ECON 340Midterm 1 -Sample questionsWinter/Spring 2012Purchasing power parity GNP per capita estimates are intended to:adjust income comparisons for covered interest parityadjust income comparisons for different amounts of exchange rate volatility across countriesadjust income comparisons for differences in the cost of living across countriesadjust income comparisons for different rates of inflation across countriescThe poverty gap measure will fall if a poor person receives an extra dollar of incomeT. True F. FalseT3. Which of the following is NOT an example of an absolute poverty line.a. $1 per dayb. $2 per dayc. Total expenditures needed to purchase 2100 calories per day, if budget is spent as local poor population.d. Half of mean income in the populationdHere are the income distribution of a country:A {1, 2, 3, 4, 5}4. Suppose the poverty line is set at 1.5. What is the poverty gap?a.1/3b.1/5c.1/15d.1/2c5. Calculate the squared poverty gap for country A with poverty line at 2.5a.0.9b.0.8c.0.09d.0.08d6. Levels of inequality tend to be highest in:a.sub-Saharan Africab.south Asiac.east Asiad.Latin Americad7. Which of the following is NOT a reason why high inequality might lead to lower economic growth:a.Credit market imperfections for the poor may be more likely under high inequality, leading to lower investments in human capital by the poorb.High inequality may lead to populist macroeconomic policies which end up causing high inflationc.High inequality means that the rich will have an unfair portion of the gains to growthd.None of the abovecDescribe the cost of basic needs approach to defining a poverty line. How does it work, that is how is the poverty line built up?Growth effect, change in equality. If everyone's income goes up, but variance does not change. Everyone's income goes up by ten percent. What is the change in poverty due to everyone's income going up by ten percent? Five percent? Etc. Changes in poverty due to change in mean income. Distribution effect, if held mean incomes constant. Take period one data, calculate poverty line. Take period 2 data, scale to the ratio of mean income in period 1 to mean income in period 2. Distribution has changed. Then calculate poverty rate. Look at what happens to poverty as distribution of income changes but mean income does not change. Change in inequality when mean income is held constant.The higher inequality is to begin with, the more growth needed to lower poverty. Economic growth has a powerful effect on poverty. Squared poverty gap is sensitive to differences in distribution of income among the poor. If very poor have low income in comparison to poor. Poverty gap does not.Poverty gap is the monetary ammount per person it would take to get all of the poor's income abovethe poverty line. Expressed as fraction of poverty line.Savings rate. Slope increases for saving curve as income increases. The slope is the marginal rate ofsavings. Convex says marginal rate of savings goes up as income goes up. Concave (down slope as income goes up). Marginal rate of savings goes down as income goes up. Average savings is midpoint between s1, y1 and s2, y2. That is S bar Y bar. With convex, average savings is lower at the median. With concave, average savings is higher at the average saving. Inequality leading to higher and lower economics growth respectively, as savings are investment. This assumes holding mean income constant. What is gini coefficient, area between 45 degree angle and lorentz curve. Don't need to know the math for this. Properly label axes for graphs in short answer.Absolute vs relative poverty. Absolute examples, $1 or $1.25 mark and caloric consumption. Fixed number. The fact that one person's income is above poverty line has no bearing on whether another person is above or below. Relative takes into account one's income relative to others in society. Example, 1/3 of median income of country. Relative line. With absolute poverty line, comparions can be made across countrie in PPP currencies, same poverty line for every country. With relative poverty line of 1/3 of median income, it will be different for every country, so poverty comparison is muddled as comparison changes country to country. Cost of basic needs, develop poverty line. PPP, cost of non tradeables is much cheaper in developing countries. Cumulative distribution function: Comparing two countries, two distributions, and defining which has more poverty. Fraction of people less than or equal to poverty line=headcount. Poverty dominance is when one distribution has lower poverty no matter where the line is placed. HDI cannot predict economic growth. Savings rate, credit constraint, political _____ for how inequality MIGHT affect economic growth. The higher inequality in South America 1960s, people theorized government would be pushed to address it. Most policies as practiced reduced economic growth (redistribution policies peru in the 1980s). Don't need to know detailed formula for HDI, but important to know what is in