectives Level: Medium

9. A policy’s objectives include_________. a. b. c. d.

Setting the target group Social costs Typically involves improving the well-being for society as w whole Spillover and feedback effects

Answer: a Heading:14.2 Seven Questions to Guide Policy Analytic Research Level: Medium

10. What is meant by the governance structure of a policy? a. b. c. d.

Involves identifying the decision makers and manager of a policy Is only relevant in the case of a public good Includes program eligibility requirements Includes the nature of all regulations imposed on the benefits from a policy

Answer: a Heading:14.2 Seven Questions to Guide Policy Analytic Research Level: Medium

11. Policies often look different on the ground than they do on paper to gain a better understanding of the true implications of a policy analysts look to the policy’s ____________. a. b. c. d.

De facto design details Implementation outcomes The paper policy just requires more detailed study Efficiency outcomes

Answer: b Heading:14.2 Seven Questions to Guide Policy Analytic Research Level: Medium

12. When policies seek to achieve their objectives by channeling benefits to their target groups, it can be susceptible to two types of targeting failures, ____________ and __________. a. b. c. d.

Over-coverage of the target group,; under-coverage to unintended groups Leakages to the target group; under-coverage of the non-target group Leakages to non-target groups; non-coverage of the target group Externalities; feedback effects

Answer: c Heading:14.2 Seven Questions to Guide Policy Analytic Research Level: Medium

13. Some policies seek to regulate behavior, however many target individual may fail to change their behavior because___________ or ______________. a. Poor monitoring or small penalties; they would have made the same choices with or without the policy. b. Strong monitoring and large penalties; the policy is underfunded c. Distance to the regulator; strong disincentives d. Externalities distort the market; feedback effects Answer: a Heading:14.2 Seven Questions to Guide Policy Analytic Research Level: Medium

14. The intended social benefits that motivate policymakers to expend resources on the policy are a policy’s__________. a. b. c. d.

Marginal Benefit Private social benefit Objectives Economic surplus

Answer: c Heading:14.2 Seven Questions to Guide Policy Analytic Research Level: Medium

15. Policymakers are interested in the effects on the behavior, or choices, of those directly affected because________. a. b. c. d.

It can encourage socially desirable behavior The behavioral responses may crowd out private market activities It can create spillover and feedback affects All of the above are reasons policymaker care about the behavior of those directly affected by the policy

Answer: d Heading:14.2 Seven Questions to Guide Policy Analytic Research Level: Medium

16. Which of the following is an example of an unintended consequence of a policy? a. b. c. d.

When a woman’s role in family decision making triggers domestic violence Increase sense of security/ decrease in vulnerability Increased school attendance Increased woman’s role in family decision making

Answer: a

Heading:14.2 Seven Questions to Guide Policy Analytic Research Level: Medium

17. Some policies only achieve their objectives indirectly through spillover effects for example: a. A program provides loans to small business in the hopes that increased labor demand will increase wages for unskilled labor b. Agricultural research and extension programs who aim to increase the well-being of adopting famers c. A resulting increase in food prices from a policy mean some poor become worse off as a result of the policy d. When a cash transfer program increases some incomes of the non-poor.

Answer: a Heading:14.2 Seven Questions to Guide Policy Analytic Research Level: Medium

18. When spillover effects are worked out in _______, they are only likely to be significant if the program is __________ relative to the market a. b. c. d.

Private institutions; large Private institutions; small Markets; small Markets; large

Answer: d Heading:14.2 Seven Questions to Guide Policy Analytic Research Level: Medium

19. Sometimes feedback effects can alter the intended outcomes of a policy, for example: In response to a policy that _______ the price of rice a farmer may see profits _______ however as more famers demand more labor profit will decrease as wages for unskilled labor __________. a. b. c. d.

Increases; increase; increases Increases; decrease; decrease Decreases; increase; increase Decreases; decrease; decrease

Answer: a Heading:14.2 Seven Questions to Guide Policy Analytic Research Level: Medium

20. Policymakers often find it useful to divide their research results in one of the following categories except: a. A detailed policy description including implementation plan

b. Discuss the nature and size of the benefits, both direct and indirect c. Describe the nature and size of the costs, both direct and indirect d. Describe the long-run plan to achieve sustainability Answer: d Heading:14.3 Putting the Seven Questions to Work Level: Medium 21. What are the fundamental objectives in policy analysis?

Answer: To identify, measure and understand policies’ benefits and costs; to assess how these benefits and costs might differ between alternative policies; and to assess how a given policy’s benefits and costs might change with small adjustments in design, with larger reforms of design or governance, with transportation to new locations or populations, or with the adoption of complementary policies.

22. What are the seven questions policy maker use to guide a poly analyst through comprehensive study of a policy’s benefits and costs?

Answer: 1. What are the policy’s objectives?

2. What design details define the policy on paper?

3. What design details define the policy’s impact in practice?

4. What sorts of individuals, households or firms are directly affected by the policy, how large are these groups and how might the identity and sizes of groups change over time?

5. What effect does the policy have on the well-being and behavior of the directly affected in the short, medium and long run?

6. When changes in the behavior of the directly affected induce changes in markets, institutions and the physical environment, what spillover and feedback effects result, and how do these effects vary over time?

7. What are the budgetary costs of the policy, and how do they vary over time?

Test Bank, Chapter 15: Targeted Transfer Programs 1. Conditional cash transfer programs differ from traditional targeted transfer programs in that they___________. a. Require poor families to meet some means test threshold for poverty b. Require poor families to do something to receive the money such as send kids to school c. Conditional cash transfer payments suffer from many more leakages than traditional targeted transfer programs d. Conditional cash transfer programs have do not encourage investments in human capital as traditional targeted transfers do Answer: b Heading:15.1A Targeted transfers and development Level: Medium

2. The specific objectives of individual targeted transfer programs can differ in all of the following ways except: a. b. c. d.

Reducing current poverty Target level of income Targeted behaviors Target populations

Answer: a Heading:15.1B Targeted transfers program objectives Level: Medium

3. Eligibility rules can include all of the following except: a. b. c. d.

Means testing Proxy means tests Poverty score cards Target lifestyles

Answer: d Heading:15.1C Targeted transfers program design and implementation Level: Medium

4. Some programs employ proxy means tests which: a. b. c. d.

Are less restrictive than a categorical restriction Are more restrictive than means testing Employ short questionnaires often called “poverty score cards” Uses easy to observe characteristics such as having at least one child

Answer: c Heading:15.1C Targeted transfers program design and implementation Level: Medium

5. Rationed food subsidies: a. Cost the government more the smaller is the difference between the subsidized and market price b. Allows households to buy limited quantities of staple foods at lower-than-market prices c. Allows households to buy unlimited quantities of staple foods at lower-than-market prices d. Gives baskets of food to poor households Answer: c Heading:15.1C Targeted transfers program design and implementation Level: Medium

6. Government structure design decisions include: a. b. c. d.

Decisions regarding eligibility requirements and transfer sizes Decisions regarding individual household enrollment in the transfer program Decisions that directly impact household Deciding how best to exclude the most rural and thus expensive households

Answer: a Heading:15.1C Targeted transfers program design and implementation Level: Medium

7. In order for a program to achieve significant poverty reduction, policy makers hope to avoid two types of targeting failure: a. Non coverage of the poor, also called an inclusion error and leakage to the non-poor also called an exclusion error b. Non coverage of the poor, also called an exclusion error and leakage to the non-poor also called an inclusion error c. Over-coverage of the poor, also called an inclusion error and under-coverage of the poor also called an exclusion error d. Over-coverage of the poor, also called an exclusion error and under-coverage of the poor also called an inclusion error Answer: b Heading:15.2A Participation decisions and targeting concerns Level: Medium

8. Job counseling services, nutrition lectures and opportunities to meet with other participants are examples of _______, while the time, money and psychological costs of traveling to application

and distribution sites, waiting in line, complying with behavioral conditions, and dealing with program personnel are examples of ____________: a. b. c. d.

Private benefits of participation; the private costs of participation Marginal private benefits; marginal private costs Indirect private benefits; external private costs Indirect public benefits; indirect public costs

Answer: a Heading:15.2A Participation decisions and targeting concerns Level: Medium

9. All of the following are reasons that a poor household may fail to participate in a transfer program except: a. b. c. d.

They are unaware the program exists They fail the eligibility test They perceive the costs to outweigh the benefits of the program They perceive the benefits outweigh the costs of the program

Answer: d Heading:15.2A Participation decisions and targeting concerns Level: Medium

10. What is meant by the Coady et al. (2004) study that found that 25% of transfer programs were regressive? a. b. c. d.

A larger share of the program benefits went to poor rather than non -poor The fees charged went up as the participants use more of the program A larger share of the program benefits went to non-poor rather than the poor The fees charged to private households for the transfer programs decreases as the program is used.

Answer: c Heading:15.2A Participation decisions and targeting concerns Level: Medium

11. The increase in a household’s well-being resulting from participation in a targeted transfer program becomes larger (all else equal) when? a. The program raises the household’s non-labor income by more; or when it requires to households to undertake fewer costly behaviors b. The program raises the household’s labor income by more; or when it requires the household to undertake more costly behaviors c. The program raises the household’s asset value; or simply increases their labor hours

d. The program lowers the threshold to qualify for the program; or includes more poor families into the program Answer: a Heading:15.2B Effects of participating on household well-being and behavior Level: Medium

12. Official transfer sizes are a measure of a transfer program’s _______? a. b. c. d.

Marginal cost Impact on the poor Availability Generosity

Answer: d Heading:15.2B Effects of participating on household well-being and behavior Level: Medium

13. If F is the quantity food to which households are entitled, Ps is the subsidized price the household has to pay to obtain the good, and Pu is the unsubsidized price, what is the formula for the cash value of any transfer? a. b. c. d.

(Pu + Ps)*F (Pu - Ps)*F (Ps -Pu)*F F + (Ps + Pu)

Answer: b Heading:15.2B Effects of participating on household well-being and behavior Level: Medium

14. All of the following could be reasons why transfer program participants’ non-labor fails to increase by the full amount of the transfer except: a. b. c. d.

Participants have to pay for transportation to collect benefits Local officials requiring “kickbacks” Participants have to pay for the eligibility testing themselves Budget constraints lead local program implementers to distribute transfers smaller than the official size

Answer: c Heading:15.2B Effects of participating on household well-being and behavior Level: Medium

15. The most obvious impact on a household who participates in transfer program is the increase in non-labor income, which can _____________.

a. b. c. d.

Tighten budget constraints and induce substitution effects Relax budget constraints and induce substitution effects Tighten budget constraints and induce income effects Relax budget constraints and induce income effects

Answer: d Heading:15.2B Effects of participating on household well-being and behavior Level: Medium

16. When households consume more leisure time as a results of a transfer program, they reduce their labor supply, and the transfer is said to __________. Theoretically this decrease in labor supply could cause wages to ___________. a. b. c. d.

Crowd out labor income; decrease Crowd out non-labor income; increase Crowd out labor income; increase Crowd out non-labor increase; decrease

Answer: c Heading:15.2B Effects of participating on household well-being and behavior Level: Medium

17. When a transfer program benefits lead to more influence in the family, __________effects are introduced. Indeed empirical studies have confirmed the presence of _______________effect where the benefits targeted to specific household member stick to those members. a. b. c. d.

Inter-household; target Intra-household; flypaper Inter-household; flypaper Intra-household; target

Answer: b Heading:15.2B Effects of participating on household well-being and behavior Level: Medium

18. When a targeted transfer program is able to respond quickly to shocks is said to exhibit ________ a. b. c. d.

Efficiency Flexibility in targeting Flexibility in funding Flexibility in few collection

Answer: b Heading:15.2C Targeted transfers and vulnerablility Level: Medium

19. Cash and food transfer programs may have important effects on local markets for food, but only when the programs are ________ relative to the local markets. In such cases the ___________ in price ________consumers and ___________ sellers. a. b. c. d.

Small; increase; helps; hurts Small; decrease; helps; hurts Large; decrease; hurts; helps Large; increase; hurts; helps

Answer: d Heading:15.2D Targeted transfers and markets Level: Medium

20. Social norms and institutions guide some families or communities to provide mutual assistance. So a household that can receive a transfer may be unable to receive the private help they would normally receive. This public transfer is said to: a. b. c. d.

Replace public transfers Substitute public safety net transfers Substitute private safety net transfers Crowd out private transfers

Answer: d Heading:15.2E Targeted transfers and institutions Level: Medium

21. Analysts often rely on shares of a program’s budget that goes to administrative costs as a measure for the efficiency of a transfer program. However ____________ are still possible, which can __________a transfer programs efficiency. a. b. c. d.

Leakages to the non-poor; decrease Leakages to the poor; increase Injections to the non-poor; not effect Injections to the poor; decrease

Answer: a Heading:15.2G Targeted transfers program budgetary costs Level: Medium

22. Why might a conditional cash transfer (CCF) program that requires school attendance as the precondition to qualify fail to increase enrollment rates significantly? a. The conditions may be poorly enforced b. Enrollment rates may already be high

c. The cash transfers pay is not able to overcome the liquidity constraints of school attendance. d. All of the above are reasons why a CCF may fail to increase school enrollments Answer: d Heading:15.4B To condition or not?

Level: Medium

23. Why is a food transfer unlikely to increase food consumption by the full amount of the transfer? a. If there is a food shortage a cash transfer may do a better job increasing consumption b. The food transfers reduce leakages to the non-poor c. Some of the free food can substitute for food the recipient would have purchased, and can now be used to increase spending on other goods. d. All of the above are reasons why a food transfer may not increase food consumption by as much as intended Answer: c Heading:15.4C Cash versus food?

Level: Medium

24. How can increasing community participation in the governance of a transfer program increase a program’s efficiency? a. b. c. d.

Allows information to be disseminated more easily about the program The cost of enforcement increases Local decision makers have better information about household’s eligibility Local decision makers have access to worse information than a government bureaucrat

Answer: c Heading:15.4D Involve the community?

Level: Medium

25. Why might a government prefer a food transfer over a cash transfer? a. b. c. d.

The cost of a cash transfer is more expensive than a food transfer The cost of providing a food transfer is greater than providing a cash transfer A food transfer increases food consumption by the full amount of the transfer A food transfer may do a better job a preventing leakages to the non-poor

Answer: d Heading:15.4C Cash versus food?

Level: Medium

26. Although at first glance targeted transfer payments don’t appear very “developmental” in recent years these programs have become very important. Why are targeted transfer programs a necessary part of development?

Answer: First, the development community has come to recognize that some groups have little potential to share directly in the benefits of economic growth. Second, the development community now recognizes how greatly well-being falls when people are vulnerable to shocks.

Third, accumulating evidence suggests that liquidity and insurance constraints prevent the poor from investing, and thus that transfers directed to the poor may speed economic growth. Fourth, recent innovations in the design of transfer programs have expanded their potential to produce sustained benefits. For example, conditional cash transfer programs – which condition poor families’ receipt of benefits on their sending children to school – simultaneously raise beneficiaries’ current income levels and encourage them to invest in human capital.

27. Why might transfer programs fail to raise participants’ non-labor income by the full amount of the transfer?

Answer: Unfortunately, participants’ non-labor income may rise by less than the full official transfer because participants must pay for transport to collect benefits, local officials demand kickbacks, or budget constraints lead local program implementers to distribute transfers smaller than the official size.

28. When a transfer program strengthens incentives towards behaviors that are rewarded by eligibility, they induce incentive effects. Give two examples of an intended behavior incentive effect and at least one example of an unintended incentive.

Answer: Some incentive effects are fully intended. Designers of conditional cash transfer programs, for example, design behavioral conditions with the aim of increasing school enrollment rates. Some incentive effects are unintended, however, and sometimes undesirable.

For example, when geographic targeting limits eligibility to households residing in certain villages, they may encourage families to migrate into the relatively poor target villages or to send their children to live with relatives there. Similarly, when programs tie the size of family allowances to the number of children in a family, they may encourage parents to have more children.

Test Bank, Chapter 16: Workfare 1. Programs that provide opportunities for poor households to earn income by performing lowskill labor in public works projects are called____________. a. b. c. d.

Welfare program Earned income tax credit program Workfare programs Unconditional targeting transfer programs

Answer: c Heading:16 Introduction Level: Medium

2. Self targeting allows the government to _____________. a. b. c. d.

Target only those who are deserving of help Discourage leakage to the non-poor at a high cost Encourage leakages to the non-poor at a low cost Add to asset creation speeding economic growth and long-run poverty reduction

Answer: d Heading: 16.1A The multi-dimensional appeal of workfare programs Level: Difficult

3. All of the following are the primary objectives of most workfare programs except: a. b. c. d.

Immediate reduction of poverty for participants Reduction in the vulnerability for households that might fall into the need in the future Increased economic growth To give poor people skills to find their own job

Answer: d Heading: 16.1B Workfare program objectives Level: Medium

4. Many workfare programs share one thing in common: a. That they are capital intensive meaning they use a relatively small amount of labor relative to capital b. That they are capital intensive meaning they use a relatively large amount of labor relative to capital c. That they are labor intensive meaning they use a relatively small amount of capital relative to labor

d. That they are capital intensive meaning they use a relatively large amount of capital relative to labor Answer: c Heading: 16.1C Workfare program design and implementation Level: Medium

5. All of the following are reasons why a household would choose to participate in a workfare program except: a. b. c. d.

If they already have a job as a high skilled worker at a less than competitive wage If they are aware of the program If they believe the benefits outweigh the costs If they are deemed eligible

Answer: a Heading: 16.2A Workfare program design and targeting Level: Medium

Figure 16.1 C

C

Jane

Mary

M+wa2(T-H) M+wp(T-H)

M+wp(T-H)

a

M+wa1(T-H)

b

a M

M

Ha Hp

T

H

T

H

6. According to figure 16.1 which person faces a higher wage in her alternative activities? a. b. c. d.

Jane Mary Neither the wages are the same There is not enough information to tell who earns a higher wage for alternative activities

Answer: b Heading: 16.2A Workfare program design and targeting Level: Medium

7. According to figure 16.1 which person will choose to participate in a workfare programs? a. b. c. d.

Jane Mary Neither Both

Answer: a Heading: 16.2A Workfare program design and targeting Level: Medium

8. According to figure 16.1 which of the following is true? a. b. c. d.

wa2 < wp > wa1. wa2 < wp < wa1. wa2>wp> wa1.

There is not enough information to tell

Answer: c Heading: 16.2A Workfare program design and targeting Level: Medium

9. According to figure 16.1 how much can each woman consume if they don’t participate in the workfare program? a. b. c. d.

Each woman can consume M Mary can consume at point A; Jane can consume at point B Mary can consume at point A; Jane can consume at point A There is not enough information to tell

Answer: c Heading: 16.2A Workfare program design and targeting Level: Medium

10. In order for a workfare program to be self targeting, it must offer a wage ______ than what’s available to poor households currently and ________ that what is available to a wealthier household? a. b. c. d.

Higher; lower Higher; higher Lower; lower Lower; higher

Answer: a Heading: 16.2A Workfare program design and targeting Level: Easy

11. In order for a workfare program to be self targeting, it must offer a ______ wage than the alternative wage available to poor households and a ________wage than the alternative wage available to wealthier households? a. b. c. d.

Higher; lower Higher; higher Lower; lower Lower; higher

Answer: a Heading: 16.2A Workfare program design and targeting Level: Easy

12. Why might self targeting in a workfare program fair to prevent benefits from leaking to nonpoor households? a. If wages are set too low b. If some members of a non-poor household have little opportunity to earn income in alternative activities c. If some members of a non-poor household have many opportunities to earn income in alternative activities d. If the means tests fail to weed out the non-poor households Answer: b Heading: 16.2A Workfare program design and targeting Level: Medium

13. All of the following are potential fixed costs a poor household may incur from participating in a workfare program, except: a. b. c. d.

Hourly babysitting fee Travel cost Any cost that does not rise as the hours worked in the program rises Tools

Answer: a Heading: 16.2A Workfare program design and targeting Level: Easy

Figure 16.2

C

C

e b

f b c

Fixed monetary cost

a

e

d T

c a

Fixed time cost

H

d

T

H

14. According to figure 16.2 in each panel the potential participant faces a fixed participation cost. Mary faces a fixed monetary cost such as _________ and Jane faces a fixed time cost such as _____________. a. b. c. d.

The cost of buying a bus ticket; the time it takes to walk to work The cost of tools; time spent at workfare job Time on the bus to work; Tools needed for the job Explicit monetary payment for getting the higher paying job; leisure time given up in exchange for work hours

Answer: a Heading: 16.2A Workfare program design and targeting Level: medium

15. According to figure 16.2 in each panel the potential participants face a fixed participation cost. Who would participate in this workfare program? a. b. c. d.

Jane Mary Both Neither

Answer: d Heading: 16.2A Workfare program design and targeting Level: Difficult

16. According to figure 16.2 in each panel the dashed line represents___________. a. Alternative work opportunities b. Workfare job opportunities

c. Indifference curves d. Fixed monetary cost required for the workfare job Answer: b Heading: 16.2A Workfare program design and targeting Level: Medium

17. According to figure 16.2 in each panel the solid line (baT) represents___________. a. b. c. d.

Alternative work opportunities Workfare job opportunities Indifference curves Fixed monetary cost required for the workfare job

Answer: a Heading: 16.2A Workfare program design and targeting Level: Medium

18. According to empirical data on targeting outcomes, the results have been anything but perfect, they reveal that: a. b. c. d.

80% of funds are going to non-poor 60-70% of participants are from poor households 20% of the participants were from poor households The work requirement played no role in preventing participation by the poor.

Answer: b Heading: 16.2A Workfare program design and targeting Level: Medium

19. Workfare program participation raises a participants’ well-being more, all else equal, the _________ the program wage exceeds the wage in the participant’s alternative activity and the __________are the worker’s fixed costs of participation. : a. b. c. d.

Smaller amount; smaller More; larger More; smaller Smaller amount; larger

Answer: c Heading: 16.2B Direct impacts of workfare participation on well-being and behavoior Level: Medium

20. Participation in a workforce program can alter participants’ behavior in all of the following ways except: a. Relax liquidity constraints

b. Alter the way a woman’s interests enter into household decision making c. Increase income d. Tighten liquidity constraints Answer: d Heading: 16.2B Direct impacts of workfare participation on well-being and behavoior Level: Medium

21. Workfare programs are _______ likely than other targeted transfer programs to generate spillover effects through labor markets, because they may significantly __________. a. b. c. d.

More; increase local supply of labor Less; increase local demand for labor More; increase local demand for labor Less; decrease local supply of labor

Answer: c Heading: 16.2D Workfare and labor markets Level: Medium

Figure 16.3 Labor Market Impacts of Workfare-Induced Demand Shifts Under Two Sets of Labor Market Conditions

(a)

(b)

Wage

Wage

LS Q

Q

wm

LS

w2 w1

wc

TD

TD

LD

o

a

b

Low-skill Labor

LD o

Low-skill Labor

22. According to figure 16.3(a) if the labor market is categorized by a market wage for low skill labor that is stuck above equilibrium at Wm , which area represents unemployment? a. b. c. d.

0- a 0-b a-b 0- (a+b)/2

Answer: c Heading: 16.2D Workfare and labor markets Level: Medium

23. According to figure 16.3which graph depicts a labor market that is categorized by under and unemployment? a. b. c. d.

Figure 16.3A Figure 16.3B Neither figure shows unemployment There is unemployment in both figure A and B

Answer: a Heading: 16.2D Workfare and labor markets Level: Medium

24. According to figure 16.3(a) the workforce program is show as _______, and in figure 16.3(b) the workforce program is shown as ____________? a. b. c. d.

A rightward shift from LD to TD; A rightward shift from LD to TD A leftward shift from TD to LD; A rightward shift from LD to TD A rightward shift from LD to TD; A leftward shift from TD to LD A leftward shift from TD to LD; A leftward shift from TD to LD

Answer: a Heading: 16.2D Workfare and labor markets Level: Medium

25.If a workfare program faces a fixed budget limit, B, then total program costs are largely fixed in advance and policy analysts may wish to ask: How many workers are likely to obtain employment through the program? If program administrators have set the program wage w and the target ratio n of non-wage to wage costs, then the budget will finance the creation of roughly _______worker-days of employment. a. B x [w(1+n)] b. B/[w(n)] c. B/[w(1+n)]

d. [w(1+n)] /B Answer: c Heading: 16.2D Workfare and labor markets Level: Medium

26. Work requirements have more bite – proving more effective at discouraging leakage and encouraging work – when they are specified in ____________, which tie pay to the quantity of tasks a worker completes, rather than _______, which tie pay to hours of presence on the job. a. b. c. d.

Daily terms; completion terms Piece rate terms ; time rate terms Completion terms; hourly terms Time rate terms; completion rate terms

Answer: b Heading: 16.3 B Supervision and piece rates Level: Medium 27. Under what conditions can workforce programs reduce vulnerability for workers?

Answer: When households are confident that the programs will enroll them, and quickly provide

them with benefits, in the event of crop failure, job loss or other shocks that reduce income.

Workfare programs are capable of reducing vulnerability for workers whose income in regular economic activities is subject to shocks, but only when the programs’ wage levels are well chosen, the programs truly guarantee employment, and the programs are expected to remain in place for the foreseeable future.

28. Discuss the cost and benefits or raising a program wage.

Answer: The most important benefit of increasing the program wage is improvement in the program’s impact on participants’ well-being; with a higher wage the program is more effective at raising a participant’s family out of poverty. Raising the wage may bring at least four additional benefits. The wage increase may improve coverage among poor households, as program benefits begin to outweigh the high fixed participation costs faced by some poor households. Higher wages may increase pressure on private employers to raise wages, generating greater spillover benefits for poor workers who do not participate, especially if the program seeks to guarantee employment at the program wage Larger wage payments (holding the number of participants constant) imply greater increases in participants’ consumer demands, increasing the program’s stimulus to the local economy. Finally, paying higher wages may raise productivity in infrastructure construction, by improving morale and reducing the potential for strikes and labor conflicts, as seems to have been the case with some South African workfare programs (Adato and Haddad, 2001).

29. Why do emergency employment programs get criticized for creating infrastructure of low quality or duration?

Answer: Created and implemented very rapidly, these programs often succeed in providing significant assistance to poor workers’ families. One of the primary reasons for the poor infrastructure performance of emergency employment programs is the need to implement projects quickly.

Test Bank, Chapter 17: Agricultural Market Interactions and Reforms 1. When governments tax, subsidize or regulate market transactions they are _________ in the market a. b. c. d.

disturbing interrupting intervening improving

Answer: c Heading: 17 Agricultural market interventions and reforms Level: Easy 2. In the 1930s, 1940s and 1950s many developing countries intervened in agricultural markets in order to _________. a. b. c. d.

Keep food prices down for the poor Keep food prices high to benefit farmers Keep food prices down for urban workers Encourage growth in export businesses

Answer: c Heading: 17.1A Background and focus Level: medium 3. Developing countries tend to ________ agriculture, while developed countries tend to _______ agriculture, keeping prices down and ____________ export profits of developing countries. a. b. c. d.

Tax; subsidize; limiting Subsidize; subsidize; limiting Tax; tax; encouraging Subsidize; tax; limiting

Answer: a Heading: 17.1A Background and focus Level: medium 4. Policies that lower consumer prices relative to free-market levels are said to impart___________. a. Consumer surplus b. Producer subsidies c. Free-market subsidies

d. General consumer subsidies Answer: d Heading: 17.1B Design and implementation of agricultural market intervention and reforms Level: medium 5. As a result of agricultural pricing policies prices paid by consumers may______ and the price received by producers may________. a. b. c. d.

Increase; decrease Decrease; increase stay the same; increase stay the same; stay the same

Answer: b Heading: 17.1B Design and implementation of agricultural market intervention and reforms Level: medium 6. Taxes that are assigned as percentages of total sales value are known as ________. a. b. c. d.

Unit taxes Excise taxes Ad valorem taxes Lump-sum taxes

Answer: c Heading: 17.1B Design and implementation of agricultural market intervention and reforms Level: medium 7. When governments impose import quotas, they require______. a. b. c. d.

Importers to obtain licenses for importing, and grant only a limited number Exporters to obtain licenses for exporting, and grant only a limited number Consumers to obtain licenses for purchasing goods producing abroad Sellers to obtain licenses for selling imported goods.

Answer: a Heading: 17.1B Design and implementation of agricultural market intervention and reforms Level: medium 8. When governments build up a buffer stock, they are attempting to: a. Cause shortages b. Cause surpluses c. Stabilize prices

d. End shortages and surpluses Answer: c Heading: 17.1B Design and implementation of agricultural market intervention and reforms Level: medium 9. When governments set up a marketing board: a. They give rights to buy and sell crops to a private business enterprise b. It is intervening in a more comprehensive way, granting a state owned entity the exclusive rights to buy and sell crops c. They are attempting to raise the price that seller receive for their crops d. They are giving farms the option to sell directly to foreign buyers Answer: b Heading: 17.1B Design and implementation of agricultural market intervention and reforms Level: medium 10. Policies are said to provide consumers with ________ subsidy when the costs of the consumer subsidy are borne by the marketing board. Policies are said to provide consumers with _______ subsidy when governments push some or all of the cost of the consumer subsidy onto domestic producers. a. b. c. d.

General; producer Implicit; explicit Consumer; general Explicit; implicit

Answer: d Heading: 17.1B Design and implementation of agricultural market intervention and reforms Level: medium 11. When explicit export taxes are imposed on exports the results is that export crop’s domestic price will________. This new tax effectively ________domestic producers and ___________domestic consumers. a. b. c. d.

Decrease; taxes; subsidizes Decrease; subsidizes; taxes Increase; taxes; subsidizes Increase; subsidizes taxes

Answer: a Heading: 17.2A Market-level analysis: taxes and subsidies Level: medium

12. The sizes of an export tax’s impacts on production, consumption, exports and the government budget depend on what primarily? a. b. c. d.

The autarky price Elasticities of the local supply and demand schedules The world price Whether there is a world shortage or surplus for that crop

Answer: b Heading: 17.2A Market-level analysis: taxes and subsidies Level: medium 13. How do quantitative export restrictions and an equivalent export tax rate differ? a. There is no difference b. Under an export tax money is generated for the government and with a quantitative restriction money is generated for domestic consumers c. Under an export tax money is generated for the government and with a quantitative restriction money is generated for domestic exporters d. Under an export tax money is generated for exporters and with quantitative restrictions money is generated for the government.

Answer: c Heading: 17.2A Market-level analysis: taxes and subsidies Level: medium 14. When a marketing board pays farmers an administered producer price less than the local export price (LEP) it is _____________? a. b. c. d.

Explicitly subsidizing farmers Explicitly taxing famers Implicitly subsidizing farmers Implicitly taxing farmers

Answer: d Heading: 17.2A Market-level analysis: taxes and subsidies Level: medium 15. Pan-territorial pricing encourages a shift in the geographic distribution of export crop production from _______ to ________ remote locations and a redistribution of income from _____ remote to ______ remote producers. a. More; less; less; more b. More; less; more; less

c. Less; more; less; more d. Less; more; more; less Answer: c Heading: 17.2A Market-level analysis: taxes and subsidies Level: Difficult 16. A uniform increase in the price of a good ______ the real income (and well-being) of households that are net _____ of it and ______ the real income of households that are net _______. a. b. c. d.

lowers; sellers; raises; buyers lowers; sellers; reduces; buyers raises; buyers; raises; sellers raises; sellers; reduces; buyers

Answer: d Heading: 17.2C The distribution of direct impacts on real income and well-being Level: Medium 17. A household, that is net buyer of a good, experiences an increase in the price and responds by consuming less of this and other goods shows: a. b. c. d.

The substitution effect The income effect The liquidity effect The intra-household effect

Answer: b Heading: 17.2D Behavioral responses of the directly affected Level: Medium 18. The net effect of a good’s price increase on total real income in a region is to ____ total real income if the region is a net ________, implying that total production in the region exceeds total consumption. a. b. c. d.

Raise; exporter Raise; importer Lower; exporter Lower; importer

Answer: a Heading: 17.2E Spillover and feedback effects Level: Medium

19. Which of the following spillover effects from a price increase would be a negative? a. b. c. d.

Increased wages reduce profits If aggregate income rises then demand for all other normal goods increase Increase in demand for complimentary non-labor tools Decreased wages increase profits

Answer: a Heading: 17.2E Spillover and feedback effects Level: Medium 20. Which of the following results of a price increase is most likely to lead to an increase in economic growth? a. b. c. d.

One time changes in the level of income Profound changes to the distribution of income A significant increase in efficiency improvements One time increase in wages

Answer: c Heading: 17.2E Impacts on economic growth?

Level: Medium 21. All of the following results of a price increase can lead to an increase in economic growth except? a. Increases in income among liquidity constrained farmers may allow them to climb out of poverty and invest b. Profound changes to the distribution of income c. A significant increase in efficiency improvements d. Allows the country to take better advantage of their comparative advantage Answer: b Heading: 17.2E Impacts on economic growth?

Level: Medium 22. The analysis of a policy design change is __________ complicated than the analysis of a reform because a policy change involves ________changes. a. b. c. d.

More; one or a small number of More; many Less; the same number of Less; many

Answer: a

Heading: 17.3A General observations Level: Medium 23. What was the experience of reformers in the 1980s and 1990s in Asia, Africa and the former Soviet Union a. Asia experienced the expected growth, the former Soviet Union surpassed expectations and Africa grew less than expected b. Asia experienced the expected growth, the former Soviet Union did not grow at all and Africa’s growth was negative c. Asia experienced the less than their expected growth, the former Soviet Union did not grow at all and Africa’s growth was positive but minimal d. Asia experienced the expected growth, the former Soviet Union experienced negative growth and Africa’s growth was positive but minimal Answer: d Heading: 17.3B Agricultural market liberalizations in the 1980s and 1990s Level: Medium 24. How does a quantitative restriction work to limit exports? a. By maximizing the impact of international demand on the domestic market, it reduces domestic prices, as well as local production and export quantities, while increasing local consumption. b. It has very different effects as an export tax c. By limiting the impact of international demand on the domestic market, it reduces domestic prices, as well as local production and export quantities, while increasing local consumption. d. It decreases production so that both domestic and foreign consumption decreases.

Answer: c Heading: 17.2A Market-level analysis: taxes and subsidies Level: Medium 25. The model of profit-maximizing production decisions suggests that if fertilizer is an important input to rice production, then an increase in the fertilizer price _________ the quantity of rice that farmers _______ to the market at any price, shifting the local rice supply schedule to the ________. a. b. c. d.

Reduces; supply; left Increases; supply; right Increases; demand; left Reduces; demand; left

Answer: a Heading: 17.2A Market-level analysis: taxes and subsidies Level: Medium 26. How can increasing the export tax rate may even cause tax revenue to fall?

Answer: The sizes of an export tax’s impacts on production, consumption, exports and the government budget depend on the elasticities of the local supply and demand schedules (as well as the size of the tax). If local supply and demand schedules are both highly elastic, then the tax reduces exports a great deal, as the tax leads to a large contraction in the quantity produced and a large increase in the quantity purchased domestically. If this shrinkage in the tax base is strong enough, then imposing the new tax may generate little revenue, and increasing the tax rate may even cause tax revenue to fall.

27. Discuss the potential benefits and costs of replacing a marketing board with a fully competitive and efficient private marketing sector.

Answer: Over their history, marketing boards developed a reputation for poor governance and inefficient execution of transport, wholesale and retail activities. Facing weaker incentives to work hard and avoid waste than competitive private traders, marketing board bureaucrats diverted funds to corrupt uses and performed these marketing activities at costs well above the efficient level. In effect, this inefficiency caused public sector transfer costs (i.e. the costs of public sector collection, transport, grading and distribution of crops to buyers) to exceed private sector transfer costs. Holding constant the prices marketing boards pay to producers (and the prices they receive from international buyers), higher transfer costs imply lower net tax revenue collection or higher marketing board budget deficits.

We must, however, recognize two reasons why the liberalization of marketing boards may reduce efficiency in marketing activities, at least in the short run. First, liquidity constraints might prevent investments that are necessary for the emergence of a competitive and efficient private marketing sector. The second reason why the elimination of a marketing board need not uniformly increase efficiency in marketing activities is that financial market failures might prevent the replacement of public sector agricultural credit by private sector credit on comparable terms. The fundamental source of friction and failure in private credit markets is the potential for borrowers to default.

28. How can an increase in the price of a good introduce intra-household effects?

Answer: If the burdens from the good’s purchases or the profits from the good’s sales are differentially attached to women in households’ mental accounts, then the price increase may introduce intra-household effects, as it alters women’s influence in household decision-making.

Test Bank, Chapter 18: Infrastructure Policies and Programs 1. In which of the following categories is the disparity between poor and developed countries the greatest? a. b. c. d.

Access to improved water source Access to telecommunications infrastructure Access to improved sanitation facilities Electricity consumption per capita

Answer: d Heading: 18.1A Infrastructure stocks Level: Medium 2. Infrastructure assets contribute to development not merely by existing, but by generating infrastructure services, such as: a. b. c. d.

Transportation of goods and people Provision of clean water and the flow of electricity All of the above are examples of infrastructure services

Answer: d Heading: 18.1B Infrastructure services in developing and developed countries Level: Easy 3. What is the ultimate objective guiding infrastructure policy? a. b. c. d.

To improve the transportation of goods and people To provide improved water services To improve well being All of the above

Answer: c Heading: 18.1B Infrastructure policy objectives Level: Medium 4. What is the difference between a connection fee and a use fee? a. b. c. d.

Connection fees are paid by consumers while use fees are paid by firms A use fee is a one-time fee will a connection fee is ongoing There is no difference between a connection fee and a use fee A use fee is ongoing and a connection fee is a one-time fee

Answer: d

Heading: 18.1C Infrastructure policy design and implementation Level: Medium 5. When infrastructure services are provided efficiently, then ______________ services are provided at a given cost or _____________ services are provided at ________________. a. b. c. d.

The most; the same amount of; the lowest possible cost The most; the least amount of; the lowest possible cost A given amount; the same amount; the government’s approved costs A large variety of; a few; the lowest possible cost

Answer: a Heading: 18.1C Infrastructure policy design and implementation Level: Medium 6. Which of the following is not likely to diminish efficiency? a. b. c. d.

Lack of adequate expertise and information Lack of adequate operation and maintenance budgets When government bureaucrats are not adequately held accountable When households are required to pay a user fee for the infrastructure service

Answer: d Heading: 18.1C Infrastructure policy design and implementation Level: Medium 7. Project selection decisions include decisions to: a. Define the more detailed technical specifications b. Determine the general type quality and location of the infrastructure assets to be constructed c. Oversee procurement of labor and materials required for operation d. Determine the fees charged for use of services Answer: b Heading: 18.1C Infrastructure policy design and implementation Level: Medium 8. Project design decisions include decisions to: a. Define the more detailed technical specifications b. Determine the general type quality and location of the infrastructure assets to be constructed c. Oversee procurement of labor and materials required for operation

d. Determine the fees charged for use of services Answer: a Heading: 18.1C Infrastructure policy design and implementation Medium 9. _________, are those goods are services people use in the absence of new infrastructure. a. b. c. d.

Displaced services or goods Inferior services or goods Substitute services or goods Obsolete services or goods

Answer: c Heading: 18.2A New infrastructure service use and benefits Level: Medium 10. All of the following are reasons why the poor are less likely to use new infrastructure than the non-poor except: a. Because some poor families will place a higher weight on food staples over using new infrastructure b. When connection and user fees are insignificant c. Because they tend to have smaller farms and fewer complimentary assets d. Poor families tend to live in more remote locations and are likely to lack physical access to some new infrastructure services Answer: b Heading: 18.2B Who uses infrastructure services Level: Medium 11. Use-rates among the poor may _________, all else equal, as fees ______, service quality _________, physical access to the services by the poor becomes _____________: a. b. c. d.

Rise; rise; falls; easier Fall; decrease; falls; easier Drop-off; rise; falls; more difficult Rise; rise; fall; more difficult

Answer: c Heading: 18.2B Who uses infrastructure services Level: Medium 12. Which of the following is a private cost of current infrastructure service?

a. b. c. d.

An increase in food prices More time may be required to use the new infrastructure service An increase in wage costs Maintenance

Answer: b Heading: 18.2B Who uses infrastructure services Level: Medium 13. User fees may reduce the net benefits that users derive from new infrastructure in two ways ________ and _____________. a. By reducing purchasing power; by motivating them to cut back on use b. By increasing the quality of the service; by decreasing the length of time the service will be available c. By decreasing the quality of service; by increasing the quantity of services d. By removing positive externalities; by eliminating the free rider problem Answer: a Heading: 18.2C Effects of infrastructure service use on users’ well-being Level: Medium 14. According to the World Bank if the government had spent ________ to maintain the roads in Africa over a decade it could have saved them ________ in read reconstruction. a. b. c. d.

$1 million; $5million $1 million; $12 million $1 billion; $12 billion $12 billion; $45 billion

Answer: d Heading: 18.2C Effects of infrastructure service use on users’ well-being Level: Medium 15. All of the following affects a household’s decision to put a particular infrastructure service to use and how much of the service to use except. a. b. c. d.

The price of the service The degree of appreciation of the benefits of that service The positive externalities that spill over to third parties The nature of complimentary policies

Answer: c Heading: 18.2C Effects of infrastructure service use on users’ well-being Level: Medium

16. All of the following are examples of positive spill-over effects from an investment in infrastructure except: a. Lower food prices b. Lower variability in food availability c. Higher wages d. Reduce profits to firms unable to use the new infrastructure program Answer: d Heading: 18.2D Other direct effects of infrastructure service use Level: Medium 17. All of the following are examples of negative externalities from an investment in infrastructure except: a. b. c. d.

Dam projects sometimes displace people Increased efficiency of other programs from improved sanitation services Road improvements can reduce safety for pedestrians One community’s domestic water and sanitation infrastructure may pollute the drinking water of downstream communities

Answer: b Heading: 18.2D Other direct effects of infrastructure service use Level: Medium 18. All of the following have been discussed as potential rationales for intervention except: a. b. c. d.

Public goods problems Liquidity constraints externalities Economies of scale problems

Answer: d Heading: 18.2E Private sector supply of infrastructure services and rationales for intervention Level: Medium 19. How do policy makers evaluate the investment in a new community level asset? a. b. c. d.

When there is significant demand When the average income in the community is below the poverty line When the social benefits outweigh the social costs When the costs outweigh the benefits for a private firm

Answer: c Heading: 18.2E Private sector supply of infrastructure services and rationales for intervention Level: Medium

20. Subsidies are: a. Equal to expenditures less any revenue gathered by charging fees or requiring contributions b. Equal to the total costs of investment operation and maintenance c. Equal to the total costs of investment operation and maintenance plus fees charged for use d. The cost of advertising the new services offered Answer: a Heading: 18.2F Budgetary costs Level: Medium 21. Which of the following is a problem associated with raising fees from a subsidized level to a level that just covers the cost of service provision? a. Reduction of infrastructure sector’s net drain on the government budget b. The additional revenue can be used to expand the quantity or quality of the service c. Reduces the use of services by poorer households where the social cost outweighs the social benefit d. May reduce the use to a point where the marginal social benefit of one more unit is greater than the marginal social cost of one more unit.

Answer: d Heading: 18.3B Raising fees Level: Medium 22. Which of the following is a benefit associated with raising fees from a subsidized level to a level that just covers the cost of service provision? a. Reduction of infrastructure sector’s net drain on the government budget b. Reduction in positive spillovers c. Increases the use of services by poorer households where the social cost outweighs the social benefit d. May reduce the use to a point where the marginal social benefit of one more unit is greater than the marginal social cost of one more unit.

Answer: a Heading: 18.3B Raising fees Level: Medium 23. What is volume targeting? a. By far the least common approach for getting subsidies to the poor

b. May take the form of decreasing block tariffs c. Average fees rise with the volume of services a household uses d. An example would be when households pay a premium for the first quantities used then a lower price as more is consumed Answer: c Heading: 18.3B Raising fees Level: Medium 24. What is administrative targeting? a. b. c. d.

Involves the use of means tests or categorical restrictions Involves offering different levels of quality Involves different prices for different quantities By far the most common approach for getting subsidies to the poor

Answer: c Heading: 18.3B Raising fees Level: Medium 25. Why would giving ownership of an infrastructure investment community make sense? a. b. c. d.

It guarantees a source of funding for maintenance The local community will have access to more technical information It gives the community the incentive to maintain the infrastructure It does not make sense to turn over control of maintenance and operations to local communities

Answer: c Heading: 18.3C Governance of operation and maintenance Level: Medium 26. Describe how switching from using substitute services to new infrastructure may improve well-being? (Include at least three new infrastructure services) Answer: Domestic water infrastructure - When new infrastructure brings water closer to home, it frees up valuable time. When it purifies water, it protects households against many waterborne illnesses.

Sanitation infrastructure assets include latrines or toilets for communal use, sewer systems that transport waste water from homes and businesses to disposal or treatment points, wastewater treatment systems and solid waste disposal systems. New sanitation infrastructure may thus increase convenience, comfort and privacy, as well as improving health by reducing disease transmission. Freed up time and improved health, again, may also increase income.

Investments in irrigation infrastructure include construction of wells, pumps, dams, reservoirs, canals and pipes that help collect and distribute water for use in agricultural production. In the absence of such infrastructure, farmers must either carry water or rely on rainfall to water their crops. New irrigation infrastructure can raise farmers’ yields and reduce the variability of their yields by reducing losses to inadequate rainfall. It may allow farmers to shift into the cultivation of higher value crops or higher yielding varieties of traditional crops, to cultivate a second or third crop per year Electricity infrastructure - The creation of new electricity infrastructure may thus free up money and time, improve health and increase educational attainment, income and consumption of entertainment.

Transport infrastructure includes roads, bridges, culverts, railroads, depots, seaports and airports, all of which contribute to the movement of goods and people. It has the potential to spread benefits to many groups, by expanding farm and non-farm business opportunities, raising wages, reducing consumer prices, stabilizing prices and supplies, and improving access to services.

Communication infrastructure includes cell phone towers, land line phone or internet networks and call exchanges. Increasingly, improved communication technologies allow people to send money, make payments and save at lower cost and with greater security.

27. Even when households choose to use new infrastructure services, they may fail to derive all the benefits policymakers might hope for, because they do not put the services to intended uses.

Give three examples of users who employ a new infrastructure service but fail to enjoy all of its intended benefits.

Answer: Households might fail to derive the full health benefits of new water infrastructure if they fail to protect water from contamination during transportation and storage, if they fail to use the treated water consistently (even when at school or in the marketplace), if they use too little water or if they fail to develop good hand washing habits. Similarly, electricity use fails to deliver its full potential health benefits if households use the electricity for lighting but continue to cook over wood fires. Improved roads also deliver fewer benefits to users who opt to walk along them rather than to purchase transport from new bus and truck services.

Test Bank, Chapter 19: Education 1. What is the ultimate goal of governments and NGO’s when creating education policies and programs? a. b. c. d.

To draw more children into schools To encourage children to remain in school for longer Increase the value of children are learning in school To Speed development by encouraging investment in human capital

Answer: d Heading: Introduction Level: Medium 2. Gross enrollment rates (GERs) in low and middle income countries have achieved nearly universal primary enrollment because? a. b. c. d.

Some students are younger than primary school age who are included in the GER Every child in low and middle now attends school There are some students included in the GER who are older than primary school age There are more classroom seats than there are students

Answer: c Heading: 19.1A Education investments in developing countries Level: Difficult

3. What is the different between Gross and Net Enrollment rates (GERs and NERs)? a. b. c. d.

The GER will tend to understand the true enrollment rates The NER will tend to overstate the enrollment rates The NER is calculated by taking the number of students/ the class seating capacity The NER takes into account students’ age.

Answer: d Heading: 19.1A Education investments in developing countries Level: Medium 4. Why is it that despite growing enrollment in schools what students ultimately learn is quite worse in poorer in countries? a. Teachers are under trained and often absent from school b. Class sizes are too small due to rural areas c. Lack of competition among students

d. Textbooks are free so undervalued Answer: a Heading: 19.1A Education investments in developing countries Level: Easy 5. What are educational stocks? a. b. c. d.

Stock market shares of companies that provide educational services Levels of education among workers accumulated through past education investments New investments in human capital New school assets

Answer: b Heading: 19.1A Education investments in developing countries Level: Easy 6. Hundreds of studies have been conducted that shows that earning go up by _____ for every _______? a. b. c. d.

10-20%; additional $1000 spent on education 25-50%; 1 year of additional schooling completed 10-20%; 1 year of additional schooling completed 25-50%; additional $1000 spent on education

Answer: c Heading: 19.1B Ultimate and Proximate Objectives in Education Policy Level: Medium 7. Which of the following is not a Proximate Goal? a. b. c. d.

Increasing the number of children who start school Improve the lives of current students when they become adults Increase the number of years children complete before leaving school Increase the value of children learn while in school

Answer: b Heading: 19.1B Ultimate and Proximate Objectives in Education Policy Level: Medium 8. Household schooling opportunities are defined by supply-side and demand-side policy implementation outcomes. All of the following are supply-side elements except? a. Tuition b. Quality and content of educational services c. Number of students in each class

d. Primary language of instruction Answer: a Heading: 19.1C Primary and Secondary Education Policy Design and Implementation Level: Medium 9. Household schooling opportunities are defined by supply-side and demand-side policy implementation outcomes. All of the following are Demand-side elements except? a. Tuition b. Cost of textbooks and other required materials c. Any factor that influences a family’s desire to send their children to school without influencing the nature of the services d. Primary language of instruction Answer: d Heading: 19.1C Primary and Secondary Education Policy Design and Implementation Level: Medium 10. When does the efficiency of with which educational services are implemented increase? a. b. c. d.

When tuition rises When the cost of providing a given set of educational opportunities falls When the indirect costs of educational services are maximized When subsidies to the school decrease

Answer: b Heading: 19.1C Primary and Secondary Education Policy Design and Implementation Level: Medium 11. Policymakers influence some implementation outcomes indirectly through school management choices including all of the following except? a. b. c. d.

Decisions regarding the numbers of teachers needed in each school Textbook choices Hiring, firing, promotion and management of teachers Decisions regarding school fees

Answer: d Heading: 19.1C Primary and Secondary Education Policy Design and Implementation Level: Medium 12. Why is sending a child to school considered to be an investment decision? a. Because a parent would only send a child to school if the perceived costs outweighed the benefits

b. Because many of the costs must be borne now, while many benefits accrue only in the future c. Because in most developing countries the funding from schools come from private investments d. Because it can raise a family’s status Answer: b Heading: 19.2A School Enrollment Decisions Level: Medium 13. The Opportunity cost of sending a child to school_________? a. Includes the tuition and fees the school charges b. May be low because some of the time a child spends in school comes out of time the child could have been earning wages c. Can be high because of the cost of transportation to and from school d. May be high because it may require their mother or older siblings to reallocate time from income generating activities to child care Answer: d Heading: 19.2A School Enrollment Decisions Level: Medium 14. All of the following have been empirically proven to increase enrollment rates in most circumstances except: a. b. c. d.

Increasing physical access to schools Changing the curriculum philosophy Reducing liquidity constraints Improve information regarding the link between education and increased earnings

Answer: b Heading: 19.2A School Enrollment Decisions Level: Medium 15. Which of the following is a long-run direct effect of schooling? a. b. c. d.

Greater future earning power Speaking a common language imbue them with a shared national identity Improved communication skills means technology disseminates more quickly Lower crime rates mean safer neighborhoods

Answer: a Heading: 19.2b The Direct and Indirect effects of schooling Level: Easy

16. Which of the following is a long-run indirect effect of schooling? a. Greater future earning power b. Subsidies for transportation to and from school could mean increased income and consumption now c. The status of the family increases d. Increased voting improves the democratic process Answer: d Heading: 19.2b The Direct and Indirect effects of schooling Level: Easy 17. What can school managers do to improve the educational services that they provide? a. b. c. d.

Allocate teaching time across different subjects Decide what effort to expend in preparing lesson plans Improve training and mentoring programs teachers receive Deciding how frequently to report to work

Answer: c Heading: 19.2c Governance and the quality of teaching and learnning Level: Easy 18. How were empirical studies on the determinants of learning conducted in the past? a. b. c. d.

With regressions of average test scores on various measures of school inputs With regressions of average math score on numbers of textbooks With regressions that included every relevant variable With current data and future data only.

Answer: a Heading: 19.2c Governance and the quality of teaching and learnning Level: Medium 19. What is the problem with using retrospective studies to look at the determinants of learning? a. The omitted variable problem means that the causal effect of some variables are understated b. The omitted variable problem means that the causal effect of some variables are overstated c. The over-inclusion variable problem means that the causal effect of some variables are understated d. The over-inclusion variable problem means that the causal effect of some variables are overstated

Answer: b Heading: 19.2c Governance and the quality of teaching and learning Level: Difficult 20. Which of the following would tend to raise the average cost for the government providing a complete primary education? a. b. c. d.

By increasing the share of cost burden on parents By accomplishing the goals of increased enrollment and retention B y reducing waste and corrupt diversion of resources When grade repetition rates fall.

Answer: b Heading: 19.2d Budgetary costs Level: Medium 21. All of the following are examples of market failure in providing education and require government intervention except: a. b. c. d.

Education generates positive externalities If schooling choices are liquidity constrained If households have perfect information about the costs and benefits of schooling If education is considered vital for achieving poverty reduction

Answer: c Heading: 19.2e Rationales for intervention Level: Difficult 22. What is the primary benefit of eliminating school fees? a. An increased in enrollment especially from children of wealthier households b. A decrease in corruption as schools no longer require voluntary contributions from parents c. The impact on most households income is significant d. An increase in enrollment especially from children of poorer households Answer: d Heading: 19.3c Eliminating school fees Level: Medium 23. Which of the following is a significant down-side to eliminating school fees? a. An increased in enrollment especially from children of wealthier households b. A increase in corruption as schools require voluntary contributions from parents c. The impact on most households income is insignificant

d. An increase in enrollment especially from children of poorer households Answer: b Heading: 19.3c Eliminating school fees Level: Medium 24. All of the following are reasons why a school based management system may fail to achieve its goals except: a. The committee may not be given enough power to effectively manage the school b. The committee may not be as motivated or have as much local information as government bureaucrats c. The motivation of committee members may be less than ideal d. All of the above are reasons a school based management system could fail Answer: b Heading: 19.3d School based management reforms Level: Medium 25. What is the primary purpose of creating an education voucher program? a. b. c. d.

An increased in enrollment especially from children of wealthier households To encourage competition among schools for government resources To encourage competition among schools for students An increase in enrollment especially from children of poorer households

Answer: c Heading: 19.3e Voucher-based privatization Level: Medium 26. Why should government bureaucrats want to transfer authority over school management to school management committees?

Answer: Policy makers hope to improve the way school resources are used by bringing the decision making closer to where the resources are actually employed. Committees may be able to operate more efficiently than government bureaucracies saving resources and allowing for greater expansion of the education system.

27. What are the potential benefits and costs of eliminating school fees?

Answer: The primary potential benefit of eliminating school fees is an increase in enrollment, especially among children from poorer households. However when policymakers abolish official

school fees, local school managers may respond to the loss of fee revenue (which is sometimes their main source of discretionary funding) by demanding "voluntary contributions" from parents. Further the decrease in cost for a family may be too small to make any real impact.

28. How have many low and middle income countries have achieved nearly universal primary enrollment according to the gross enrollment rates (GERs) presented in the text?

Answer: While it is true that efforts by governments of developing countries have increased enrollments through various programs, there are reasons why this statement is misleading. The primary GER is calculated by taking the number of children enrolled in primary school (usually from school administrative records) and dividing by the number of children of primary school age (from a census or survey). They may exceed 100 percent, because some children in primary school are older than primary school age, either because they started school late or have repeated a grade.

Test Bank, Chapter 20: Agricultural Research and Extension 1. Why does technical change in agricultural merit the concern of development economists? a. Technical change can be an important source of inflation b. In a developing country where a small percentage of the population are involved in agriculture, technical change is less important than other development goals c. It has the ability to reduce poverty for many groups within a developing country d. Technical change will be required to sustain inflation in food prices Answer: c Heading: 20.1A Agricultural technical change and development20 Level: Medium

2. What are the costs associated with a “zero tillage” cropping system? a. Farmers use tiles to precisely measure the area between each crop so the cost is labor hours b. Farmers leave crop residue at the end of harvest and plant the next crop without removing it, costing the famer extra labor and irrigation c. Farmers leave crop residue at the end of harvest and plant the next crop without removing it, costing the famer extra difficulty with pest control d. Farmers remove crop residue and use it as fertilizer instead of traditional fertilizers, costing the farmer in reduced crop yield

Answer: c Heading: 20.1B The nature and diversity of technical change in agriculture Level: Medium

3. Which of the following is not a benefit to developing countries of the “Green Revolution”? a. Using safer chemicals as fertilizer reduced output but improved crop quality b. It was founded on the development of new varieties of wheat, rice and corn that increased per-acre yields c. New seed varieties produce crops with shorter growing season, which reduce farmers exposure to late-season droughts d. New seed varieties yield crops that are more resistant to transportation and retain more nutrients Answer: a Heading: 20.1B The nature and diversity of technical change in agriculture Level: Medium

4. How can managers of agricultural research institutions influence the direction of technical change? a. b. c. d.

They choose which crops to work on They choose plant characteristics They choose which capital goods to develop Managers of agricultural research institutions can do all of the above to influence the direction of technical change

Answer: d Heading: 20.1B The nature and diversity of technical change in agriculture Level: Easy

5. Which three groups are crucial to putting technical change in agriculture into practice? a. b. c. d.

Managers, laborers, and farmers Agricultural researchers, extension agents, and end users Farmers, bankers, and government bureaucrats Managers of agricultural research institutions, large corporations, and small businesses

Answer: b Heading: 20.1C The process of technical change in agriculture Level: Medium

6. Which of the following would not be classified as an extension agent? a. b. c. d.

Farmers, when they share knowledge about technologies with their neighbors Any actor who in forms farmers about the use of new technologies Agricultural researcher in a developed country All of the above could be considered an extension agent

Answer: c Heading: 20.1C The process of technical change in agriculture Level: Medium

7. When do agricultural research and extension agents actually introduce change into economic systems? a. b. c. d.

When the up-front cost of the new technologies outweighs the perceived benefits When farmers adopt the new technologies When farmers are introduced to new farming technologies When the government introduces new technologies to the population

Answer: b Heading: 20.2 The Economics of technical change in agricaulture Level: easy

8. All of the following are types of knowledge that are important to a farmer in the decision to adopt a new technology except? a. b. c. d.

The farmer must know of the technology’s existence The famer has to learn how to use it The farmer has to understand the benefits and costs of employing it on a farm All of the above are important types of knowledge for a famers adoption decision

Answer: d Heading: 20.2A Agricultural technology adoption decisions Level: easy

9. Which of the following is not considered an up-front cost of adopting a new technology? a. b. c. d.

The cost of purchasing or constructing capital structures The cost of learning Fees for extension services Labor costs for utilizing the new technology

Answer: d Heading: 20.2A Agricultural technology adoption decisions Level: easy

10. Several studies have confirmed that as the time and effort needed to adopt new technology_________ farmers tend to ________, undertaking less experimentation of their own? a. b. c. d.

Increases; under-adopt Increases; free-ride Decreases; over-adopt Decreases; under-adopt

Answer: b Heading: 20.2A Agricultural technology adoption decisions Level: medium

11. Circumstantial sensitivity in agricultural research means that: a. All a developing country has to do is borrow the research already done by developed countries b. If a new strain of wheat doubles the yield in India it will do so in every other climate c. Agricultural technologies deliver results that vary with agro-climate conditions d. Technologies offering excellent results in some areas should never be altered Answer: c Heading: 20.1C Agricultural technology adoption decisions Level: medium

12. Agricultural extension agents include any actors who: a. b. c. d.

Informs or teach farmers about the use of new technologies Farmers who use new technology Extend the life of current technology Agricultural researchers who develop new strains of crops

Answer: a Heading: 20.1C Agricultural technology adoption decisions Level: medium

13. Adoption rates differ among males and females and development programs can ______ gender gaps by: a. b. c. d.

Widen; developing better technologies only for men’s crops Widen; developing better technologies for women’s cops Shrink; developing better technologies for women’s cops Shrink; developing better technologies only for men’s crops

Answer: a Heading: 20.2A Agricultural technology adoption decisions Level: medium

14. Adoption rates of new technologies will tend to ________ for farms when output prices ___________ or when labor and fertilizer costs _______. a. b. c. d.

Increase; decrease; decrease Increase; increase; decrease Decrease; increase; increase Decrease; decrease; decrease

Answer: b Heading: 20.2A Agricultural technology adoption decisions Level: medium

15. Let p, q, and w represent the crop price, fertilizer price and harvest-season wage. Which of the following is an expression for the expected change in profits from adopting a new technology?

a. Δπ = p ΔY + q ΔF - w ΔL b. Δπ = p ΔY – q ΔF + w ΔL c. Δπ = p ΔY + q ΔF + w ΔL d. Δπ = p ΔY – q ΔF - w ΔL Answer: d

Heading: 20.2A Agricultural technology adoption decisions Level: medium

16. As a farm’s access to crop insurance ________ the ______any additional risk will deter adoption of a new technology. a. b. c. d.

Increase; more Increase; less Decrease; probability will remain the same that Decrease; less

Answer: b Heading: 20.2A Agricultural technology adoption decisions Level: medium

17. A farmer who anticipates chronic short-term liquidity constraints would, therefore, be ______ likely to adopt a technology that ___________ annual planting season input and financing requirements a. b. c. d.

more; leaves unchanged more; raises less; decreases less; raises

Answer: d Heading: 20.2A Agricultural technology adoption decisions Level: medium

18. Which of the following effects from adopting a new agricultural technology is considered a spillover effect? a. b. c. d.

When technical change leads to an increased crop yield When technical change lowers the cost of labor for a farm When technical change leads to an increase in food supply lowering the price of food When technical change leads to an decrease in farm profit

Answer: c Heading: 20.2B Direct and indirect effects of technology adoption Level: medium

19. Which of the following effects from adopting a new agricultural technology is considered a negative spillover effect? a. When technical change leads decreases crop yield b. When technical change lowers the cost of labor for a farm c. When technical change leads to an increase in food supply lowering the price of food paid by consumers d. When technical change leads to an decrease in farm profit for non-adopting farms as food prices decrease Answer: d Heading: 20.2B Direct and indirect effects of technology adoption Level: medium

20. When governments intervene by effectively identifying and punishing producers who use protected ideas without license, it is dealing with the problem of _______ in order to ______the profits of private firms. a. b. c. d.

Non-excludability; decrease Non-rivalry; increase Non-excludability; increase Non-rivalry; decrease

Answer: c Heading: 20.2C Agricultural research investment and rationales for intervention Level: medium

21. Many new agricultural technologies are better characterized as toll goods rather than pure public goods meaning: a. b. c. d.

Non-excludable and non-rival Non-rival but excludable Non-excludable but rival in consumption Rival and excludable

Answer: b Heading: 20.2C Agricultural research investment and rationales for intervention Level: medium

22. Which of the following can be an explanation for the slow technological progress throughout the world? a. The free rider problem b. Rivalry in basic research c. Asymmetric information in applied research

d. Moral hazard from basic research Answer: a Heading: 20.2C Agricultural research investment and rationales for intervention Level: medium

23. Which of the following is a rationale for intervention in agricultural extension? a. b. c. d.

Privately held firms rarely provide extension services even when profitable Farmers may be unaware of the potential benefits from extension services There are significant negative externalities associated with extension services Because free riding in extension services is not possible intervention is less important than in other areas.

Answer: b Heading: 20.2D Agricultural extension service supply and rationales for intervention Level: medium

24. The internal rate of return (IRR) indicates the interest rate at which the discounted stream of benefits would just equal the discounted costs; thus _______ internal rates of return indicate ______ investments. ? a. b. c. d.

Lower; no change to Lower; better Higher; worse Higher; better

Answer: d Heading: 20.3D How valuable are public sector investments in agricultural research and extension?

Level: medium

25. What is meant by Pull financing ? a. b. c. d.

Paying for civil service inputs Offers rewards for specified new technologies Does not require the new technologies to ever be implemented One farm is a government trial farm hoping to “Pull in new farms”

Answer: b Heading: 20.3E Re-directing research subsidies from push toward pull mechanisms Level: medium

26. How does the tacit nature of technological knowledge complicate the job of an extension agent?

Answer: Knowledge is tacit when it cannot be imparted from one person to another simply by handing over a written list of instructions or a physical input in which the technology is embodied (e.g. a seed). To convey adequate working knowledge of how to use a new variety of soybean, for example, the agent may need to train a farmer through hands-on demonstrations, guided practice and other teaching methods.

27. Discuss the direct and indirect effects of adopting a new agricultural technology. (Include at least 2 examples of positive effects and negative effects for each case).

Answer: To fully appreciate the impact of technology adoption in agriculture, we must examine the impacts on average income, the variability of income, nutrition, health and environmental conditions, not only for adopting farmers, but also for rural workers, entrepreneurs in the rural non-farm sector, urban consumers and non-adopting farmers.

28. What are some rationales for government intervention in agricultural research?

Answer: For technologies embodied in inputs, and tailored for use in regions where farmers are

non-poor and unhindered by liquidity constraints, the private sector may face robust incentives for investment in research, even in the absence of intervention. In some cases, creation and enforcement of patent laws and plant breeders’ rights systems may enhance these incentives.

The private sector is unlikely, however, to develop technologies that are not embodied in inputs, or technologies that are embodied in inputs but intended for use by poor and liquidityconstrained farmers. Policymakers may be able to improve research system outcomes by subsidizing the development of such technologies.

Test Bank, Chapter 21: Microfinance 1. Which of the following terms describe programs which offer credit and other financial services to clients that are poorer than are typically serviced by commercial banks? a. b. c. d.

Charity Programs NCLB Programs Microfinance programs Savings and loan associations

Answer: c Heading: Introduction Level: Medium

2. Microfinance programs were first created by Nobel prize winning economist Muhamed Yunus in what decade? a. b. c. d.

1950’s 1960’s 1970’s 1990’s

Answer: c Heading: 2.1 The Microfinance idea Level: Medium

3. A microenterprise is ______. a. b. c. d.

A small family run business Has relatively easy access to capital to finance investments A car rental company offering smaller sized vehicles A small business with at least three employees

Answer: a Heading: 21.1A The Microfinance idea Level: Easy

4. What does it mean for a microfinance institution (MFI) to be financially sustainable? a. b. c. d.

It has earned a large enough grant to operate without interest and fees from loans Its revenue from interest and fees exceeds its operating costs Donors have guaranteed the funds will remain available It has earned the funds through commercialization

Answer: b Heading: 21.1B Microfinance program objectives

Level: Medium

5. Contemporary microfinance programs are incredibly diverse which of the following are the same for all MFIs? a. b. c. d.

Eligibility Types and sizes of loans Recruitment practices Goal is to improve lives of poor people

Answer: d Heading: 21.1C Microfinance program design and implementation Level: Easy

6. Most microfinance programs are loans consisting of? a. b. c. d.

A single loan A larger loan than is typically given out in a commercial bank A series of loans that are increasing in size An indefinite series of loans that remains the same size over time

Answer: c Heading: 21.1C Microfinance program design and implementation Level: Medium

7. Microfinance loans can be as small as_____ on interest free loans for beggars and have been reported to be as high as_____ in Mexico? a. b. c. d.

$100; $20,000 $100; $5,000 $1.00; $1000 $3.00; $7,000

Answer: d Heading: 21.1C Microfinance program design and implementation Level: Medium

8. The penalty for failing to repay a microfinance loan can be? a. b. c. d.

Jail time Seizure of personal property Denial of access to future microfinance loans There is no penalty for failing to repay a microfinance loan

Answer: c Heading: 21.1C Microfinance program design and implementation

Level: Easy

9. Why is microcredit considered by many to be effective and self targeted tool for reducing poverty? a. b. c. d.

Low income earners are liquidity constrained High income earners are not likely to be liquidity constrained High income earners are unlikely to find the high interest rates attractive All of the above are correct.

Answer: d Heading: 21.2A Microcredit program participation Level: Easy

10. What is the primary benefit of using microfinance for business investment? a. b. c. d.

Status Higher current income To find opportunities to start new businesses Future business profits

Answer: d Heading: 21.2A Microcredit program participation Level: Easy

11. All of the following are reasons why a person may choose not to take advantage of microcredit except? a. b. c. d.

Households living in rural areas Potential borrower as few skills Loans are too small Future loans can be for larger amounts

Answer: d Heading: 21.2A Microcredit program participation Level: Easy

12. As interest rates increase the cost of borrowing_____, profit for microenterpirses_____ and participation in microfinance programs__________? a. b. c. d.

increases; increases; increases increases; decreases; decreases decreases; decreases; increases increases; stays the same; decreases

Answer: d Heading: 21.2A Microcredit program participation

Level: medium

13. As minimum loan sizes _____, or as loan repayment schedules become ____stringent participation in microfinance programs__________? a. b. c. d.

increase; more; increases increase; less; decreases decrease; less; increases decrease; more; decreases

Answer: c Heading: 21.2A Microcredit program participation Level: medium

14. While the goal of almost all microcredit programs is to raise well-being, which of the following could hurt a family as a result of taking a microloan? a. b. c. d.

Having to work more hours to repay the loan Increased consumption of durable goods Increase food consumption If the loan is taken by a women it may increase her voice in the family

Answer: a Heading: 21.2B Direct Effects on Well-Being Level: Easy

15. While the goal of almost all microcredit programs is to raise well-being, which of the following could hurt a family as a result of taking a microloan? a. Having to work more hours to repay the loan b. A sound investment could not work out because of poor demand c. Illness may or poor investments may cause the family to reduce consumption further to repay the loan plus interest d. All of the above Answer: d Heading: 21.2B Direct Effects on Well-Being Level: Easy

16. Why is it difficult to empirically measure the impact of a microfinance program? a. b. c. d.

Microfinance programs are too young to measure the impacts There are too few examples of microfinance in practice to create any significance The time it takes to for investments to payoff are different in each case Incomes are measured in different currencies

Answer: c Heading: 21.2B Direct Effects on Well-Being Level: Medium

17. Which of the following exemplifies benefits of microcredit programs which would be considered a spillover effect? a. A small village’s telecommunication services improves as a result of a microentrepreneur selling time on a cell phone b. A microloan allows a farmer to purchase better equipment which raises his income c. A household uses a microcredit program to save a sick family member d. A household uses a micro loan to pay off a higher interest loan Answer: a Heading: 21.2C Spillover and Feedback effects Level: Medium

18. An unintended consequence of a new microcredit program is that it makes it more difficult for other lenders to determine if potential borrowers are already deeply indebted and? a. Allows borrowers to default without losing access to future credit b. Allows low income families a way to climb out of poverty c. Allows households to plan for a major event such as paying a dowry without having to sell of assets d. If the loan is given to women can increase their status in the family or the community Answer: a Heading: 21.2C Spillover and Feedback effects Level: Medium

19. The higher the ratio of revenue to operating costs for an MFI the ______ sustainable they are considered and the excess of revenue over operating costs is referred to as_______? a. b. c. d.

More; Profit More; Inflation Less; Loss Less; Bankruptcy

Answer: a Heading: 21.2D Microlending costs and Financial Sustainability Level: Medium

20. Many MFIs aren’t able to maintain a high enough degree of profitability to be self sustaining.

These MFI’s require differing amounts of subsidies and can come in the form of all of the following except:

a. b. c. d.

Investors willing to take less than competitive returns Grants to cover non-financial services Obtaining funds in commercial capital markets Ongoing donations to fund the supervising of loans

Answer: c Heading: 21.2D Microlending costs and Financial Sustainability Level: Medium

21. In order for an MFI to be profitable the interest rate charged for poorer borrowers tends to be ________, so most of the loans are going to the _______ of potential borrowers. a. b. c. d.

Lower; poorest Lower; wealthiest Higher; wealthiest Higher; poorest

Answer: c Heading: 21.2D Microlending costs and Financial Sustainability Level: Medium

22. New lending technologies reduce lending costs when they _______default rates without ________ supervision costs, or __________ supervision costs without raising the default rates. a. b. c. d.

Reduce; raising; increase Increase; lowering; reduce Reduce; lowering; increase Reduce; raising; reduce

Answer: d Heading: 21.2D Microlending costs and Financial Sustainability Level: Medium

23. Several MFIs take advantage of an innovative lending technology known as group liability lending. What is the advantage of group liability lending a. Its shifts the burden of screening and supervising from group members to loan officers b. It reduces the risk involved in borrowing from an MFI c. It lowers lending costs by shifting some the burden of screening and supervising from loan officers to group members d. It provides borrowers with dynamic incentives for repayment Answer: c Heading: 21.2D Microlending costs and Financial Sustainability Level: Medium

24. All of the following lending practices have been undertaken by MFIs to lower costs of microlending except a. b. c. d.

Offering borrowers a series of loans that grow larger with each repayment Offering 0% interest rates on loans Group liability lending Requiring borrowers to begin repaying the loans soon after taking them out

Answer: b Heading: 21.2D Microlending costs and Financial Sustainability Level: Medium

25. Why might a government intervene in a fully sustainable MFI? a. Being profitable doesn’t guarantee the credit services are being supplied in a socially optimum way b. To save scarce resources for other purposes c. To add competition to existing commercial banks d. To avoid bankruptcy Answer: a Heading: 21.2D Microlending costs and Financial Sustainability Level: Medium

26. Which of the following ideas is likely to improve the outreach of an MFI’s micro credit program? a. b. c. d.

Changing from group liability to individual liability Increase the time until the first payment is due Switch from weekly to biweekly meetings All of the above would improve outreach

Answer: a Heading: 21.2C Microcredit program design changes Level: Medium 27. It has been argued that MFI’s goal should be to achieve commercialization, discuss the benefits and costs of pursuing a microcredit program that is fully sustainable.

ANSWER: According to the Consultative Group to Assist the Poor (CGAP) the “best practice” in micro lending is to pursue sustainability and to only rely on subsidies during the start up years. Their argument is that the only way MFIs can reach the billions of poor people they hope to help is by being financially sustainable. Subsidies do work though and without them lending to the poorest of the poor would be difficult as they wouldn’t be able to cover the cost of administering the loan. Further research is needed however to study the impact of a subsidy to microcredit versus say a direct transfer payment or a road build for a rural village.

28. What are some ways that MFI’s can increase sustainability without sacrificing outreach or impact?

ANSWER: Individual versus group liability studies have shown that outreach can grow and that default rates did not get any worse when switching from group to individual liability. Although this almost certainly will raise the cost of lending as it raises loan officer time required for each case. Another possibility is to increase the grace period on the first repayment, many investments require large upfront costs and longer gestational periods. Another complaint MFIs have heard is the requirement of weekly meetings which takes away from productive uses of their time. Switching to biweekly meetings may reduce the burden.

29. Why might a government intervene in MFIs program when it has achieved financial sustainability and does not divert any resources away from other development projects?

ANSWER: Financial sustainability does not guarantee that credit services will be supplied in a socially optimum way. Poorer borrowers may not be able to afford the higher interest rates charged by profitable MFI’s.

Test Bank, Chapter 22: Public Health, Health Care and Health Insurance 1. The burden of a disease is best measured by: a. b. c. d.

Death rate Disability Adjusted Life Years lost Infant mortality Life expectancy

Answer: b Heading: 22.1A Health, health care and health spending in developing countries Level: Medium 2. Which of the following statistics are true of developing countries health care systems? a. Average newborns in high income countries can expect to live 21 years longer than in low and income countries b. Infants in low income countries are 14 times more likely to die during their first year c. Expectant mothers are 39 times more likely to die before or during delivery in low income countries d. All of the above Answer: d Heading: 22.1A Health, health care and health spending in developing countries Level: Easy 3. In which countries is healthcare spending as a percentage of GDP the highest? a. b. c. d.

Low and middle income countries High income countries Neither spend a significant amount on healthcare when compared to the GDP All groups spend about the same on healthcare

Answer: b Heading: 22.1A Health, health care and health spending in developing countries Level: Easy 4. People experience health shocks when they: a. b. c. d.

Have a probability of contracting a disease See a health care provider Experience episodes of illness or injury Die

Answer: c Heading: 22.1A Health, health care and health spending in developing countries Level: Easy 5. A person’s health stock is: a. b. c. d.

Potential for health at the start of the year Determined by genetics Determined by lifestyle choices All of the above

Answer: d Heading: 22.1A Health, health care and health spending in developing countries Level: Easy 6. The local climate, pollution levels, prevalence of communicable disease and any other factors outside her control that influence the likelihood of illness or injury are called: a. b. c. d.

Health inputs Health environment Health behavior Health shock

Answer: b Heading: 22.1A Health, health care and health spending in developing countries Level: Easy 7. When a household purchases health insurance they pay a _____________ in exchange for the promise of financial assistance in paying health care bills called _________. a. b. c. d.

Premium; pay-out User fee; indemnities User fee; premium Premium; indemnities

Answer: d Heading: 22.1A Health, health care and health spending in developing countries Level: Medium 8. Which of the following is a proximate objective of health policy makers? a. Reduce the physical burden households experience when health shocks strike

b. Reduce the mental burden households experience when health shocks strike c. Reduce the risk of health shocks d. All of the above Answer: c Heading: 22.1C Health policy objectives and broad policy options Level: Medium 9. In many experimental contexts, households exhibit ___________, or a tendency to value goods and services ________ when asked to give them up (e.g. when asked to sell them) than when offered an opportunity to acquire them (e.g. through purchase). ? a. b. c. d.

Loss aversion; more Loss aversion; less Status quo aversion; more Status quo aversion; less

Answer: a Heading: 22.2A Household acquisition of health inputs Level: Medium 10. If _________ is significant, then even small inconveniences – such as having to walk a kilometer to obtain free immunizations -- may represent _________ barriers to acquisition. a. b. c. d.

Future bias; significant Present bias; insignificant Present bias; significant Health bias; insignificant

Answer: c Heading: 22.2A Household acquisition of health inputs Level: Medium 11. The social cost of equipping a household with a health input includes all of the following except: a. b. c. d.

The cost of manufacturing The cost of transporting and distributing it to the household Externalities from consuming the item All of the above are social costs

Answer: c

Heading: 22.2B Health input supply, rationales for intervention and program design options Level: Medium 12. A household’s willingness to pay for health inputs depends on all of the following except: a. b. c. d.

Externalities Lack of knowledge Liquidity constraints All of the above can affect the willingness to pay

Answer: d Heading: 22.2B Health input supply, rationales for intervention and program design options Level: Medium 13. Why would private retailers under-invest in the dissemination of information about the potential health benefits? a. b. c. d.

They would have to pay the full private cost of producing It would raise the demand for their competitors goods as well They would receive the full benefit from the sale All of the above

Answer: b Heading: 22.2B Health input supply, rationales for intervention and program design options Level: Medium 14. Some marketers of health inputs believe that health input use decisions are subject to a sunk cost effect, which renders households ________ to use a health input if they have paid ______ to acquire it. ? a. b. c. d.

More likely; more Less likely; less Less likely; more More likely; less

Answer: a Heading: 22.2C Direct and indirect effects of health input acquisition and use Level: Medium 15. All of the following are reasons why some development economists argue it would be better to charge a fee for treated bed nets rather than distributing them for free except:. a. Charging a fee covers some cost and allows them to distribute more nets

b. Prevent waste from distributing a net to someone who won’t use them c. Will help in informing households of the benefits d. Sunk cost effect Answer: c Heading: 22.2E Free distribution or sale of insecticide-treated bed nets?

Level: Medium 16. Empirical experiments have shown that when considering the costs and benefits of charging for bed nets the size of the costs of charging a fee are __________ and the benefits are ________ a. b. c. d.

Large; large Small; small Large; small Small; large

Answer: c Heading: 22.2E Free distribution or sale of insecticide-treated bed nets?

Level: Medium 17. The traditional response of Governments and NGOs to apparent failures of the health care system was in a ________________fashion, setting up a government hospital or clinic to provide care ________. a. b. c. d.

Supply side; indirectly Supply side; directly Demand side; indirectly Demand side; directly

Answer: b Heading: 22.3 The economics of Health Insurance Programs Level: Medium 18. The tradition response of governments and NGOs to health care systems failures was to respond in a supply side fashion. This approach often failed because: a. The government couldn’t afford to supply the needed subsidies b. The governments couldn’t afford to supply the needed funds to provide basic health services c. The government couldn’t afford to increase taxes d. The government the subsidies to households weren’t enough to cover even basic care

Answer: b Heading: 22.3 The economics of Health Insurance Programs Level: Medium 19. Insurance companies engage in _______________ when they take on liability for the cost of any necessary health care for many people, only some of whom will in fact be struck by health shocks in a given year

a. b. c. d.

Demand side policies Economies of scope Economies of scale Risk pooling

Answer: d Heading: 22.3A Health insurance, health care utilization and out-of-pocket spending Level: Medium 20. If an individual faces a 3% chance of requiring a surgery that costs $10,000 then a riskaverse person would be willing to pay ____________ per year for health insurance that would cover the cost of the surgery if the shock hits. a. b. c. d.

More than $300. $30 $300 $3,000

Answer: a Heading: 22.3A Health insurance, health care utilization and out-of-pocket spending Level: Medium 21. If each of 2,000 individuals face a 3% chance of requiring a surgery that costs $40,000 then an insurance company would expect to pay for ____________ surgeries (on average) per year that would cost __________, and would charge premiums of__________. a. b. c. d.

100; $4,000,000; $2,000 30; $1,200,000; $600 60; $2,400,000; $1,200 200;$8,000,000; $4,000

Answer: c Heading: 22.3A Health insurance, health care utilization and out-of-pocket spending Level: Medium

22. Health care is provided efficiently when a given array of services is provided ____________, and when providers expend any effort or resources on a patient’s care for which the likely social benefits _______ the social costs. a. b. c. d.

At the lowest cost per person; equal To the most people; equal Using the fewest resources; outweigh At the lowest cost; outweigh

Answer: d Heading: 22.3B Health insurance, health care quality and efficiency Level: Medium 23. All of the following are reason why markets are unlikely to yield high quality and efficient health care in the absence of intervention except: a. There is an asymmetric information problem where households know more about their situation than healthcare providers b. Some providers may seek to raise profits by subscribing unnecessary tests c. Financial markets may limit health care providers ability to manage stocks of medicines and supplies d. Households’ lack of knowledge regarding when to seek care may diminish efficiency Answer: a Heading: 22.3B Health insurance, health care quality and efficiency Level: Medium 24. When governments provide health insurance rather than providing the heakth services directly it represent a shift from __________ to ____________. a. b. c. d.

Supply side; demand side Demand side; Supply side Inefficiency; efficiency Efficiency; inefficiency

Answer: b Heading: 22.3B Health insurance, health care quality and efficiency Level: Medium

25. In __________, program employees manage and provide both health insurance and health care services. Such programs provide subsidies for health insurance and health care in _________ fashion, through the direct provision of low-cost health care.

a. b. c. d.

Fully integrated programs; supply-side Partially integrated programs; demand -side Decentralized programs; supply-side Healthcare management programs; demand-side

Answer: a Heading: 22.3B Health insurance, health care quality and efficiency Level: Medium 26. How is the DALYs lost to a disease in a given year calculated?

Answer: To calculate the number of DALYs lost to a disease in a given year, statisticians gather data on the age and gender of everyone struck by the disease in that year. For victims that die, they use mortality rate tables to estimate how many more years the victim would have lived had she not succumbed to the disease during that year, and count those years as lost. For victims that survive, they calculate the average duration (until the end of the episode or end of life) of any disability and count those years as partially lost, with the fraction of each year lost to a given disability determined by a panel of experts. After applying a 3 percent discount rate (which causes years of life lost further in the future to count less) and non-uniform age weights (which reduce the weight placed on the earliest and latest years of life relative to the straight 3 percent discount rate), the statistician adds together the losses due to death and disability to produce the final statistic.

27. Within developing countries, why is ill health is a greater burden for the poor than the nonpoor?

Answer: Poor households are more likely to live in locations that lack water and sanitation infrastructure, where they are more exposed to infectious disease and pollution; and they tend to undertake more dangerous work. When they become ill or injured, they are less likely to obtain care, because they live further from health care facilities, are more daunted by fees and are more likely to consider illness “normal.” When they get care, the quality is often lower than for wealthier patients.

28. What proximate objectives to health policy makers pursue to help pursue the ultimate goals of reducing the physical mental and financial burden of health shock and to reduce households’ vulnerability to the burdens that future health shocks might bring?

Answer: In practice, health policymakers work toward their ultimate objectives by pursuing one or more of four proximate objectives: (1) reducing the risk of health shocks, (2) increasing the share of households that obtain health care when hit by health shocks, (3) improving the quality of health care, and (4) reducing the financial trauma inflicted on households by health care costs.

Specific health policies emphasize different combinations of these proximate objectives, and may concentrate more narrowly on reducing the burdens associated with particular diseases.

Some reflect deep concern with equity in access to healthy environments and health care, concentrating especially on improvements for the poor and other disadvantaged groups.