VERSION B
ECN 110B: World Economic History II
Spring 2014
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MIDTERM EXAMINATION II
Suggested Answers
NAME
UC DAVIS STUDENT ID NUMBER
PLEASE READ THE FOLLOWING CAREFULLY
INSTRUCTIONS
This exam is worth 160 points.
This exam has a multiple choice section (8 questions for 5 points each for a total of 40
points or 1/4 of the exam grade) and a short answer section (4 questions, 30 points each
for a total of 120 points or 3/4 of the exam grade).
Th
The multiple choice questions have one correct answer and should be answered both on a
scantron sheet and on the exam. The short-answer questions require some thought but not
a lot of writing. Please write your answers within the space provided on the exam. Plan
your time carefully.
DON’T FORGET TO PUT YOUR STUDENT ID NUMBER ON THE SCANTRON
SHEET
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I. MULTIPLE CHOICE QUESTIONS (5 Points each for a total of 25% of the grade)
Give the best response to each of the following questions. NOTE: Each question has one
and only one correct answer.
1. The best explanation for the strong economic growth in South Korea between
1960 and 1990 is
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a. an export-led boom
b. investment rose due to government incentives which then led to an export
boom
c. the Marshall Plan
d. The Bretton Woods system led to stability and raised investment
e. Borrowing from the US increased which raised investment and rising
domestic demand
2. The main reason the gold standard failed in the interwar period (1920-1938) was
because
a.
b.
c.
d.
the British Empire had disappeared
economic growth was abnormally high
there were current account deficits in some countries
there was much less credibility and also cooperation amongst nations
was lacking
e. there was excessive reliance on the banking system
3. Which of the following is NOT a key explanation for economic growth between
1960 and 1990 in several East Asian nations (e.g., Korea, Taiwan, and Singapore)
when compared to other countries say in Latin America
High human capital
Low dependency ratios
Low inequality
Improved factor productivity or technology
High investment
Th
a.
b.
c.
d.
e.
4. Which would best categorize the way the Bretton Woods system dealt with the
trilemma? (sovereign means independent in this context)
a. Floating exchange rates, sovereign monetary policy, free capital
movement
b. Fixed exchange rates, sovereign monetary policy, free capital movement
c. Fixed exchange rates, sovereign monetary policy, capital controls
d. Fixed exchange rates, non-sovereign monetary policy, capital controls
e. Floating exchange rates, sovereign monetary policy and capital controls
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VERSION B
5. To eliminate hyperinflation in Germany in 1923, which of the following was not
done?
a. Corporate taxes were lowered
b. Reparations were eased
c. Exchange rate was pegged
d. The French occupied the Ruhr valley industrial area
e. Lower unemployment benefits
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6. Which factor below was not a feature of the strong economic growth between
1950 and 1970 in western Europe
a.
b.
c.
d.
Rapid growth in trade
New plant and equipment making workers more productive
Low inflation
Heavy capital inflows from the USA supporting recovery from war
via investment in infrastructure
e. Centralized wage bargaining
7. The Treaty of Versailles, which was signed in 1919, helped lead to which of the
following outcomes?
a.
b.
c.
d.
e.
Closer integration and political cooperation between European nations
Hyperinflation in Germany in 1923
Low capital flows to Europe from the US
A poorly designed gold standard system after 1925
The lack of a leading globally oriented country which could run the
international economy like Britain had prior to 1914
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8. During the 1930s, many countries in the world experienced banking crises.
Which of the following was not associated with a high likelihood of having a
banking crisis
a. an exchange rate peg or adhering to the gold standard
b. being an agricultural exporter
c. heavy competition in the banking system
d. a lack of branch banking
e. having deposits in foreign countries that were also experiencing banking
crises
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VERSION B
Section II. Short-Answer Questions.
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1. Consider the following figure from the lecture notes regarding the levels of GDP of
several nations during the Great Depression. Note that each nation’s GDP is indexed such
that its level in 1929 = 100.
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i.
What is the main message of this figure? Explain carefully what is on the
y-axis, what is on the x-axis, what the “time-series lines” next to the
country names in the graph are trying to tell us. There are two key points
we are looking for here. (30 Points)
Three possible points:
1. The depth of the slump/depression varied from
country to country.
2. Recovery usually started quickly when a country
abandoned the gold standard. Japan was not on the
gold standard, which explains their relatively mild
recession and successive astronomical growth.
3. Not all countries abandoned the gold standard
immediately. This can explain the length of the
Great Depression across countries. France stayed on
gold until 1936. The US until 1933 etc.
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ii.
Give three economic variables that were affected by going off the gold
standard (or devaluing the exchange rate) during the Depression, how they
were affected. Then state briefly how these changes mattered for recovery
from the Depression? DO NOT FOCUS ON GDP HERE BUT RATHER
OTHER MACROECONOMIC VARIABLES THAT MIGHT CHANGE
GDP. (30 Points)
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Three variables:
1. Exports rose after going off gold. This raises GDP since exports are a
component of GDP
2. Investment rose since real interest rates fell after abandoning the gold
standard
3. Real wages fell after abandoning the gold standard since prices rose while
nominal wages were sticky…
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If the definition of “macroeconomic variable” confused you, and it confused
a lot of people, we were looking for variables which directly change GEDP
which is either output or income, depending on how one does the accounting.
Y=C+I+G+NX or it equals total income, which includes things like wages
and the return on capital.
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iii. Imagine that the year is 1930. The world’s leading monetary economist advises all
countries on the gold standard that they should lower interest rates to avoid further
declines in GDP. Give two reasons why policy makers of the time might have justified
not following this policy advice. (30 Points)
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1. Policy makers might have associated expansionary monetary policy with
being off the gold standard and high inflation like in the 1920s. This was
something they wanted desperately to avoid. However, note that if all
countries had lowered interest rates, they would not have had to abandon the
gold standard necessarily.
2. “The Austrian view”: going off gold would be expansionary and would bring
back the bubble of the 1920s. A recession was needed to “purge” the system
of excess. Labor, banks, and firms should be “liquidated”.
Needless to say, both of these excuses were counter-productive in terms of getting
economies back to full employment. While some inflation might have occurred with
a fall in interest rates, the deflation that countries had experienced already
suggested that some inflation might be useful.
Although the lack of cooperation in this time made it difficult to enact this policy,
the question asked: “why policy makers of the time might have justified not
following this policy advice.” Answering lack of cooperation here was not what we
were looking for. Credibility was even less relevant in this case. Partial credit was
awarded for mentioning that there were problems with coordination (or
cooperation), but that was not what the question asked.
2. Government policy helped promote economic growth in East Asia (Korea and Taiwan)
and Western Europe between 1950 and 1970. “Commitment” was integral to both.
Explain how commitment mattered by giving two examples- one from Asia and one from
Europe- that we gave in class. (Hint: think about investment and remember why Nobel
prize winner Finn Kydland who spoke in Davis on May 1st said commitment was
important for the US economy even today). (30 points)
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In East Asia the government attempted to make sure coordination did not fail. In
particular investment in many sectors was needed but it was not likely to be
profitable if investment in any one sector was not undertaken. Therefore the
government in South Korea assured the private sector that investment would be
profitable. The government in South Korea committed to making such investments
profitable. The reading by Rodrik shows how the government guaranteed
investment in ship-building The government made sure Korean oil refineries
shipped using Korean owned tankers when a global slump led to cancellation of
foreign orders. In Taiwan, government incentive and as via the ERSO and other
interventions made sure the relevant industries had the support and supply from
other necessary inputs etc.
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In Europe governments also helped to increase cooperation between labor and
capital. Here, the social safety net was used so that if workers demanded excessive
wage rises their benefits would be reduced. Industry would also lose tax breaks. The
government was committed to a high growth, high investment environment. Also
during Bretton Woods governments shied away from expenditure reduction as a
means of adjustment. This commitment to full employment led to high growth.
Another form of “commitment” in Europe was seen between countries in the
forming of various organizations and commissions to promote trade and oversight.
Examples include the Treaty of Rome in 1957, the ECSC, and the EU, to name a
few.
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END OF EXAM
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