Why do economists convert incomes into purchasing power parity terms before comparing living standards across countries?
It adjusts for differences in what goods cost in each country
✓
It removes the effect of population size on output
It subtracts the depreciation of capital from output
It counts only goods sold in international trade
Correct Answer
It adjusts for differences in what goods cost in each country
The same amount of money buys more in a country where prices are low, so purchasing power parity converts incomes into units that reflect what they can actually buy. It removes the effect of population size on output describes dividing by population, which is what per capita measures do. It subtracts the depreciation of capital from output describes net domestic product. It counts only goods sold in international trade is wrong because the adjustment covers all goods, not only traded ones.
Category: Comparing Economies
Question 2
A country produces a GDP of $900 billion and has a population of 60 million. What is its GDP per capita?
$1,500
$15,000
✓
$54,000
$150,000
Correct Answer
$15,000
GDP per capita is GDP divided by population: $900,000,000,000 / 60,000,000 = $15,000. $1,500 comes from misplacing a decimal place in the division. $54,000 comes from multiplying 900 by 60 instead of dividing. $150,000 comes from dropping one zero from the population.
Category: Comparing Economies
Question 3
Why can a country with one of the largest total GDPs in the world still have a modest average standard of living?
Its exports are larger than its imports
Its currency is fixed to the U.S. dollar
Its output is divided among a very large population
✓
Its central bank aims for low inflation
Correct Answer
Its output is divided among a very large population
Average living standards depend on GDP per person, so a huge total GDP spread over a huge population can still mean a modest amount per person, as with China. Its exports are larger than its imports describes a trade surplus, which does not by itself set income per person. Its currency is fixed to the U.S. dollar describes an exchange rate policy, not output per person. Its central bank aims for low inflation describes a monetary goal that does not lower average income.
Category: Comparing Economies
Question 4
Compared with low-income countries, high-income countries tend to have populations that are
Younger, with a larger share of children
Growing faster because of high birth rates
More concentrated in rural farming areas
Older, with a larger share of elderly people
✓
Correct Answer
Older, with a larger share of elderly people
High-income nations are aging, with elderly people making up a much larger share of the population than in low-income nations, which have younger populations today. Younger, with a larger share of children describes low-income countries. Growing faster because of high birth rates also fits lower-income countries better. More concentrated in rural farming areas is wrong because high-income countries are more urbanized.
Category: Comparing Economies
Question 5
In high-income economies, compared with low- and middle-income economies, agriculture typically accounts for
A much smaller share of GDP
✓
A much larger share of GDP
About the same share of GDP
A share that grows as income rises
Correct Answer
A much smaller share of GDP
Industrial structure differs across income levels: farming is a small slice of output in high-income economies and a much larger slice elsewhere. A much larger share of GDP reverses the pattern. About the same share of GDP ignores the clear difference in industrial structure. A share that grows as income rises is wrong because agriculture's share shrinks as economies develop.
Category: Comparing Economies
Question 6
Using the rule of 72, about how long does it take incomes to double if they grow at 6% per year?
6 years
12 years
✓
36 years
72 years
Correct Answer
12 years
The rule of 72 estimates doubling time as 72 divided by the annual growth rate, so 72 / 6 = 12 years. 6 years simply repeats the growth rate. 36 years is the doubling time at 2% growth. 72 years forgets to divide by the growth rate.
Category: Growth Arithmetic
Question 7
Using the rule of 72, what annual growth rate would make incomes double in about 24 years?
1.5%
2%
3%
✓
6%
Correct Answer
3%
Rearranging the rule of 72, the growth rate is 72 divided by the doubling time, so 72 / 24 = 3% per year. 1.5% would take about 48 years to double income. 2% would take about 36 years. 6% would take about 12 years.
Category: Growth Arithmetic
Question 8
According to the growth consensus, the productivity gains that raise a country's standard of living come mainly from
Natural resources, climate, and geography
Population growth and foreign aid
Tariffs and fixed exchange rates
Human capital, physical capital, and technology
✓
Correct Answer
Human capital, physical capital, and technology
The growth consensus holds that growth is built on productivity improvements, which come from more human capital, more physical capital, and better technology working together in a market-oriented economy. Natural resources, climate, and geography shape a country's opportunities but do not by themselves determine its income, as resource-rich but poor countries show. Population growth and foreign aid are not the sources the consensus names, and foreign aid has a mixed record of producing growth. Tariffs and fixed exchange rates are trade and currency policies, not sources of productivity growth.
Category: Growth Policy
Question 9
Compared with typical Latin American and African economies, saving rates in the fast-growing East Asian economies and China were
Much higher, funding heavy investment in physical capital
✓
Much lower, because governments encouraged consumption
About the same, with growth coming from foreign aid
Much lower, with investment paid for by printing money
Correct Answer
Much higher, funding heavy investment in physical capital
These economies saved around one-third or more of GDP, compared with roughly one-fifth in typical Latin American and African economies, and that saving financed domestic investment. Much lower, because governments encouraged consumption reverses the pattern. About the same, with growth coming from foreign aid is wrong because their growth did not rest on aid. Much lower, with investment paid for by printing money is wrong because printing money fuels inflation, not lasting investment.
Category: Growth Policy
Question 10
Why do very low incomes make it hard for a low-income country to accumulate capital?
Interest rates are held at zero by law
Nearly all income goes to necessities, leaving little saving
✓
High wages make investment unprofitable
Large trade surpluses drain domestic funds
Correct Answer
Nearly all income goes to necessities, leaving little saving
When people earn very little, almost everything goes to food, shelter and other essentials, so there is little saving to supply loanable funds for physical or human capital. Interest rates are held at zero by law is not the cause described. High wages make investment unprofitable is wrong because wages in these countries are low. Large trade surpluses drain domestic funds is wrong because low-income countries tend to receive capital, not send it abroad.
Category: Growth Policy
Question 11
Policies in high-income countries that invest in education, technology and equipment aim to raise the economy's productive capacity, which the AD/AS model shows as a shift of
Aggregate demand to the left
Aggregate supply to the left
Aggregate supply to the right
✓
Aggregate demand to the right
Correct Answer
Aggregate supply to the right
More human capital, physical capital and better technology raise the amount an economy can produce, which shifts aggregate supply to the right. Aggregate demand to the left describes a fall in total spending. Aggregate supply to the left describes a loss of productive capacity or a cost shock. Aggregate demand to the right describes higher total spending, not higher productive capacity.
Category: Growth Policy
Question 12
According to the Keynesian model, which policy response fits unemployment caused by a recession?
Contractionary monetary policy that raises interest rates
Higher taxes to balance the budget during the downturn
Stricter limits on laying off workers
Expansionary monetary policy that lowers interest rates
✓
Correct Answer
Expansionary monetary policy that lowers interest rates
Cyclical unemployment comes from too little aggregate demand, so the Keynesian prescription is to increase the money supply, lower interest rates and boost spending. Contractionary monetary policy that raises interest rates would reduce aggregate demand further. Higher taxes to balance the budget during the downturn would also cut spending and work against automatic stabilizers. Stricter limits on laying off workers is a labor market rule that tends to raise the natural rate, not a demand-side remedy.
Category: Unemployment Worldwide
Question 13
A common explanation for why European countries have long had higher natural rates of unemployment than the United States is
Rules that raise the cost of hiring and firing workers
✓
Deeper and more frequent recessions
Lower levels of education among workers
Central banks that keep interest rates too low
Correct Answer
Rules that raise the cost of hiring and firing workers
The natural rate reflects labor market conditions, and heavier regulation of hiring, firing and starting businesses discourages firms from adding workers. Deeper and more frequent recessions would raise cyclical unemployment, not the natural rate. Lower levels of education among workers is not the difference economists point to between Europe and the United States. Central banks that keep interest rates too low would tend to stimulate hiring, not reduce it.
Category: Unemployment Worldwide
Question 14
If a law imposes large new costs on any firm once it reaches 50 employees, the model of labor market regulation predicts that the law will
Encourage firms to hire exactly 50 workers
Discourage firms from growing past 49 workers
✓
Have no effect on hiring decisions
Lower the natural rate of unemployment
Correct Answer
Discourage firms from growing past 49 workers
Firms weigh the cost of each hire, so a large jump in costs at 50 employees gives them a reason to stay just below that size, which is why France has many more firms with 49 workers than with 50. Encourage firms to hire exactly 50 workers reverses the incentive. Have no effect on hiring decisions ignores that costs shape hiring. Lower the natural rate of unemployment is wrong because limiting hiring tends to raise it.
Category: Unemployment Worldwide
Question 15
In Lewis's dual-sector model, why does labor move from agriculture into manufacturing?
Farm wages rise faster than factory wages
Governments forbid new farms from opening
Low-skilled workers' marginal product is higher in manufacturing
✓
Manufacturing needs mostly highly skilled labor
Correct Answer
Low-skilled workers' marginal product is higher in manufacturing
In a mature farm economy with fixed land and water, extra farmworkers add almost nothing, while early-stage factories put low-skilled labor to more productive use and pay steadier wages. Farm wages rise faster than factory wages would pull workers the other way. Governments forbid new farms from opening is not part of the model. Manufacturing needs mostly highly skilled labor is wrong because early manufacturing uses low-skilled labor.
Category: Unemployment Worldwide
Question 16
The Lewis turning point is reached when
Manufacturing output first exceeds farm output
The government ends all farm subsidies
Unemployment insurance covers all workers
Surplus farm labor has been fully absorbed into manufacturing
✓
Correct Answer
Surplus farm labor has been fully absorbed into manufacturing
The turning point comes once the pool of farmworkers who added almost nothing to farm output has been taken up by manufacturing, after which wages in both sectors tend to rise. Manufacturing output first exceeds farm output is a different milestone. The government ends all farm subsidies is a policy change, not the turning point. Unemployment insurance covers all workers concerns social insurance, not labor absorption.
Category: Unemployment Worldwide
Question 17
The extremely high inflation in countries such as Zimbabwe and Venezuela was fueled by
Governments printing money to cover large budget deficits
✓
Rapid growth in manufacturing productivity
Central banks raising interest rates sharply
Large trade surpluses with high-income nations
Correct Answer
Governments printing money to cover large budget deficits
When a government pays for huge deficits by creating money, too much money chases too few goods and prices soar. Rapid growth in manufacturing productivity raises the supply of goods and eases price pressure. Central banks raising interest rates sharply is a tool for fighting inflation, not causing it. Large trade surpluses with high-income nations do not explain runaway money creation.
Category: Inflation Worldwide
Question 18
Some economies with inflation of 10% to 30% a year have still grown by automatically linking wages, contracts and interest rates to the inflation rate. What is this practice called?
Dollarization
Indexing
✓
Sterilization
Devaluation
Correct Answer
Indexing
Indexing ties payments to inflation so that wages and loan repayments keep their purchasing power as prices rise. Dollarization means using the U.S. dollar in place of the domestic currency. Sterilization refers to a central bank offsetting the money supply effect of other transactions. Devaluation is a government lowering the value of a fixed exchange rate.
Category: Inflation Worldwide
Question 19
To keep running a trade deficit year after year, a country must
Raise tariffs on all imported goods
Lend its domestic savings to other countries
Receive loans or investment from foreign countries
✓
Keep its currency at a fixed value
Correct Answer
Receive loans or investment from foreign countries
Buying more from abroad than it sells means the country must finance the gap with foreign loans or investment that foreigners expect to be repaid. Raise tariffs on all imported goods is a trade restriction, not a way to finance a deficit. Lend its domestic savings to other countries describes a country with a trade surplus. Keep its currency at a fixed value does not provide the funds needed.
Category: Trade and Capital Flows
Question 20
If the U.S. dollar fell sharply and made imported inputs more expensive, the short-run aggregate supply curve would shift
To the right, lowering the price level
To the right, raising real GDP
Not at all, since only demand would change
To the left, putting upward pressure on prices
✓
Correct Answer
To the left, putting upward pressure on prices
Costlier imported inputs raise firms' production costs, which shifts short-run aggregate supply to the left and can push up the price level. To the right, lowering the price level describes a fall in input costs. To the right, raising real GDP also describes cheaper inputs or more capacity. Not at all, since only demand would change ignores the cost effect on supply, even though cheaper exports also raise aggregate demand.
Category: Trade and Capital Flows