BEC 5

Question 1

Trough of a business cycle

Answer 1

Is an economic low point with no positive indicators for the future. It is characterized by unused productive capacity and an unwillingness to risk new investments.

Question 2

Business cycles (economic fluctuations)

Answer 2

Business cycles are best described as fluctuations in the level of economic activity, relative to a long-term growth trend.

Question 3

Change in GDP formula

Answer 3

Change in GDP= Spending/ (1- MPC)

MPC=Marginal propensity to consume

also: 1/ (1-MPC) X Spending

Question 4

Full employment

Answer 4

When there is full employment there is still some unemployment known as the natural rate of unemployment such as frictional, structural, and seasonal.

Frictional unemployment: time lag that individuals experience between jobs

Structural unemployment: mismatch of skills and jobs in the economy.

Seasonal unemployment: fluctuations in employment as a result of seasonal demand.

Question 5

Cyclic unemployment

Answer 5

Is caused by the business cycle. It tends to rise during a recession and fall during an expansion.

Question 6

Expenditure approach

GICE mnemonic

Answer 6

The expenditure approach to computing GDP includes “GICE”

Government expenditures
capital Investment
Consumption
net Exports

Question 7

Expansionary monetary policies

Answer 7

Expansionary monetary policies affects the economy through the following chain of events:

1) an increase in the money supply causes interest rates to fall,
2) falling interest rates stimulate the desired levels of firm investment and household consumption
3) increases in desired investment and consumption cause an increase in aggregate demand
4) aggregate demand shifts to the right causing real GDP and the price level to rise.

Question 8

Real interest rate

Answer 8

Real interest rate = Nominal interest rate - Inflation rate

Question 9

Inflation rate calculation

Answer 9

Inflation rate = CPI (this period) - CPI (last period) / CPI (last period) X 100

Question 10

Inflation rate

Answer 10

Inflation rate measures the rate of increase in the overall price level in the economy.

Question 11

Stagflation

Answer 11

Stagflation occurs when the economy suffers a recession that is characterized by falling output, rising unemployment, and a rising price level.

Question 12

Deflation

Answer 12

Deflation is defined as a continuous or sustained decline in the overall price level.

Question 13

Personal income vs disposable income

Answer 13

Personal income represents income received by households and noncorporate businesses.

While disposable income is the entire amount of personal income minus personal taxes for households and noncorporate businesses.

Question 14

Demand-pull inflation

Answer 14

can be caused by tax decreases

Question 15

Cost-push inflation

Answer 15

can be caused by an increase in nominal wages.

Question 16

Perfect competition

aka pure competition

Answer 16

Key assumptions:

1) customers are indifferent about which firm they buy from
2) the level of a firm’s output is small relative to the industry’s total output
3) there is freedom of entry into and exit out of the industry
4) firm is a price-taker

Question 17

Monopolistic competition

Answer 17

Includes:

1) numerous firms with differentiated products
2) ease of entry- few barriers
3) firms exact some influence over price and market
4) non-price competition is frequent and critical

Question 18

Oligopoly market conditions

Answer 18

Characterized by

1) few firms in the market
2) significant barriers to entry
3) differentiated products
4) fixed (or semi fixed) prices
5) kinked demand curves

Question 19

The following are situations that would cause competition to be an even stronger force impacting the profitability of a firm

Answer 19

1) the market is not growing fast
2) there are several equal-sized firms in the market
3) customers do not have strong brand preferences
4) the costs of exiting the market exceed the costs of continuing to operate
5) some firms profit from making certain moves to increase market share
6) various firms in the market use different types of strategic plans

Question 20

The following factors increase the bargaining power of the customer:

Answer 20

1) customers make up a large volume of a firm’s business
2) there is much information available to customers
3) the buyers have low switching costs
4) there are a high number of alternate suppliers

Question 21

Supply Chain Operations Reference (SCOR) model

Answer 21

1) Plan -balance supply and demand goals and objectives
2) Source-how to the entity obtains its resources for production
3) Make- production process
4) Deliver- all activities of getting the finished products into the hands of the ultimate consumers

Question 22

Elasticity of demand

Answer 22

Elasticity of demand= % change in qty demand/ % change in price

Question 23

Elasticity of supply

Answer 23

Price elasticity of supply %= % change in quantity supplied/ change in price

Question 24

Michael Porter’s five forces

Answer 24

Barriers to market entry
Bargaining power of customers
Existence of a substitute product
Market competitiveness
Bargaining power of suppliers

Question 25

Natural monopoly

Answer 25

A natural monopoly is a monopoly that arises because economic and/or technical conditions permit only one efficient supplier.

Question 26

Measuring GDP- Income Approach

I PIRATED

Answer 26

I-Income of proprietors
P-Profits of corporations
I-Interest (net)
R-Rental income
A-Adjustments for net foreign income and misc items
T-Taxes (indirect business taxes)
E-Employee compensation(wages)
D-Depreciation (also known as capital consumption allowance)