Economic growth and development strategies practice questions.

Which policy is most consistent with a strategy of import substitution industrialisation?

• Removing all tariffs to expose domestic firms to world competition
• Tariffs on imported manufactures to protect infant industries
• Subsidising exporters to help them win foreign market share
• Joining a monetary union with the country's main trading partners

Answer: Tariffs on imported manufactures to protect infant industries

Import substitution aims to replace imported manufactures with domestic production, typically behind protective barriers such as tariffs and quotas that shelter infant industries.

Which of the following is a commonly cited disadvantage of pursuing import substitution rather than export promotion?

• Domestic consumers gain access to cheaper foreign goods too quickly
• The exchange rate depreciates uncontrollably
• The country becomes too dependent on world demand conditions
• Protected firms face little competition and stay inefficient

Answer: Protected firms face little competition and stay inefficient

Shielded from foreign competition, protected industries often stay high-cost and inefficient, and consumers pay higher prices for lower-quality goods.

Which of the following best describes microfinance?

• Small loans and financial services for poor people excluded from banks
• Concessional lending by the World Bank to national governments
• Foreign direct investment undertaken by small and medium-sized enterprises
• Short-term lending by a central bank to commercial banks

Answer: Small loans and financial services for poor people excluded from banks

Microfinance institutions extend very small loans, savings and insurance products to poor households and micro-entrepreneurs who lack collateral and access to commercial banks.

A donor government grants aid on the condition that the recipient country spends the funds on goods and services produced by firms in the donor country. This is an example of which type of aid?

• Humanitarian aid
• Multilateral development assistance
• Tied aid
• Concessional long-term lending

Answer: Tied aid

Tied aid obliges the recipient to buy from the donor, which can raise costs and reduce the real value of the assistance compared with untied aid.

Which of the following best describes the main development role of the World Bank?

• Providing short-term loans to stabilise countries facing balance of payments crises
• Long-term loans and technical help for development projects
• Setting and enforcing the rules of international trade
• Issuing an international reserve currency

Answer: Long-term loans and technical help for development projects

The World Bank focuses on long-term development lending and expertise; short-term balance of payments support is the role of the IMF, and trade rules are the WTO's domain.

Which of the following is a potential disadvantage for a developing country of relying on foreign direct investment by multinational corporations?

• Profits may be repatriated home, limiting host-economy gains
• The capital stock of the host country falls
• Domestic unemployment must rise as a result
• Technology transfer to local firms is guaranteed to be excessive

Answer: Profits may be repatriated home, limiting host-economy gains

MNCs may send profits back to shareholders abroad, use imported inputs and capital-intensive methods, so the net benefit to the host country can be smaller than the headline investment suggests.