Question

1. The COVID-19 pandemic has forced some firms to stop producing to avoid further spread of the disease. Many workers as well as the self-employed and business owners have seen their incomes drop sharply or disappear altogether. Even firms that continue to operate have had to limit their services to take precautions, ensure social distancing, and disinfect their equipment and premises regularly. All of this has raised their production costs. However, the increased costs have not been associated with inflation. To the contrary, so far, all advanced economies have faced deflation after the COVID-19 outbreak. These observations suggest that as a result of the pandemic, advanced economies must have experienced

1. only a major negative demand shock.
2. only a major adverse supply shock.
3. an adverse supply shock combined with a stronger negative demand shock.
4. a favorable supply shock combined with a stronger negative demand shock.
5. a favorable supply shock combined with a stronger positive demand shock.
6. Explain your answer

2. The Government of the Pakistan has received $2 billion from international donors and wants to spend the money in the best way to increase the country's GDP growth rate over the next decade. Which one of the following policies is likely to contribute towards this goal?

1. Spend the donation on education programs that raise the quality of the Pakistani labor force and, thereby, facilitate the adoption of new technologies by Pakistani firms.
2. Spend the donation on creating more government jobs to reduce the unemployment rate among the population in the major cities.
3. Spend the donation on importing armored cars for use by the top politicians and government officials.
4. Spend the donation to provide popular sports events and national celebrations of government’s achievements in the election year.
5. All of the above.Explain your answer

Questions 3-5 are about the role of various factors (institutions, technology, and capital accumulation) in the spectacular economic growth of East Asian economies. For example, high savings rates are an important feature of those economies and some observers have asked whether the high growth rates in those economies could explain their growth performances over the past several decades. This is the subject of Question 3.

Improving the business environment and creating strong incentives for innovation and adoption of new technologies have been other features of the region’s economies. These are the subject of Questions 4 and 5.

To analyze the potential role of such factors in growth, you will consider two hypothetical countries, A and B, that are identical in every respect. (They have the same preferences, institutions, technology, labor supply, population growth rates, savings rate, depreciation rate, and per capita capital stock.)

3. Assume that both countries, A and B, finance their investments entirely through their domestic savings. Starting this year, the people in Country A decide to save and invest a larger share of their income and maintain the new savings rate indefinitely in the coming years, while people in B maintain their previous saving and investment rates. If the returns to capital in both economies are diminishing, then Country A’s GDP will grow at

1. a faster rate than country B’s GDP in the next few years and many decades later.
2. a slower rate than country B’s GDP in the next few years and many decades later.
3. the same rate as country B’s GDP in the next few years and many decades later.
4. a faster rate in the next few years, but at the same rate as country B’s GDP many decades later.
5. a slower rate in the next few years, but at the same rate as country B’s GDP many decades later.
6. the same rate as country B’s GDP in the next few years, but at a faster rate many decades later.Explain your answer

4. Again, consider the two economies, A and B, described above. Starting this year, the government of Country B offers tax incentives to encourage the country’s businesses to invest more in order to expand employment. The government of Country A also offers the same amount of tax incentive and generates the same amount of additional investment, but it requires the investments to focus on the adoption of advanced technologies through R&D or through joint ventures and/or licensing with foreign companies. In this situation, Country A’s GDP will grow at

1. a faster rate than country B’s GDP in the next few years and many decades later.
2. a slower rate than country B’s GDP in the next few years and many decades later.
3. the same rate as country B’s GDP in the next few years and many decades later.
4. a faster rate in the next few years, but at the same rate as country B’s GDP many decades later.
5. a slower rate in the next few years, but at the same rate as country B’s GDP many decades later.
6. the same rate as country B’s GDP in the next few years, but at a faster rate many decades later.Explain your answer

5. Once again, consider the two economies, A and B, described above. The government of country A wants to help its economy to grow faster than country B’s economy over the next decades. Which one of the following policies is likely to contribute towards this goal in country A?

1. An increase in government expenditure to provide free lunches for officials and bureaucrats.
2. An increase in expenditure on national celebrations that create more government jobs.
3. A decrease in the rate of growth of money supply over the next decade.
4. A reform that makes the judiciary more independent, improves enforcement of property rights, and lowers the cost of doing business in the country.
5. All of the above. Explain your answer

Answer 1

Q1) The answer is (c) an adverse supply shock combined with a stronger negative demand shock.

While there is a direct supply shock as workers can not come to work and raw materials can not be procured, there is also a demand shock when firms engage in large scale layoffs and people lose purchasing power due to unemployment. Thus, both the supply and demand shift tot he left but if the demand shifts by more, the prices will actually fall.

Q2) The answer is (a) Spend the donation on education programs that raise the quality of the Pakistani labor force and, thereby, facilitate the adoption of new technologies by Pakistani firms.

Long term economic growth can be boosted only by investing in human capital and by technological progress. Education is one of the most fundamental ways of improving labor productivity and long term economic growth.

(b) and (c) will both increase output in the short run but will not affect capacity in the long run.

(d) and (e) are wasteful expenditures which will not boost the economic growth potential at all.