B5- Economic Concepts Flashcards
Trough of a business cycle is defined by?
Unused productive capacity and an unwillingness to risk investments
Expansionary Monetary Policy
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
What does INCR. in gov spending and DECR. in taxes do?
Aggregate demand curve shifts right
Real GDP (output) increases
INCR. in average interest rates?
Incr. cost of capital - shifts demand curve to the left
What does Real GDP RISING and overall price level FALING do?
Aggregate supply curve shifts RIGHT.
Decline in av. interest rates?
Demand curve shifts RIGHT.
When potential national income exceeds actual national income?
Recessionary phase
Change in GDP formula
(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.
GDP expenditure approach (HINT: 4 things)
Government Expenditures
Capital Investments
Consumption
Net Exports
GDP Formula = G + I + C+ E
Gov Exps
Cap Investments
Consumptions
net Exports
Real Interest Rate
formula
Real Int = Nominal - Inflation
Nominal = Real Int + inflation
and Nominal is overall price level
Inflation Rate – the rate at which the overall price level increases
formula
(hint: CPI)
Inflation Rate = [CPI(this period) - CPI (last period / CPI(last period)] * 100
stagflation
Recession characterized by falling output, rising unemployment, and rising price level
Deflation
Continuous decline in the overall price level
Federal Reserve Increase Money Supply?
Decrease Money Supply?
1) Increase Money Supply:
REDUCE Discount Rate
2) Decrease Money Supply
INCREASE Discount Rate
Entry into monopolistic competition: 4 characteristics
- 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
Oligopoly market conditions
- few firms in the market
- SIGNIF barriers to entry
- Differentiated products
- fixed or semi-fixed prices
- kinked demand curves
Firm that has the ability to control price of the product it sells?
Faces a downward-sloping demand curve
What if a demand is price IN-elastic?
aka perfectly NON price sensitive - can charge any price
An increase in price will result in an increase in total revenue
FYI: when demand is unit-elastic, there is no change
Vertical Linkage Analysis
Understanding the activities of the suppliers and buyers of a product, and determining where value can be created external to the firm’s operations
Elasticity of Demand
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.
Under monopolistic strategy, what do plans focus on?
Profitability from production levels that maximize profits
What happens when demand and supply increase?
Equilibrium quantity increases.
NOTHING ELSE is for sure
Product demand increases, quantity supplied Decreases
quantity: UNCERTAIN
price: increases
