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September 26th, 2005 Economics 360 1st Midterm Exam


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September 26th, 2005

Economics 360 1st Midterm Exam


STUDENT ID:
Instructions: You will have 60 minutes to complete the exam. The exam will be comprised of two parts and will be worth a total of 50 points. Please write all of your answers on this exam sheet.



  1. Part I will consist of 5 short answer questions (each worth 5 to 8 points). Please be a succinct and as clear as possible. If it only takes you one sentence to answer the question, that is fine, there is no minimum length for a correct answer.



  2. Part II will consist of 5 multiple choice questions and one qualifying question (each from 1 to 4 points). Please select the answer that is MOST appropriate. I will allow for partial credit if you write a sentence or two explaining WHY you selected a particular answer. However, if you select the correct answer and write a comment this is incorrect, I will subtract points as well.



  3. There is also one extra-credit question (whose value I will consider at the end of the term).



  4. Please DO NOT write your name on the front of this exam. Please DO write your name in small print on the inside of the last page of this exam, up near the staple.



PART I: Short Answers (30 points)


  1. (5 points) In thinking about the growth rate of world income between the year 0 and 1000 AD, can the basic principles of the Harrod-Domar growth model be used to explain this growth experience? Briefly explain.


  1. (5 points) “The mythical nation of Ouija had a Human Development Indicator Index in 2002 of 0.555. Another mythical nation, Kajagoogoo, had an HDI Index for that year of 0.405. Therefore, Ouija and Kajagoogoo are not equally developed.” Evaluate the foregoing statement.




  1. (6 points) We have discussed in class that relying on GDP to assess the relative economic activity across countries is not an exact science. There are three reasons why reported GDP statistics might be inexact representations of a nation’s true wealth: (1) Data quality/existence problems; (2) Measurement problems; and (3) the Index Number Problem. In thinking about how to compare the wealth of two countries, say Angola and Kazakhstan, provide an example of a measurement problem. Also, provide an example of the index number problem.




  1. (6 points) Describe, in simple English, what this expression means:

k = sy – (n+)k



(the letters are all lowercase)



  1. (8 points) Please refer to the figure at the end of this exam to answer part (a) and (b).



    1. (2 points) If the initial level of capital per worker in this country is k1, what will the equilibrium levels of capital per worker and output per worker be in future time periods?


    1. (4 points) Describe the process by which this happens.


    1. (2 points - You do not need to refer to the picture for this question) According to the Solow growth model, would a country have to experience capital deepening or capital widening in order to expand income per person?





PART II: Multiple Choice (20 points total)



  1. (4 points) If a country’s production function shared the same characteristics as the one used in the Harrod-Domar growth model, which of the following policies would likely result in a decrease in the growth rate of national income in the short run?

    1. A substantial increase in immigration of talented workers into this country

    2. An increase in the rate of consumer spending in the economy

    3. An increase in the amount of foreign aid supplied to a country.

    4. The incremental capital output ratio falls substantially


  1. (4 points) We discussed in class that one thing that must happen for countries to develop is for them to undergo “structural change.” This is thought to be the case because of the experience of today’s developed countries. Which of these is not likely to occur during the process of structural change?

    1. A change in consumption patterns, as people begin to consume durable goods and leisure goods such as washing machines and taking vacations.

    2. Growing interdependence and trust between citizens.

    3. Decrease in the share of GNP that comes from agricultural sector.

    4. Decreases in agricultural productivity.



  1. (4 points) What can we say definitively about a country that in 1990 had an ICOR of 2.0 and an ICOR of 4.0 in 2000?

    1. Machines are depreciating faster in 2000 than they were in 1990.

    2. This country’s growth rate of income would be smaller in 2000 than in 1990.

    3. This country is moving to more capital intensive production technologies.

    4. This country is using its machines much less efficiently in 2000 than it was in 1990.




  1. (4 points) Which of the following statements is most accurate?

    1. Income growth is a sufficient condition for economic development.

    2. Building a damn that costs $2 billion but that provides $3 billion of benefits is not a Pareto improving project.

    3. Mass immigration of Albanians to France would likely result in a contraction of Albanian GNP.

    4. Hurricanes Katrina and Rita likely decreased the ICOR in the Southern United States.



  1. (3 points) Which type of technical change would developing country policymakers generally prefer to experience?

    1. Capital augmenting technical change

    2. Labor augmenting technical change

    3. Neutral technical change

    4. Labor saving technical change





  1. (1 point) Give an example of the type of change you supplied in question 10. improvement.



PART III: Extra Credit

In the case study you were asked to read on the development success of Taiwan, the authors indicate that,


Taiwan's success is best explained by a combination of emphasis on education, absorption of productive ideas from abroad, extensive infrastructure development, thoroughgoing land reform, very high rates of savings and investment, effective industrial policy, and last but not least, ensuring that incentives of the marketplace to produce wealth rather than seek a share of existing wealth are established with solid property rights and not undermined by other policies.”
Many of these characteristics are common to both Taiwan and the successful economies of the Western World. Can you describe two problems faced by Taiwan today which were discussed in the case-study that are problems in today’s Western world as well?


This diagram captures the fact that the savings rate is likely to vary with the level of income per capital in many countries.





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