BSocSc Bachelor of Social Science Bachelor of Social Science Economics 5 — Questions and Answers
Question 1: The Solow growth model attributes long-run per capita economic growth primarily to:
- Capital accumulation
- Labor force growth
- Technological progress (Correct answer)
- Government investment
Correct answer: Technological progress
In the Solow model, capital accumulation faces diminishing returns, so only sustained technological progress (total factor productivity growth) drives long-run per capita income growth.
Question 2: When a central bank conducts open market operations by purchasing government bonds, the immediate effect is:
- Decrease in money supply and higher interest rates
- Increase in money supply and lower interest rates (Correct answer)
- Higher taxes and reduced government deficit
- Depreciation of the currency through direct exchange
Correct answer: Increase in money supply and lower interest rates
Buying bonds injects reserves into the banking system, expanding the money supply and pushing interest rates downward as loanable funds increase.
Question 3: The Heckscher-Ohlin trade theory predicts that countries will export goods that intensively use their:
- Scarcest factor of production
- Most abundant factor of production (Correct answer)
- Most technologically advanced input
- Cheapest imported materials
Correct answer: Most abundant factor of production
Heckscher-Ohlin theory holds that countries have a comparative advantage in goods that use their relatively abundant and thus cheaper factor of production intensively.
Question 4: A public good is defined by which two properties?
- Rivalrous and excludable
- Non-rivalrous and non-excludable (Correct answer)
- Rivalrous and non-excludable
- Non-rivalrous and excludable
Correct answer: Non-rivalrous and non-excludable
Public goods are non-rivalrous (one person's use does not reduce availability to others) and non-excludable (it is impossible to prevent non-payers from benefiting).
Question 5: Which economic indicator measures the average price change experienced by urban consumers for a basket of goods and services?
- Producer Price Index (PPI)
- GDP Deflator
- Consumer Price Index (CPI) (Correct answer)
- Personal Consumption Expenditures (PCE) index
Correct answer: Consumer Price Index (CPI)
The CPI tracks the cost of a fixed market basket purchased by typical urban consumers and is the most commonly cited measure of retail inflation.
Question 6: In the context of economic development, the 'Dutch Disease' phenomenon describes how:
- Foreign aid creates dependency traps in low-income countries
- A booming export sector causes currency appreciation that hurts other traded sectors (Correct answer)
- Industrialization leads to agricultural decline
- High tariffs reduce manufacturing competitiveness
Correct answer: A booming export sector causes currency appreciation that hurts other traded sectors
A natural resource boom raises export revenues, appreciating the currency and making other exports like manufacturing uncompetitive — a pattern seen in the Netherlands after North Sea gas discovery.
Question 7: According to the Efficient Market Hypothesis (EMH) in its strong form, which of the following is true?
- Only public information is reflected in stock prices
- Insider information can consistently generate abnormal returns
- All public and private information is already reflected in asset prices (Correct answer)
- Technical analysis can predict future price movements
Correct answer: All public and private information is already reflected in asset prices
The strong form of EMH asserts that asset prices fully reflect all information — public and private — making it impossible for anyone, even insiders, to consistently earn abnormal returns.
BSocSc Bachelor of Social Science Bachelor of Social Science Economics 5
The Solow growth model attributes long-run per capita economic growth primarily to: