July 2005
MID-TERM EXAM

CARLETON UNIVERSITY
Department of Economics
ECON 4807* V

Instructor: R. Carson

DIRECTIONS:
Please answer each question below. The question weights are as indicated. Use graphs where you find them useful, making sure to explain them.  In general, be sure to explain yourself well enough that the grader knows that you know what you are doing. Please write on every other line.

1.  Economic reform in China has been accompanied by rapid economic growth. Increases in average living standards have been far more rapid than in the period before 1979. By contrast, growth in the European transition economies was much slower until recently.

A.  (20%)  Give at least four basic reasons why China has been able to combine the transition to a market economy with faster economic growth than has been enjoyed by European transition economies. Explain briefly.

B.  (10%)  In what key areas is reform still incomplete?  Explain briefly what needs to be done and why.

C. (10%)  Recently, inflation in China has slowed and even disappeared.  Explain what the economic cost of this has been and how it relates to the role and lending practices of the Chinese banks.  (Hint: Why might we expect China to face a trade-off between inflation and unemployment?)
 

2.  This question deals with the reform in rural areas of China.
A. (15%) What is the "responsibility system", as applied to rural areas of China? Why did the introduction of this system lead to a large initial increase in farm output after it replaced the old system of collectivized agriculture? (Give two sources of productivity gain.) What other factor contributed to the rise in output?
    B. (15%) Why did the reform in agriculture make the need for expansion of the sector of small private and collective firms in rural areas (the rural enterprise sector) more critical? How did changes in property rights vis-à-vis these firms in the mid-1980s encourage faster expansion and greater efficiency in this sector? How did the open-door policy aid the growth of this sector?
3.  The roots of the present Japanese financial and economic crisis lie in the collapse of the economic "bubble" over 1990-91 and in the nature of ties between Japanese banks and the Japanese government.
    A. (15%)  Explain how Japanese government policy helped first to fuel the spectacular rise in prices of land, equities, and other assets during the latter part of the 1980s and then to cause the sharp fall in these prices during the early 1990s. How did the collapse of the asset price bubble result in a financial crisis?

    B. (15%)  This crisis has led to long-term economic stagnation (or slow economic growth), a major cause of which is "crowding out" in credit markets.  In this context, what is "evergreening" and how does it relate to crowding out? What is the reason for this practice? How has it worked to convert the crisis in the financial system into over-all economic stagnation?

    OR

3'.  Sometimes, the Japanese economy is described as an example of "finance capitalism" - that is, of an economic system based on close ties between banks and business firms. Japanese banks also have close ties with government and have been a highly regulated sector.
A. (15%)  Explain why finance capitalism arose in Japan. What basic problem of economic development did it help to solve in the 19th and early 20th centuries and how did it solve this problem?

B.  (15%)  Explain how Japanese government policy helped first to fuel the spectacular rise in prices of land, equities, and other assets during the latter part of the 1980s and then to cause the sharp fall in these prices during the early 1990s. How did the collapse of the asset price bubble result in a financial crisis?