Midterm_1_Winter_2024_answers

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Midterm Exam 1 ECO 2117B - Introduction to Development Economics February 2, 2024 Name: Student Number: INSTRUCTIONS You have 80 minutes to complete the exam (from 11:30 a.m. to 12:50 a.m.). • This exam consists of 30 multiple-choice questions, each contributing equally to your total grade. • Read each question thoroughly before selecting an answer. • Record all answers on the provided Scantron sheet using a pencil. • A formula sheet is included at the end of this exam for your reference. • The sharing of calculators is not allowed. • This questionnaire is printed on both sides. Please check to ensure you have all pages. • A detachable blank sheet is provided at the end for rough calculations. • Write your full name and student number on the top of the first page. • On the Scantron sheet, enter the course code , your student number , and your last name . Ensure all cells are filled in properly. • Incomplete or missing personal information on the Scantron may result in your exam not being graded. • After completion, submit both the Scantron sheet and this questionnaire directly to the TA or professor. Questions 1. According to the Input-Output analysis, how do linkages contribute to the overall economic develop- ment of a country? (a) By encouraging economies of scale within specialized sectors without inter-industry exchanges. (b) They generate multiplier effects that can lead to increased production and employ- ment across sectors. (c) By facilitating bilateral trade agreements, which align the economic policies of partner countries to create a unified market presence. (d) Through fostering competitive import substitution, reducing the need for sectoral interdepen- dence. (e) All of the above. 1

2. During the 1960s and 1970s, what observation led to rethink the exclusive focus on economic growth in development economics, and a shift towards considering also inequality and poverty? (a) Very rapid economic growth internationally and the elimination of income inequalities and poverty across nations. (b) Economic growth led to decreased income inequality in poor countries but increased income inequality in rich countries. (c) Economic growth increased inequality in several cases, and development economists found that growth alone was not enough. (d) Very low economic growth internationally but the elimination of income inequalities and poverty across nations. (e) None of the above. 3. What relationship between income levels and income inequality is suggested by the Kuznets’s inverted U hypothesis? (a) It proposes that income inequality will intensify in the initial stages of a country’s economic development, but after a certain threshold, further growth will lead to a reduction in inequality. (b) It suggests that income inequality remains constant as a country transitions from low-income to high-income status. (c) It indicates that higher levels of income in a country will always be associated with lower levels of inequality. (d) It posits that economic growth in a country leads to a diversified economy where income inequal- ity is addressed through sectoral shifts and educational advancements, effectively rendering the relationship between growth and inequality neutral over time. (e) None of the above. 4. What does the theory of the Taking Off say about the process of development? (a) High-income countries will maintain their economic status, with low-income countries remaining in a perpetual state of underdevelopment. (b) Development trajectories are predetermined, with historical patterns dictating the exclusive path for each country’s economic evolution. (c) All economies have the potential to achieve growth through sequential stages, even- tually reaching a stage of development. (d) Economic development is a zero-sum game, with one country’s development only possible at the expense of another’s stagnation. (e) None of the above. 5. A development economist is designing a Randomized Controlled Trial (RCT) to evaluate the impact of microfinance programs on small business growth in rural areas. The economist has a list of 200 small businesses that are eligible for the program. To ensure the study’s validity, which of the following steps should the economist take to randomize the treatment? (a) Select the 100 businesses closest to the microfinance institution to receive the program, as they are most likely to participate. (b) Assign the businesses to the treatment or control group based on their past financial performance to ensure groups are comparable. (c) Use a lottery method where each business has an equal chance of being selected for the treatment group, irrespective of their location or past performance. 2

(d) Choose businesses for the treatment group that have the highest need for the program, as deter- mined by a survey of their financial needs. (e) None of the above. 6. In the context of Randomized Controlled Trials (RCTs), what does the selection problem refer to? (a) The challenge of randomly selecting a sufficient sample size for the trial. (b) The difficulty of choosing the most effective treatment to be tested in the trial. (c) The issue that occurs when characteristics that affect participation are also related to the outcomes being measured. (d) The challenge of ensuring that the trial results are applicable to the general population. (e) All of the above. 7. How can the selection problem specifically impact the results of an RCT? (a) It prevents the results from being generalizable to the entire population of interest. (b) It may lead to biased estimates, meaning we can overestimate or underestimate the effect of the treatment. (c) It complicates the analysis because it prevents the group that needs the treatment the most from necessarily receiving it. (d) It minimizes the need for randomization by creating naturally occurring comparison groups. (e) All of the above. 8. What are spillover effects in the context of a social cash transfer (SCT) program? (a) The combined direct and indirect effects of the transfer on the income of households receiving the treatment. (b) The immediate increase in income for the households directly receiving the cash transfer. (c) The effects of the transfer on households that did not receive the cash transfer but are part of the local economy and may be indirectly affected. (d) The opportunity cost associated with implementing the social cash transfer program. (e) None of the above. 9. Why are placebos used more in medical trials than in social science experiments? (a) In medical trials, placebos can be used to keep patients unaware if they are receiving the real treatment. This is often not applicable in social science experiments because of the practical nature of the treatments. (b) In social science experiments, it is not necessary for the control group to think they are getting the real treatment to accurately measure its effects. (c) Ethical rules in social science experiments often prevent researchers from using placebos that could mislead participants. (d) The psychological effects of placebos are significant for medical outcomes but are not as applicable in social science studies. (e) None of the above. 10. Even when we have pre-treatment and post-treatment measurements of the outcome of interest for the treatment group, why is a control group essential in a Randomized Controlled Trial (RCT)? (a) To help mitigate selection bias by ensuring that participants in the treatment group are similar to those in the wider population. 3

(b) To provide additional data for analyzing whether the treatment is more effective for certain types of participants. (c) To compare the treatment group with a baseline that shows what happens without the treatment, taking into account natural changes in the condition and external factors that could affect the results. (d) To ensure that the study results can be generalized to other settings or populations, enhancing the external validity of the research. (e) All of the above. 11. Why is Cost-Benefit Analysis (CBA) important for development economists when evaluating projects? (a) It accounts for the opportunity cost of using resources in one project instead of another. (b) It includes the time value of money, recognizing that the value of money changes over time due to factors like inflation and interest rates. (c) It helps to assess if a project’s long-term benefits justify its initial costs, considering both present and future values. (d) It allows economists to compare the net present value of different projects to make informed decisions. (e) All of the above. 12. Why is considering the bank’s interest rate important when conducting a Cost-Benefit Analysis (CBA) for a development project? (a) Because the bank’s interest rate represents an alternative return on investment, serving as the opportunity cost of the project. (b) Because a higher bank interest rate directly increases the costs of the project. (c) Because the bank’s interest rate has to be paid by the project, adding to its expenses. (d) Because the interest rate affects the project’s deadline to break even, unrelated to the opportunity cost. (e) All of the above. 13. If you want to save enough money to have $ 1,000 in a bank account three years from now at an annual interest rate of 5%, how much would you need to deposit today? (a) $ 816.30 (b) $ 863.84 (c) $ 888.49 (d) $ 850.00 (e) None of the above. 14. You are evaluating a project with an initial cost of $ 60 at time t = 0 and annual benefits of $ 20 for each subsequent period from t = 1 to t = 4. If the interest rate is 7%, what is the Net Present Value (NPV) of the project? (Round your derivations to two decimal places.) (a) $ 5.81 (b) $ 7.77 (c) $ 9.85 (d) $ 12.32 (e) None of the above. 4

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