Chapter 21: Quiz Answers -- Transition Economies

1. Which of the following statements is not true?
   Capitalist economies primarily ration goods and services based on government decisions regarding transfer payments and taxes. This statement is false because the main rationing of goods and services occurs through the market system in capitalist economies. Workers are paid based primarily upon their marginal productivity of labor, and prices of goods and services are set by the forces of supply and demand.

2. Inflation is generally high in the early years of transition because
   price liberalization removes price ceilings on many key goods and services. Socialist economies tend to subsidize the consumption of key goods and services by setting low prices. Removal of those prices leads to an initial burst of inflation. Velocity also rises, but the increase occurs because money demand falls.

3. The main reason that socialism collapsed is
   the absence of intensive growth via the process of creative destruction. The arms race and agricultural crises may have hastened the decline, but the main culprit was the lack of incentives to enhance productivity by implementing technological change. Firms had no competition and had no need to engage in the process of creative destruction.

4. Pressure exists for transition governments to print money because
   all of the above. Tax revenues tend to declines faster than government expenditures decline, increasing budget deficits.

5. Transition economies often experience severe currency devaluation because
   consumer demand for newly available imports increases the demand for foreign exchange. This is a tough question because the other two choices have elements of truth. Capital flight does help to devalue the currency, but it increases the demand for foreign exchange. Likewise, a reduction in exports puts downward pressure on the currency, but it does so by reducing the supply of foreign exchange.

6. Which of these is not an advantage to a transition economy that adopts a fixed exchange rate system?
   the government can typically devalue the currency later on without serious consequences. The government's credibility is often severely damaged once devaluation occurs. Because the government has essentially promised to peg the currency at a particular value, a devaluation is seen by the citizens as a broken promise.

7. Russia's transition has been less successful than Poland's because
   All of the above. Poland, in contrast, has a history of markets, less organized crime, and greater compliance with tax laws.

8. Eastern European transition economies have generally done better than the Former Soviet Republics.
   True. The Eastern European economies of the Czech Republic, Hungary and Poland are the front-runners in transition performance. Ukraine, Russia and other Former Soviet Republics had had more crime, lower growth rates and higher inflation rates since the transitions began in the early 1990s.

9. Economic growth in socialist economies was dismal immediately following World War II.
   False. In fact, socialist economies experienced decent economic growth until the early to mid-1960s. Most of the growth was extensive growth.

10. Transition economies must go through a short period of hyperinflation in order to ultimately stabilize prices.
    False. Perhaps the answer "it depends" is more accurate. Post-transition Czech Republic, for example, never experienced hyperinflation. Its highest inflation rate was 56.6 percent in 1991. A major reason for this exceptional performance is that the Czech Republic began the transition with low levels of foreign debt relative to other transition economies.