MEcon Master of Economics Development Economics 2 — Questions and Answers
Question 1: Microfinance programs primarily aim to:
- Finance large government infrastructure projects
- Provide small loans to low-income borrowers excluded from formal credit markets (Correct answer)
- Fund central bank reserves in developing economies
- Support multinational corporations entering emerging markets
Correct answer: Provide small loans to low-income borrowers excluded from formal credit markets
Microfinance extends small-scale credit, savings, and insurance services to low-income individuals and micro-entrepreneurs who are typically excluded from conventional banking.
Question 2: Import substitution industrialization (ISI) seeks to promote development by:
- Subsidizing domestic producers to increase their exports
- Protecting nascent domestic industries from foreign competition to foster industrialization (Correct answer)
- Attracting foreign direct investment to free-trade export zones
- Eliminating all trade barriers to maximize market competition
Correct answer: Protecting nascent domestic industries from foreign competition to foster industrialization
ISI uses tariffs, quotas, and subsidies to shield domestic industries from foreign competition, allowing them to grow and develop before facing global markets.
Question 3: The Washington Consensus package of economic reforms included all of the following EXCEPT:
- Fiscal discipline and deficit reduction
- Trade liberalization
- Privatization of state-owned enterprises
- Capital controls to protect domestic financial markets (Correct answer)
Correct answer: Capital controls to protect domestic financial markets
The Washington Consensus promoted open capital accounts and financial liberalization, not capital controls, as part of its market-oriented reform agenda.
Question 4: Randomized controlled trials (RCTs) are used in development economics primarily to:
- Forecast macroeconomic trends in emerging markets
- Identify causal impacts of specific development interventions (Correct answer)
- Determine optimal tax structures for low-income countries
- Estimate long-run steady-state growth rates
Correct answer: Identify causal impacts of specific development interventions
RCTs randomly assign individuals or communities to treatment and control groups, enabling credible causal inference about the impact of interventions like cash transfers or vaccination programs.
Question 5: Which statement best describes 'poverty traps' in development economics?
- Government policies that inadvertently increase the poverty headcount
- Self-reinforcing mechanisms where poverty itself creates barriers to escaping poverty (Correct answer)
- Geographic regions with structurally high and permanent poverty rates
- Tax systems that penalize income growth among the poor
Correct answer: Self-reinforcing mechanisms where poverty itself creates barriers to escaping poverty
Poverty traps arise from threshold effects and non-convexities—the poor lack the minimum resources required to invest in capital that would generate income growth.
Question 6: Foreign direct investment (FDI) is valued in developing countries primarily because it:
- Reduces government tax revenues by creating profit-shifting opportunities
- Transfers capital, technology, and managerial skills to host economies (Correct answer)
- Guarantees higher wages for all domestic workers in all sectors
- Automatically eliminates trade deficits in recipient countries
Correct answer: Transfers capital, technology, and managerial skills to host economies
FDI is valued not only for the capital it brings but also for technology transfer, knowledge spillovers, managerial expertise, and access to global markets.
Question 7: The infant industry argument for trade protection holds that:
- All new domestic industries should receive permanent tariff protection
- Nascent industries may need temporary protection to achieve scale economies and competitiveness (Correct answer)
- Agricultural industries always require more protection than manufacturing
- Trade protection is never economically justifiable under any circumstance
Correct answer: Nascent industries may need temporary protection to achieve scale economies and competitiveness
The infant industry argument contends that new industries may temporarily require protection to learn, achieve scale economies, and develop competitiveness before facing international competition.
MEcon Master of Economics Development Economics 2
Microfinance programs primarily aim to: