ISET DEVELOPMENT ECONOMICS: SAMPLE EXAM QUESTIONS
                    (1) We discussed the Banerjee and Duflo’s ”Economic Lives of the Poor” in class.
                        What is the reason for poorest people taking up multiple jobs? Why is taking
                        up multiple jobs sub-optimal for the people in the long run? Why it might be
                        optimal for the individual in the short run? Elaborate briefly.
                    (2) Think of one reason why a country with a lower ratio of capital to labor might
                        grow faster than a country with higher ratio, and one reason why it might grow
                        slower. Refer to models we discussed and list all important assumptions.
                    (3) The Harrod-Domar model has the following simple production function y = Ak.
                        Assumethatthere is some level of income (let’s say poverty line y ) which people
                                                                                            p
                        need to consume in order to survive. We define discretionary income as y =
                                                                                                        d
                        y − y if the income is above the poverty line and equal to zero if it is below.
                              p
                        We also assume that individuals save a constant share of their discretionary
                        income σ. In other words sy = σyd (i.e., there is no saving if income y is below
                        y ). Assume that the rate of depreciation of capital is δ and that there is no
                         p
                        population growth.
                         (a) What is the functional relationship between growth and physical capital in
                             this model? Show graphically where y is on the vertical axis and k is on the
                             horizontal axis. Describe the graph briefly.
                         (b) How do we call the situation when the income is below yp?
                         (c) What would happen if the technology A improved (i.e. if A increased)?
                             Draw another graph and describe.
                         (d) What is the policy implication of this model? Elaborate briefly.
                    (4) Recall the Romer’s model of deliberate technological progress in which the pro-
                        duction function is as follows:            h    i
                                                            γ     α      1−α
                                               Y(t) = E(t) K(t)     uH
                        The E(t) is the current amount of technical know-how in the country, K(t) is
                        the current capital stock, H(t) is the current stock of human capital, and u is
                        the share of human capital devoted to final goods production, where u ∈ h0;1i.
                         (a) There is a remaining part (1 − u)H. What is it devoted to in this model?
                             Explain in words and in terms of parameters of the model.
                         (b) Imagine that you are a policymaker who can influence u. What would
                             happen to the income of the economy in period t if you increased u in that
                             period (two opposing effects are present, explain both of them)?
                   Date: Miniterm V, 2016.
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              2        ISET DEVELOPMENT ECONOMICS: SAMPLE EXAM QUESTIONS
                   (c) Imagine that you increased u for the duration of the period t. Will the
                     income in the economy in period t + 1 be higher, lower, or it is impossible
                     to say what would happen without knowing the exact parameters of the
                     model? Explain the in words (no explanation results in 0 points).
                   (d) What is the main difference of this model from the Solow’s growth model
                     we discussed in class?
                (5) We discussed the paper by Efferson et al. (2015) in class. The paper examined
                   the role of social norms in female genital mutilation (FGM).
                   (a) What would be the predictions of the FGM prevalence in respective com-
                     munities should the social norms hypothesis were true? Elaborate, draw a
                     graph, or explain using a normal form game representation.
                   (b) Based on the social norms hypothesis, propose a policy that would help
                     mitigate the problem of FGM in high FGM rate communities.
                   (c) The paper speaks against the social norms hypothesis. How? Explain.
                   (d) How would the policy recommendation proposed in (b) change with the
                     knowledge of the results of the paper?
                (6) Evaluate the following statements by deciding whether they are true or false.
                   Always provide a brief explanation (no explanation results in 0 points).
                   (a) Number of people living under the poverty threshold is the best poverty
                     measure imaginable.
                   (b) Income gap ratio calculates the average gap between the income of poor and
                     poverty threshold.
                   (c) Dalton-Pigou principle states that ”if one income distribution can be con-
                     structed from another using a series of regressive transfers then the former
                     distribution has to be more equal.”
                (7) In the article of Hall and Jones (1999) the authors aim to estimate the causal
                   effect of quality of institutions (they call it social infrastructure) on economic
                   performance. The OLS model they estimate is as follows:
                                  log(y ) = α +βS +ε
                                     i      i i
                   Wherelog(y ) is the natural logarithm of the country i GDP and S is the level of
                          i                               i
                   social infrastructure in the country where a higher value of S means better social
                                                      i
                   infrastructure in the country i. The authors find that β > 0 and the coefficient
                   is statistically significant.
                   (a) Explain briefly in words what does the positive coefficient β mean.
                   (b) What problems do you see with this type of estimation? Does it allow us
                     to answer the original research question?
                   (c) Can you find an alternative type of estimation that would resolve the prob-
                     lem you identified in your response in part (b)? Briefly explain in words and
                     by writing down the econometric model how would you apply this method
                     practically in order to address the issues raised in your response above?