Deck 16: Creating an Environment for Growth and Prosperity

Question 1

Which of the following is most likely to be a serious obstacle retarding the growth of less-developed nations?

A) A lack of knowledge about modern technology.
B) A lack of natural resources.
C) Slow population growth.
D) Low capital formation as the result of a weak legal system.

Answer 1

Low capital formation as the result of a weak legal system.

Question 2

Economic growth is likely to be faster when

A) higher tax rates are imposed on high income individuals in order to provide greater cash payments to the poor.
B) domestic markets are opened to foreign sellers and foreign investors.
C) the supply of money is increased rapidly so individuals have more money to spend.
D) dramatic changes in political and legal institutions occur often.

Answer 2

domestic markets are opened to foreign sellers and foreign investors.

Question 3

Which of the following will discourage investment?

A) Well-defined property rights.
B) Monetary instability.
C) A low and steady rate of inflation.
D) Low tax rates.

Answer 3

Monetary instability.

Question 4

Which of the following would be most likely to help the residents of a nation produce a larger output and consume a wide variety of products at economical prices?

A) Imposition of tariffs on imported goods.
B) Quotas that protect domestic businesses against foreign producers that pay workers low wages.
C) Free trade.
D) Exchange rate controls.

Question 5

Which of the following would be most likely to improve the standard of living of people in less-developed nations?

A) The development of strong labor unions.
B) An increase in foreign investment.
C) An increase in the share of the population under fifteen years of age.
D) Higher tariffs and the imposition of other restraints designed to restrict international trade.

Question 6

When the money supply is expanding and prices rise rapidly, economic growth

A) is slowed by the resulting unpredictability of the future level of prices.
B) is enhanced as economic activity grows more rapidly.
C) is enhanced because profits are higher so that capital investment is greater.
D) is enhanced because existing debt is reduced in value, so people are willing to buy more goods.

Question 7

When competition is present and property rights secure, people will be encouraged to

A) plunder the resources of others.
B) pay the lowest possible wages.
C) provide others with things that they value in exchange for income.
D) Invest in other countries where markets are less competitive and property rights less secure.

Question 8

In a market economy, what determines whether an entrepreneur will continue in business or terminate the production of a new product?

A) Government regulations.
B) Licensing by industrial development agencies.
C) The profit or loss of the business.
D) The taxes paid to the government relative to the subsidies received.

Question 9

A legal system that protects private property and enforces contracts in an even-handed manner helps promote economic growth because it

A) makes it possible for individuals to generate large incomes and get ahead without cooperating with others.
B) provides people with a strong incentive to supply others with things that they value at an economical price.
C) encourages people to use resources now rather than conserving them for the future.
D) keeps the real wages of workers low and thereby makes it possible for business firms to supply goods and services economically.

Question 10

Which of the following is an important ingredient of efficient economic organization?

A) High marginal tax rates.
B) Competitive markets.
C) Rapid increases in the money supply.
D) Imposition of high tariffs that will protect domestic producers from the ravages of foreign competition.

Question 11

When a country's inflation rate varies substantially from year-to-year and is therefore difficult to predict, this will

A) reduce the volume of trade and the gains derived from it.
B) reduce the risk accompanying investment.
C) encourage entrepreneurs to innovate and develop better products.
D) increase the level of foreign investment in the country.

Question 12

Monetary and price instability will

A) make it easier for both individuals and businesses to plan wisely for the future.
B) generate uncertainty, and encourage investors and businesses to move their activities to countries with a more stable monetary environment.
C) encourage businesses to invest and expand their future output.
D) encourage domestic citizens to increase their rate of saving.

Question 13

When the government is heavily involved in the regulation of business activity, entrepreneurs will be encourage to spend more time and resources on

A) research and the development of better products.
B) keeping their production costs low.
C) rent seeking.
D) productive activities and less on political lobbying.

Question 14

Which of the following factors would be most likely to encourage capital formation in a less-developed nation?

A) High and variable rates of inflation.
B) Tariffs and quotas that restrict international trade.
C) A legal system that provides for secure property rights and even-handed enforcement of contracts.
D) High marginal tax rates.

Question 15

Why do political instability and insecure property rights retard economic growth?

A) Fear that private property will be confiscated substantially reduces the incentive to invest and create wealth.
B) When property rights are insecure, foreign investors will be reluctant to invest in the country.
C) Savings will tend to flow out of a country if individuals fear their property is insecure.
D) All of the above are correct.

Question 16

When the markets of an economy are more competitive, economic growth

A) is harmed by the resulting low rates of profit for industry.
B) is enhanced because producers have a stronger incentive to provide goods efficiently.
C) will be slower because prices do not rise as rapidly.
D) is unaffected.

Question 17

Which of the following would be most likely to encourage capital formation in a less-developed country?

A) The expectation of sustained high inflation.
B) The expectation that property rights will be highly secure in the years ahead.
C) The imposition of high tariffs and other restraints limiting imports.
D) Higher personal and corporate tax rates.

Question 18

When the residents of a nation are free to trade with foreigners, domestic producers will be able to

A) export more goods for which they are a high-cost supplier.
B) supply a larger quantity of goods they can produce at a relatively low cost.
C) charge higher prices then would otherwise be the case.
D) survive in the marketplace even if they do not produce efficiently.

Question 19

When regulations interfere with exchange and limit entry into various businesses and occupations, they will

A) help a country achieve more rapid economic growth.
B) promote more efficient use of investment capital by entrepreneurs.
C) retard economic progress.
D) increase the profits of business firms.

Question 20

Which of the following would be most likely to improve the standard of living of a less-developed country?

A) Development of strong labor unions.
B) More foreign investment, attracted by the expectation of economic and political stability.
C) Adoption of trade barriers (higher tariffs and quotas).
D) Widespread use of price controls to allocate goods and resources.

Question 21

The historical record indicates that foreign aid has

A) played a major role in helping formerly poor countries grow rapidly and achieve high income levels.
B) re-enforced corrupt governments and policies that stifle productive activities.
C) helped poor countries escape counterproductive policies imposed by authoritarian political leaders.
D) promoted economic growth, but slowed the movement toward political democracy.

Question 22

The English economist, Thomas Malthus, believed that sustained growth of income per person would be impossible because of

A) rapid growth of capital formation if population increased above the subsistence level.
B) rapid growth of population if income increased above the subsistence level.
C) rapid growth of government if income increased above the subsistence level.
D) political democracy if income increased above the subsistence level.

Question 23

An open capital market affects a nation's economic growth by

A) channeling capital into productive projects and away from wasteful projects.
B) rewarding investors who find the most productive projects and invest in them.
C) making the lowest-cost capital available from around the world.
D) all of the above.

Question 24

Which of the following is true about investment?

A) In a competitive capital market, private investors have a strong incentive to evaluate projects carefully and allocate their funds toward those projects expected to yield the highest rates of return.
B) In a competitive environment, profitable investment projects will tend to increase the wealth of the nation.
C) When investment funds are allocated by governments (rather than capital markets), political clout rather than the expected rate of return will generally determine which projects are undertaken.
D) All of the above are correct.

Question 25

Which of the following policies would be most likely to reduce the efficiency of a country's economic organization?

A) A legal structure that establishes secure property rights.
B) Imposition of tariffs and other barriers limiting international trade.
C) Competitive markets.
D) Aa stable monetary system.

Question 26

(I)  Governments that respect property rights and freedom of exchange while following monetary (and fiscal) policies consistent with relative price stability, establish the foundation for economic growth.
(II)  Governments have often diminished the economic prospects of a nation by levying high taxes, instituting price controls, and following inflationary monetary policies.

A) I is true; II is false.
B) I is false; II is true.
C) Both I and II are true.
D) Both I and II are false.

Question 27

Which of the following would be most likely to enhance the growth rate of an economy?

A) Imposition of a quota restricting the quantity of steel imports.
B) Gradual elimination of all tariffs over the next 10 years.
C) Legislation limiting the number of hours employees can work during a week to 32.
D) Legislation requiring employers to provide one year of severance pay to any employee who is dismissed from employment.

Question 28

Most economists believe that the poor economic performance of countries located in tropical areas is primarily the result of

A) the hot climate that saps the energy of people in tropical countries.
B) the poor institutional quality in most tropical countries.
C) the lack of natural resources in most tropical countries.
D) the failure of rich countries to provide foreign aid to tropical countries.

Question 29

Which of the following will tend to retard the growth and prosperity of a country?

A) Imposition of price controls and regulations that restrain domestic and international trade.
B) An expansionary monetary policy that leads to high rates of inflation.
C) High marginal tax rates.
D) All of the above.

Question 30

Which of the following is an important ingredient for the achievement of efficient economic organization?

A) Highly restrictive exchange rate controls.
B) Secure property rights and political stability.
C) High and variable rates of inflation.
D) High marginal tax rates.

Question 31

Which of the following is true about tax rates and economic growth?

A) Marginal tax rates that take a large share of income will enhance the incentive of individuals to invest and engage in productive activities.
B) High tax rates will tend to drive investment funds and highly productive citizens to other countries where tax rates are lower.
C) As marginal tax rates increase, individuals get to keep a larger share of their earnings.
D) Countries can gain by imposing higher tariffs and other barriers that will restrain international trade.

Question 32

If the political leaders of a country want to promote economic growth, which of the following policy alternatives would be most effective?

A) Imposition of price controls on agricultural products in an effort to keep food cheap.
B) A public-sector investment program financed by highly progressive taxation.
C) Low taxes, a monetary policy consistent with long-run price stability, and the abolition of price controls and trade restrictions.
D) Expansionary monetary policy designed to keep interest rates low.

Question 33

Concerning economic growth, which of the following is true?

A) Nations achieve high rates of economic growth primarily because of their natural resource endowments.
B) Human and physical capital investments are largely irrelevant to economic growth.
C) Poor nations grow slowly because they do not have access to modern technology
D) A favorable institutional environment will tend to attract more investment in human and physical capital.

Question 34

The recent growth records of Japan and Hong Kong during the last fifty years indicate that a nation can grow rapidly without

A) securely defined property rights.
B) adopting modern technology.
C) significant capital formation.
D) abundant domestic natural resources.

Question 35

(I)  A monetary policy that results in price stability will encourage the realization of gains from trade and thereby help promote economic growth.
(II)  High tariffs and restrictive quotas will encourage rapid economic growth.

A) I is true; II is false.
B) II is true; I is false.
C) Both I and II are true.
D) Both I and II are false.

Question 36

How do high tariffs and other restraints on international trade affect a nation's prosperity?

A) They increase employment and thereby promote the growth of real GDP.
B) They prevent the nation from fully realizing the potential gains from specialization, exchange, and competition.
C) They protect domestic producers and thereby promote economic growth.
D) Both a and c are correct.

Question 37

How do high marginal tax rates affect the economic prosperity of a nation?

A) They reduce the incentive of individuals to earn reported income.
B) They encourage the nation's most productive citizens to emigrate to countries where taxes are lower.
C) They discourage foreigners from investing in the country.
D) All of the above are correct.

Question 38

If a nation is going to achieve and sustain a high rate of economic growth, it must

A) prohibit low-wage foreign producers from supplying goods to the domestic market.
B) have an abundant domestic supply of low cost energy resources.
C) have a mechanism capable of attracting savings and channeling them into wealth-creating projects.
D) impose regulations that will limit the intensity of competition among domestic firms.

Question 39

Concerning tax rates and growth, which of the following is true?

A) Tax rates do not influence economic growth.
B) Countries with high marginal tax rates have generally had higher rates of economic growth than those with low tax rates.
C) Countries with low marginal tax rates have generally had higher rates of economic growth than those with high tax rates.
D) Countries that impose high marginal tax rates at low-income thresholds generally have high rates of economic growth.

Question 40

Which of the following will be most likely to contribute to the growth of a less-developed country?

A) Price controls that keep the cost of agricultural products low.
B) Rapid population growth.
C) Exchange rate controls and export restrictions.
D) Secure property rights and low marginal tax rates.

Question 41

During the past several decades, foreign aid to sub-Saharan Africa

A) has been smaller than the aid to other regions, but the reduction in  the extreme poverty rate has been larger in Africa than in other areas of the world.
B) has been larger than the aid to other regions, but the reduction in  the extreme poverty rate has been smaller in Africa than in other areas of the world.
C) has declined and as a result the poverty rate in sub-Saharan Africa has risen sharply.
D) has risen and, as a result, the poverty rate in sub-Saharan Africa has declined substantially.

Question 42

Which of the following would be most likely to improve the standard of living of a less-developed country?

A) development of strong labor unions.
B) more foreign investment, attracted by the expectation of economic and political stability.
C) adoption of trade barriers (higher tariffs and quotas).
D) widespread use of price controls to allocate goods and resources.

Question 43

When competition is present and private ownership rights are clearly defined and securely enforced,

A) production and trade are encouraged and plunder (taking from others) is discouraged.
B) people get ahead by helping others in exchange for income.
C) employers will have to provide prospective employees with at least as good a deal as they could get elsewhere.
D) all of the above are correct.

Question 44

Which of the following is most important for the achievement of long-term economic growth and a high level of per capita income?

A) Abundant natural resources.
B) Foreign aid.
C) Policies and institutions that encourage productive activities.
D) Institutions and policies that control the growth of population.

Question 45

Which of the following is true about growth rates?

A) in recent decades, the rich countries of the world have consistently grown more rapidly than poor countries.
B) no less developed country (LDC) was able to achieve a more rapid growth rate than the United States during the 1980 through 2005 period.
C) during recent decades, most LDCs have stagnated economically.
D) during 1980 through 2005, the fastest growing countries in the world were mostly LDCs.

Question 46

If the legal and regulatory environment fails to protect property rights and is often used to favor some at the expense of others, which of the following is most likely to be encouraged?

A) Productive activities.
B) A high rate of investment.
C) Rent-seeking and unproductive activities.
D) Competitive markets.

Question 47

Institutions that encourage productive activities and discourage counterproductive ones, will tend to promote

A) economic growth.
B) rent-seeking
C) economic fluctuations
D) high rates of unemployment.

Question 48

Which of the following is true of sub-Saharan Africa?

A) The poverty rate in the region is low.
B) Most of the sub-Saharan African countries rank among the freest economies in the world.
C) The poverty rate in sub-Saharan Africa is the highest of any region in the world, and the reduction in the rate during the past quarter of a century has been modest.
D) The poverty rate in sub-Saharan Africa is the lowest of any region in the world, and the rate has declined sharply during the past quarter of a century.

Question 49

Which of the following is true of sub-Saharan Africa?

A) Sub-Saharan Africa has received very little foreign aid and as a result, the poverty rate in the region is high.
B) Sub-Saharan Africa has received more foreign aid than any other region and nonetheless the poverty rate in the region remains high.
C) The economic freedom rating of sub-Saharan African countries is high, but the poverty rate in the region is still the highest in the world.
D) The reduction in the poverty rate in sub-Saharan Africa has been faster than for other regions of the world during the past quarter of a century.

Question 50

Private ownership and competitive markets are important for economic growth because they provide individuals with a strong incentive to

A) care for resources and use them beneficially.
B) innovate and introduce new products that are highly valued relative to their cost.
C) produce goods efficiently.
D) all of the above are correct.

Question 51

When institutions and policies provide secure property rights, a fair and balanced judicial system, monetary stability, and effective limits on the power of government, which of the following is most likely to be encouraged?

A) Rent-seeking.
B) Actions that reduce the value of resources.
C) Productive activities.
D) Destructive activities.

Question 52

Which of the following did Thomas Malthus believe would make sustained economic growth and the achievement of high income levels impossible?

A) Rapid growth of government spending.
B) The expansion of political democracy.
C) The expansion of communism to the developed world.
D) Growth of population.

Question 53

When a nation's institutional environment is more favorable, it will

A) attract more physical investment.
B) encourage individuals to invest more heavily in human capital.
C) encourage the development and efficient use of natural resources.
D) all of the above.

Question 54

Stable money and prices are a key source of economic growth because

A) they allow activist policymakers to fine tune the economy.
B) uncertainty and instability in prices will attract investors and business decision makers.
C) price instability increases capital formation.
D) price stability reduces the risks that accompany investment and other long-term commitments.

Question 55

In a market economy, what must an entrepreneur do in order to be successful?

A) Purchase resources at lower prices than rivals.
B) Produce a good that can be sold for more than its production cost.
C) Obtain large subsidies from the government.
D) Hire workers at low wage rates.

Question 56

Which of the following is most important if a country is going to grow rapidly and achieve a high level of per capita income?

A) An abundance of natural resources.
B) A warm moist climate.
C) A small population relative to the geographic size of the country.
D) Institutions and policies that encourage people to engage in productive activities.

Question 57

Regarding economic growth and income levels, which of the following is true?

A) Poor countries are unable to ignite the growth process unless they receive financial aid from richer countries.
B) Countries that fail to adopt institutions and policies supportive of trade, entrepreneurial discovery, and private investment will remain poor in the foreseeable future.
C) Countries that lack an abundance of natural resources have been unable to grow and achieve high income levels.
D) Countries with a large population relative to their land area are destined to remain poor.

Question 58

Which of the following is true about economic growth?

A) The United States is rich because it has democratic political institutions.
B) Economic growth is primarily the result of gains from trade, discovery of better ways of doing things, and capital investment.
C) Without foreign aid, poor countries are unable to break the cycle of poverty, low savings and investment, and economic stagnation.
D) Most all countries with an abundance of natural resources have been able to achieve rapid growth and high levels of per capita income.

Question 59

Individuals are more likely to engage in productive activities when institutions and policies

A) create a fair and unbiased judicial system.
B) result in high and variable rates of inflation.
C) transfer a large share of income through the political process.
D) are used to centrally plan the economy.

Question 60

Which of the following is true of sub-Saharan Africa?

A) The poverty rate in the region is low.
B) The region has received more foreign aid than any other area of the world.
C) Most of the countries in the region rank among the freest economies in the world.
D) The poverty rate in the region is the lowest of any region in the world, and the rate has declined sharply during the past quarter of a century.

Question 61

The growth records of Japan and Hong Kong during the last fifty years indicate that an economy can grow rapidly without

A) securely defined property rights.
B) abundant domestic natural resources.
C) significant capital formation.
D) adopting modern technology.

Question 62

Some low-income countries generally remain poor because

A) their institutional arrangements and policies often discourage productive activity and reduce the potential gains from specialization and exchange.
B) they are oppressed by developed nations that benefit from the cheap goods available from countries with low wage rates.
C) they are poorly endowed with natural resources, which are essential for long-term growth.
D) when the average income level is low, workers have little incentive to earn higher incomes.

Question 63

Increases in per capita GDP are

A) important, because it means governments have more resources.
B) important, because they generally improve our living standards.
C) not important, as governments take the increased output and waste it.
D) not important, because increases in per capita GDP do not affect our living standards.

Question 64

Which of the following is true regarding the per person income of the world during the past 1000 years?

A) The world's income per person has approximately doubled during the past 1000 years and most of that growth has occurred since 1900.
B) The world's income per person changed very little during the 800 years prior to 1813, but it has increased by nearly tenfold during the past 200 years.
C) The world's income per person has grown steadily during the past 1000 years.
D) The world's per person income grew at an annual rate of more than 2 percent during 1000-1813, but the annual growth rate has declined as the population increased during the past 200 years.

Question 65

According to Angus Maddison, a leading authority in the area, world per capita GDP

A) increased by about 50 percent  during the 800 years following year 1000, but it increased  by nearly tenfold  during the past 200 years.
B) increased by nearly tenfold during the 800 years between 1000 and 1813, but it increased by only 50 percent during the past 200 years.
C) has grown steadily during the past 1000 years.
D) Grew at an annual rate of more than 2 percent during 1000-1813, but the annual growth rate has declined as the population increased during the past 200 years.

Question 66

Life expectancy at birth for the world rose from 24 years to 26 years between 1000 and 1820, but  by 2010, life expectancy had risen to

A) 36 years.
B) 44 years.
C) 52 years.
D) 70 years.

Question 67

If a nation is going to achieve and sustain a high rate of economic growth, it must

A) prohibit low-wage foreign producers from supplying goods to the domestic market.
B) have an abundant domestic supply of low cost energy resources.
C) have a mechanism capable of attracting savings and channeling them into wealth-creating projects.
D) impose regulations that will limit the intensity of competition among domestic firms.

Question 68

Which of the following is most important if the living standards of people residing in a country are going to improve?

A) growth of population
B) growth of per capita GDP
C) growth of the money supply
D) growth of government expenditures as a share of GDP

Question 69

During the past 1000 years, the income per person of the world has

A) increased each century, and it is now five times greater than the level of 1000 years ago.
B) risen rapidly in Western Europe, North America, Japan, and  Australia, but there has been little change in income per person in other parts of the world.
C) increased by approximately tenfold during the past 200 years, but there was only a small increase during the 800 years prior to 1800.
D) persistently increased, but the largest increases occurred during the 1200 to 1800 era.

Question 70

Measured in 2011 dollars, the GDP per person of the world was $1,122 in 1820.  By 2010, the world's income per person had risen  to

A) nearly $1200, almost twice the level of 1820.
B) $2,422, almost four times the level of 1820.
C) a little more than $3,600, approximately six times the level of 1820.
D) $13,070, nearly twelve times the level of 1820.

Question 71

The historical record indicates that foreign aid has

A) played a major role in helping formerly poor countries grow rapidly and achieve high income levels.
B) re-enforced corrupt governments and policies that stifle productive activities.
C) helped poor countries escape counterproductive policies imposed by authoritarian political leaders.
D) promoted economic growth, but slowed the movement toward political democracy.

Question 72

During the past 1000 years, the income per person of the world has

A) increased each century, and it is now five times greater than the level of 1000 years ago.
B) risen rapidly in Western Europe, North America, Japan, and  Australia, but there has been little change in income per person in other parts of the world.
C) increased by approximately tenfold during the past 200 years, but there was only a small increase during the 800 years prior to 1800.
D) persistently increased, but the largest increases occurred during the 1200 to 1800 era.

Question 73

During the past 200 years, income per person  has

A) increased in the developed countries of Western Europe and North America,  but declined in the rest of the world.
B) declined in the developed countries of Western Europe and North America, but increased in the rest of the world.
C) increased far more rapidly in both developed and less developed  countries than during the centuries prior to 1800.
D) Increased far less rapidly in both developed and less developed countries than during the centuries prior to 1800.

Question 74

The per capita income level of the world grew very slowly prior to

A) around 1800, when per capita GDP began to increase rapidly in some Western countries.
B) around 400, when the collapse of the Roman empire resulted in a substantial increase in the growth of real GDP.
C) around 2000, when mobile phones became commonly available.
D) the 14^th century, when the Italian Renaissance began.

Question 75

What has happened to the world's economy over the past 200 years?

A) People have become malnourished because they no longer grow most of their own food.
B) Rich countries have become richer and poor countries have become poorer.
C) People have more consumer goods but health and happiness has decreased.
D) There has been economic growth, less poverty, and longer life spans.

Question 76

If real GDP is increasing more rapidly than population,

A) population must be declining.
B) the country will have to export more than it imports.
C) the general level of prices must be increasing.
D) per capita real GDP will be increasing.

Question 77

When per capita real GDP is increasing, real output is growing

A) more rapidly than prices.
B) more rapidly than population.
C) less rapidly than prices.
D) less rapidly than population.

Question 78

When individuals and businesses are permitted to trade freely over a larger market area,

A) wages will decline to the level of the poorest country in the region.
B) the monopoly power of business firms will increase.
C) they will be able to produce a larger output and consume a more diverse bundle of goods.
D) businesses will be able to earn higher profits, but the income levels of individuals will decline.

Question 79

Which of the following is true for the world as a whole?

A) During the past 200 years, the income per person of the world has increased sharply, but there has been little change in the years of life expectancy at birth.
B) During the past 200 years, the years of life expectancy at birth has increased sharply, but there has been little change in the world's income per person.
C) During the 800 years between 1000 and 1800, the increases in both world income per person and life expectancy at birth were small, but both of these indicators have increased sharply during the past 200 years.
D) Both income per person   and life expectancy rose steadily during 1000-1800, but neither of these indicators have increased much during the past 200 years as the population of the world has become larger and larger.

Question 80

Which of the following is true of the per person income of the West (Western Europe and its offshoots of the United States, Canada, Australia, and New Zealand)

A) It has increased each century and grown steadily since 1500.
B) It is now approximately 20 times greater than the figure of 200 years ago.
C) It rose steadily between 1000 and 1800, but income growth has slowed during the past 200 years.
D) While income per person has increased since 1800, there has been little change in life expectancy and other indicators of quality of life during this time period.