Chapter 12 Study Problems 1. Is there a broad consensus among economists about how to achieve high growth rates of /? a. Yes. Fewer government programs to provide education and other support to the poor. b. Yes. More government programs to provide education and other support to the poor. c. No. There is no one agreed upon answer. d. Yes. Changing the moral suasion of the nation. 2. In Aidni, a person s caste used to determine a person s education and occupation. Then the government passes sweeping legislation opening all occupations to those of any caste and barring caste discrimination in education. According to class, this will likely: a. cause the PPC to shift our more slowly than otherwise. People will spend more time shopping for education and occupations and less time working. b. cause the PPC to shift out further than otherwise. Resources, namely labor, can now be used more efficiently. c. not affect how the PPC shifts out. It will, however, cause consumption spending to crowd out spending on new (physical) l. d. not affect how the PPC shifts out. It will, however, cause spending on new (physical) l to crowd out consumption spending. 3. Che Bolivar has just been elected president of Puerto Pobre, a low-income country with typical low-income country characteristics. Che campaigned on the promise of helping the poor by taxing the rich and using the revenues to provide income, education, and land for the poor. According to chapters 11 and 12: a. everything about Che s plan is bad for long-run growth. b. Che s plan has many aspects which will likely decrease long-run growth. In some regards, however, Che s plan is pro long-run growth. c. in the long-run, everything about Che s plan is pro-growth. 4. Madame Fictionale has just been elected President of French Guyana. She plans to increase income tax rates from 15% to 25% and use the revenues to increase funding for public education. According to the readings and lecture, what effect will this program have on long-run growth? a. The growth rate will likely decrease. b. The growth rate could either increase or decrease. Some aspects of her plan likely will increase the growth rate, others will likely decrease it. c. The growth rate will likely increase. # 5 10: Oz is a typical poor country. Assume Oz shares the characteristics of most poor countries. 5. The use of corruption and bribery to get one s way is likely: a. less common in Oz than in most rich nations. b. about as frequent in Oz as in most rich nations. In terms of $ value, however, rich nations see more bribery per. c. more common in Oz than in most rich nations. 1
6. Income distribution in Oz is likely: a. less equal than in most rich countries. b. about as equal as in most rich countries. c. more equal (more unequal) than in most rich countries. d. Less equal or more equal than rich countries depending on how one measures it. If one looks at taxable $ income things in Oz are less equal than in a most rich countries. If one looks at the goods people actually receive, things in Oz are more equal than in most rich countries. 7. Currently, about 25% of the 1 million adults in Oz are allowed to vote. However, a group of a 10 rich elite (los espantapájaros) try to seize power in Oz. Their plan is to draft a new constitution and government. What, according to text and lecture, is likely to happen if this group comes to power and forms a government? a. Spending on public assistance such as food stamps will increase. b. Spending on public education will increase. c. The laws will be written so that those in power can use the property of others if it is in the interest of the government. d. Property rights will become better defined and more secure. e. all of the above 8. How would the answer to # 7 likely affect (very) long-run growth in Oz? a. Oz will experience lower growth, ceteris paribus, rates over the long-run. b. Oz s growth rate will be unaffected. However, income distribution will likely change. c. Oz will experience higher growth rates, ceteris paribus, over the long-run. 9. Assume that instead, the law is changed so that everyone age 18 and up can now vote. Further, voters will soon elect representatives to draft a new constitution. What, according to text and lecture, is likely to happen because of this widespread enfranchisement (i.e. letting everyone vote)? a. Government spending of all kinds will likely decrease. b. Spending on public assistance such as food stamps will increase. c. Government will likely cut public education spending and decide to rely on the private sector to provide education. d. both a & c 10. What, according to text and lecture, is another probable result of this widespread enfranchisement (i.e. letting everyone over 18 vote as in question 9)? a. Property rights will become better defined and more secure. b. A flat tax system will likely be adopted. c. Government will tax sales rather than wages. d. The rich will now find it easier to take property and income from the poor. 11. It s 1790 and two colonies have just gained independence from their European colonizers. Both are about to draft a new government. Alphastan is a society in which income and wealth are very unequally distributed. All the land in Alphastan is owned by only a few families. In Betanam, however, income and wealth are distributed very equally. Which country will, according to our readings and lecture, have higher long-run growth rate? a. Alphastan b. Betanam c. there is no reason to suspect their long-run growth rates will differ. 2
12. What best explains you answer to the question above? a. If only a few have resources, they will likely leave the country after independence. b. If only a few have resources, those few will likely be more keen to have legal protection of property rights. c. If only a few elites have power when the government is created, they will determine the shape of government. These elites will likely adopt a corrupt system designed to promote only their interests. 13. Write in the name of the European country that colonized (or was the main colonizer) for each of the countries below. Canada (especially after 1763) Jamaica (after 1655) Mexico Haiti 14. Economic historians have often argued that Britain had better property rights than France, and France had better property rights than Spain during most of the 1700s. Economists (including economic historians) have also argued that a system of good property rights is good for very long-run growth. Does this mean that former British colonies, therefore, had better growth and ended up richer in the very long-run? In each blank below, write that country s /Capita (for 2007). Canada Jamaica Mexico Haiti 15. Bob has just graphed per in relation to several key variables. Unfortunately, his pet hyena chewed up his graphs. He needs to know which graph shows how Democracy and per are related. Which graph best fits the real world relationship between the level of Democracy and per? Hmmm Our text did not use the word; Democracy? A dictatorship or police state, such as North Korea, has very low levels of Democracy. A state in which almost all adults can vote, the more powerful people in government are elected, and elections are relatively free and fair, would have high levels of Democracy. a. b. low levels high levels low levels high levels c. d. low levels high levels low levels high levels 3
Chap 12 Reading Quiz John Lovett 16. Based on the text, which of the following are possible explanations, to the above question? Check any and all that both a) explain the above correlation (or lack of correlation) and b) are supported by the text. There could be an element of random luck. The U.S., Canada, and Western Europe are rich. Therefore, any characteristic that is Western European or of Western European descent will show up as being correlated with being rich. For example, Western Europeans, Americans, and Canadians (and increasingly Japanese) own many more dogs per than the rest of the world. It is just luck that dog ownership is positively correlated with high per. Democracy means government has to cater to the needs of all. As a result, government may be more likely to choose a legal system in which all have the opportunity to succeed, rather than a system in which only those with access to power can succeed. Stronger property rights, better incentives, and better opportunity are the result. Democracy means higher government transfers. Government transfers mean the rich are having more of their income taxed. This reduces the rich s incentive to work. The poor are receiving goods and money without paying for them. This reduces the poor s incentives to work. 17 22: According to lecture and handouts, how well do the following correlate with being rich today and how certain are we of the correlation? 17. Being a former British colony is: b. negatively correlated with being rich today. c. uncorrelated, a correlation coefficient that s almost zero, with being rich today. 18. How certain are we, based on statistical inference (regression analysis) of the above (former British colony and being rich today) correlation? to North America. 19. Being a former colony that had high mortality rates for Europeans is: b. negatively correlated with being rich today. c. uncorrelated, a correlation coefficient that s almost zero, with being rich today. 4
Chap 12 Reading Quiz John Lovett 20. How certain are we, based on statistical inference (regression analysis) of the above (high mortality rates for Europeans and being rich today) correlation? to North America 21. Being a former colony with low native population density is: d. negatively correlated with being rich today. e. uncorrelated, a correlation coefficient that s almost zero, with being rich today. 22. How certain are we, based on statistical inference (regression analysis) of the above (low native population density and being rich today) correlation? to North America. 5