ECON TEST #4

Which of the following policies would be most effect in dealing with the problem of stagflation

None of the above, since stagflation is a problem associated with aggregate supply, not aggregate demand

In order to end the shortages that arose in Germany after WWII, the German economics and finance administrator Ludwig Erhard decided to:

Abolish the existing set of government price controls

Which of the following is correct about the "progressive tax system" in 1970's Britain

As incomes rose, the tax rate imposed on any additional income earned would also rise, For high income earners, the marginal tax rate on earned income got as high as 83%, For investors the marginal tax on unearned income(i.e., interest and dividend income) got as high as 98%, The high marginal tax rates imposed on high income earners discouraged savings, investment and entrepreneurship, ALL OF THE ABOVE ARE TRUE

Which of the following is a goal of shock therapy programs

Decrease the budget deficit, Control inflation and encourage saving, Reduce the size of the public sector through privatization, ALL OF THE ABOVE

Which of the following is a goal of structural adjustment programs

Decrease the budget deficit, Control inflation and encourage saving, Reduce the size of the public sector through privatization, ALL OF THE ABOVE

Which of the following statements is true

Efficiency means no or minimal waste or recourses; and the ability to produce a quality product at lower cost

During the 1970's oil supply crisis, economists and policy makers did not realize what could happen

They did not realize that aggregate supply could shift so suddenly and abruptly as a result of the sharp increase in the price of crude oil

Some of the reasons for the rapid economic growth seen in many East Asian economies in the years following WW2 are:

Good economic policies such as market-friendly leadership, targeting capital intrusive & high tech industries, high savings rates, investments in human capital and a high rate of physical capital accumulation

One of the problems that contributed to the hyperinflation in 1922-1923 Germany was:

Government over-spending on reparation payments and on the wages of striking factory workers in the Ruhr region, Low interest rates and the ease of obtaining credit and loans when government expanded the money supply, Overall hoarding of goods and spending in Germany was high relative to the productive capacity of the German economy. ALL ARE TRUE

Since the mixed economies of Western Europe had been so successful in eliminating unemployment and raising living standards in the 30 years that followed after 1945, why did people start to lose confidence in government's ability to manage and direct the economy

Government's inability to control the rising inflation and unemployment of the 1970s, The inefficiency and waste within the state-owned enterprises, The failure of Keynesian fiscal policy to reduce unemployment after the oil supply shocks, the inability of Keynesian economics to control the beast of "stagflation" ALL THE ABOVE ARE TRUE

Margaret Thatcher was once quoted saying, "Britain needs more millionaires and more bankrupts." This statement:

Illustrated her support for market-friendly, entrepreneurial culture to stimulate the economy, even if some firms fail in the competitive struggle

A common argument used by a developing country to justify protecting a domestic industry from import competition is the ________ argument, which is related to the process of "learning by doing"

Infant Industry

Over the long term, import substitution leads to which adverse outcome

It leads to the creation of inefficient, noncompetitive industries, It hinders innovation among domestic firms, It can become an impediment to more rapid growth, ALL OF THE ABOVE

One of the most successful countries in implementing export driven growth policies

Japan

Which school of economic thought provided the intellectual foundations for a mixed economy or regulated form of capitalism where government plays an important role in stabilizing the macro economy

Keynesian economics, named in honor of John Maynard Keynes

Which of the following assumptions is true according to the school of Classical Economic Theory, (better known as "laissez faire")

Markets automatically self-adjust on their own, Recessions and inflation are short term problems that are eventually resolved by markets without the need for government intervention, Government has no role to play in managing the economy, ALL OF THE ABOVE ARE TRUE

At the close of WWII in 1945, the new Labour Party government of Britain established a _______ economic system

Mixed

The most influential and notorious labor union in 1970s & 1980s Britain was:

National Union of coal miners

When the price of an essential raw material such as crude oil suddenly rises abruptly and sharply in price, what happens to the economy? (Hint: which curve, if any, is impacted by such an event? in what direction would it shift?)

Output falls, prices rise, and unemployment rises

Suppose Aggregate Demand (AD) intersects Aggregate Supply (AS) along the vertical portion of the aggregate supply curve. If government were then increase spending on both purchases of goods and transfer payments, what would happen?

Prices would increase, but output would remain the same.

Assume this graph reflects the condition of an economy BEFORE anything happens. Later, an oil supply shock occurs, and in response, the government applies a fiscal stimulus to the economy (such as increasing transfer payments or cutting taxes). What would happen? (Hint: First, determine which curve (if any) will be impacted by the oil supply shock. Next, determine which curve (if any) will be impacted by the fiscal stimulus.)

Prices would rise further

Privately-owned firms tend to be more concerned about costs & customer-oriented than state-owned firms because:

Privately-owned firms operate under the principles of the market economy. If costs exceed revenues, they will go bankrupt. Also, they get all of their revenue from customers who can go elsewhere if they are not satisfied.

Which group are supply-side economists most concerned with

Producers, workers and investors, since advocates of supply-side economics understand that incentivizing all three of these groups is necessary to encourage more investment spending and production

Margaret Thatcher was once quoted saying, "the lady is not for turning." This statement:

Shows her determination to move toward a freer market economy by selling off state-owned enterprises to private sector, even some jobs were lost in the process

Which segment of the German population was most negatively impacted financially by the hyperinflation that raged from 1922-1923

The German middle class, which was compromised of white collar workers, professionals, shopkeepers, artisans and musicians

Which agency lends money to countries to help them stabilize their exchange rates

The International Monetary Fund

Which agency lends money to countries to promote their economic development

The World Bank

Assume the graph reflects the condition of an economy BEFORE anything happens. If the economy were to experience an "oil supply shock," what curve would be impacted (if any) and in what direction would it shift (if it all)

The aggregate supply curve (AS) would shift leftward and unemployment and prices would rise

The 40-year rivalry between the US & The former soviet union between the end of World War 2 and the 1980's was called

The cold war

Which of the following is true about "stagflation"

There is a simultaneous rise in unemployment and prices during stagflation, Stagflation is caused by sudden, sharp increases in the price of an essential raw material such as crude oil or energy, Stagflation is a condition where the economy stagnates or ceases to grow, Stagflation is a condition that arises when a "supply shock" hits the economy, causing the aggregate supply curve to lurch leftward & upward, ALL ARE TRUE STATEMENTS

Statistics show that the less developed a country is

The larger is the share of agricultural output in its total output

In many Latin American economies, we find a large number of firms operating without required permits and licensees. A reason for this is:

The presence of a complex bureaucracy compromised of many rules, many regulations that are difficult to understand and costly to adhere to, The presence of highly complex, difficult to understand tax code compromised of many different taxes and high marginal tax rates, Too much red tape involved in setting up a business or registering property. ALL OF THE ABOVE are reasons why many firms operate without licenses or permits

Which of the following was true about the British economy during the 1970s

The welfare state and the nationalized companies required significant subsidies from the government for survival

During the 1980's, a new school economic thought emerged that explained the impact of 1970's oil supply crisis on the economy and what could be done to stimulate more investments, more production and ultimately, economic growth. The school became known as supply-side economics

True

In Britains mixed economy during the period of 1945-1982, entrepreneurship and innovation suffered due to the progressive tax system that was in place at the time that taxed away ever larger amounts of any additional income that was earned\

True

In the 1970's, policy-makers did not know how to properly handle the problems created by the oil supply crisis because at that time in history, no one imagined it possible for aggregate supply to shift so suddenly in the short-term. Consequently, all they knew how to do was either lower unemployment via fiscal stimulus, or lower inflation via a fiscal restraint. Either way, fiscal policy could not fix the problems associated with the oil supply crisis

True

The Great Depression started when the US stock market crashed in October of 1929. A reason for this crash was over speculation in the stock market by investors

True

The term "welfare state" refers to government taking responsibility for the welfare of its citizens by providing basic services to all of them, such as retirement benefits, unemployment benefits, etc.

True

A quota is

a government-imposed restriction on the quantity of a specific good that can be imported into a country

Which of the following is an example of a supply side stimulus to the economy

a marginal tax cut

A tariff is

a tax on imported goods

The maximum amount of a good that may be imported during a certain time is

an import quota

To promote efficient, competitive domestic industries, protectionist policies for import-substituting industrialization should:

be temporary

The powerful British labor unions and trade unions:

eventually brought down the government of Edward Heath because of the disruptions they created when they went on strike to protest his policy of freezing all wages

The policy in which industrial production is oriented towards foreign consumers is called

export promotion

The process of developing local industries to manufacture goods to replace imports is known as

import substitution

All of the following are factors that limit a poor nation's economic growth rate EXCEPT

insufficient controls on free trade

A dictatorship is a system of government in which ultimate power

is concentrated in a single person

Capital flight refers to the fact that both human and financial capital

leave developing countries in search of a higher rate of return

The trend in current tariff laws is to

lower tariffs on foreign goods

Building roads, power generators, and irrigation systems are projects that are referred to as

physical infrastructure

High tax rates were blamed for causing some of Britain's problems in the 1970's because it was believed that high taxes:

reduced an incentive for entrepreneurs to take risks at new business ventures since any profits made would be highly taxed.

A democracy is a system of government in which ultimate power

rests with the hands of the people

The 'U-turn' in policy made by the Conservative government under Edward Heath in Great Britain refers to Heath's :

reversal of his commitment to reform the mixed economy of Britain and instead, turned to socialist-oriented policies of more government spending

Between 1922-1923 Germany:

suffered a hyper-inflation as the government tired to pay its way out of the problems by spending too much and printing too much money

During the 1970's Great Britain:

suffered from high unemployment and high inflation with a stagnating economy

A difference between a quota and a tariff is that

the government collects revenue from a tariff, which does not happen with a quota

The Commanding Heights of the British economy right after WWII were:

the heavy industries such as coal, steel, railroads, and utilities.

Prime Minister Edward Heath's Conservative government lost the election in 1974 in large part due to

the massive coal miner's strike and his lack of success in reducing unemployment and inflation in Britain

When one compares privately-owned firms with state-owned firms we usually find:

the private-firms deliver higher quality goods at a lower costs than do state-owned firms

A "Brain Drain" is

the tendency of talented people in developing countries to get education in developed countries and stay there after graduation

During the 1970's constant strikes gave _______ a stranglehold on Britain's economy.

the trade unions and labor unions

Marxist Socialists or communists believe :

violent revolution and confiscation of property is permissible because there is no way to get private businessmen to cooperate with nationalization of their businesses

The Fabians in England differed from marxists or communist in the USSR in that the Fabians:

were socialists who, unlike marxists communists, believed that religion was not evil, and that nationalization of industry could be accomplished peacefully through fair compensation of industrialists