5 - Economics

Question 1

What are the characteristics of a positive supply curve shift (shift right)?

Answer 1

Examples: Government subsidies or technology improvements that decrease costs for suppliers

Question 2

What are the characteristics of a negative supply curve shift (shift left)?

Answer 2

Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market

Question 3

What is a Positive Demand Curve Shift (Shift Right)?

Answer 3

Price of substitutes go up - price of beef rises- so people buy more chicken
Future price increase is expected - War in Middle East- people go out and buy gas
Market expands - i.e. people get new free health care plan- demand at clinic rises
Expansion - more spending increases equilibrium GDP

Question 4

What is a Negative Demand Curve Shift (Shift Left)?

Answer 4

Price of complement goes up - price of beef goes up- less demand for ketchup
Boycott - Company commits social blunder- consumers boycott
Consumer income rises - Demand for inferior goods drops as people have more money to spend
Consumer tastes change
Contraction - less spending decreases equilibrium GDP

Question 5

What is the Marginal Propensity to Consume?

Answer 5

How much you spend when your income increases Calculate: Change in Spending / Change in Income

Question 6

What is the Marginal Propensity to Save?

Answer 6

How much you save when income increases
Calculate: Change in Savings / Change in Income
Also = 1 - MPC

Question 7

How does spending change due to the multiplier effect?

Answer 7

The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect.
One consumer spends money- which:
*Increases the income of a business
*Increases the income of a vendor
*Increases income of employees
*Increases tax revenue

Question 8

How is Price Elasticity of Demand calculated?

Answer 8

% Change in Quantity Demand / % Change in Price

Question 9

What is Unitary Demand?

Answer 9

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1

Question 10

How is Income Elasticity of Demand calculated?

Answer 10

% Change Quantity Demanded / % Change in Income
Normal goods > than 1 (D increases more than income)
Inferior goods < than 1 (D increases less than income)

Question 11

What conditions occur under periods of inflation?

Answer 11

Interest rates increase Reduced demand for loans Reduced demand for houses- autos- etc.
Value of bonds and fixed income securities decrease
Inferior good demand to increase
Foreign goods more affordable than domestic
Demand for domestic goods decrease

Question 12

What is GDP (Gross Domestic Product)?

Answer 12

The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests
Included: Foreign company has US Factory
Not included: US company has foreign factory

Question 13

What is Nominal GDP?

Answer 13

Measures goods/services in current prices.

Question 14

What is Gross National Product (GNP)?

Answer 14

Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included

Question 15

What is the Consumer Price Index (CPI)? How is it applied?

Answer 15

Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 1.0

((CPI Current - CPI Last) / CPI Last) * 100

Question 16

How is disposable income calculated?

Answer 16

Personal Income - Personal Taxes

Question 17

How is Return to Scale calculated?

Answer 17

% Increase in output / % Increase in input
Greater than 1 : Increasing returns to scale
Less than 1 : Decreasing returns to scale

Question 18

How does inflation relate to unemployment?

Answer 18

High Unemployment : Low Inflation (Vice Versa)

Question 19

What is the Discount Rate?

Answer 19

The rate a bank pays to borrow from the Fed.

Question 20

What is the Prime Rate?

Answer 20

The rate a bank charges their best customers on short-term borrowings.

Question 21

What is Deficit Spending?

Answer 21

Increased spending levels without increased tax revenue.

Lower taxes without decrease in spending

Gamble that the multiplier effect will take over and boost economy

Question 22

How does the Fed control economy-wide interest rates?

Answer 22

By adjusting the discount rate charged to banks

Question 23

How do international trade restrictions affect domestic producers?

Answer 23

They are good for domestic producers.

Demand curve shifts right

Fewer substitutes

They can charge higher prices

Question 24

How to international trade restrictions affect foreign producers?

Answer 24

They are bad for foreign producers

Demand curve shifts left

Fewer buyers

They must charge lower prices

Question 25

How do international trade restrictions affect foreign consumers?

Answer 25

They are good for foreign consumers

Supply curve shifts right

Goods purchased at lower prices in the foreign markets

Question 26

How do international trade restrictions affect domestic consumers?

Answer 26

They are bad for domestic consumers

Supply curve shifts left

Fewer goods bought due to higher prices

Question 27

What is Accounting Cost?

Answer 27

Explicit (Actual) cost of operating a business

Implicit costs are opportunity costs

Question 28

What is Accounting Profit?

Answer 28

Revenue - Accounting Cost