B5- Economic Concepts

Question 1

Trough of a business cycle is defined by?

Answer 1

Unused productive capacity and an unwillingness to risk investments

Question 2

Expansionary Monetary Policy

Answer 2

1) incr. in money causes int. rates to FALL
2) falling interest rates stimulate household consumption
3) incr. in desired investment and consumption cause an increase in agg. demand
4) Agg demand shifts right

GDP Rising, unemployment falling

Question 3

What does INCR. in gov spending and DECR. in taxes do?

Answer 3

Aggregate demand curve shifts right

Real GDP (output) increases

Question 4

INCR. in average interest rates?

Answer 4

Incr. cost of capital - shifts demand curve to the left

Question 5

What does Real GDP RISING and overall price level FALING do?

Answer 5

Aggregate supply curve shifts RIGHT.

Question 6

Decline in av. interest rates?

Answer 6

Demand curve shifts RIGHT.

Question 7

When potential national income exceeds actual national income?

Answer 7

Recessionary phase

Question 8

Change in GDP formula

Answer 8

(move 1.2 tril. actual GDP to 1.3 tril. potential GDP) = x

Change in GDP thus = x * (1-marginal propensity to consume)

EG

=100Billion * (1-.08) = 100Bil * .2 = 20 bil.

Question 9

GDP expenditure approach (HINT: 4 things)

Answer 9

Government Expenditures
Capital Investments
Consumption
Net Exports

Question 10

GDP Formula = G + I + C+ E

Answer 10

Gov Exps
Cap Investments
Consumptions
net Exports

Question 11

Real Interest Rate

formula

Answer 11

Real Int = Nominal - Inflation

Nominal = Real Int + inflation
and Nominal is overall price level

Question 12

Inflation Rate – the rate at which the overall price level increases

formula

(hint: CPI)

Answer 12

Inflation Rate = [CPI(this period) - CPI (last period / CPI(last period)] * 100

Question 13

stagflation

Answer 13

Recession characterized by falling output, rising unemployment, and rising price level

Question 14

Deflation

Answer 14

Continuous decline in the overall price level

Question 15

Federal Reserve Increase Money Supply?

Decrease Money Supply?

Answer 15

1) Increase Money Supply:
REDUCE Discount Rate

2) Decrease Money Supply
INCREASE Discount Rate

Question 16

Entry into monopolistic competition: 4 characteristics

Answer 16

• Ease of entry / low barriers to entry
• Numerous firms with DIFFERENTIATED products
• Firms exact some influence over price and market
• non-price competition is frequent and critical

Question 17

Oligopoly market conditions

Answer 17

• few firms in the market
• SIGNIF barriers to entry
• Differentiated products
• fixed or semi-fixed prices
• kinked demand curves

Question 18

Firm that has the ability to control price of the product it sells?

Answer 18

Faces a downward-sloping demand curve

Question 19

What if a demand is price IN-elastic?

aka perfectly NON price sensitive - can charge any price

Answer 19

An increase in price will result in an increase in total revenue

FYI: when demand is unit-elastic, there is no change

Question 20

Vertical Linkage Analysis

Answer 20

Understanding the activities of the suppliers and buyers of a product, and determining where value can be created external to the firm’s operations

Question 21

Elasticity of Demand

Answer 21

Price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded.

Question 22

Under monopolistic strategy, what do plans focus on?

Answer 22

Profitability from production levels that maximize profits

Question 23

What happens when demand and supply increase?

Answer 23

Equilibrium quantity increases.

NOTHING ELSE is for sure

Question 24

Product demand increases, quantity supplied Decreases

Answer 24

quantity: UNCERTAIN
price: increases