BEC 5 - Economic Concepts & Analysis

Question 1

what is the definition of a business cycle?

Answer 1

fluctuations in the level of economic activity, relative long-term growth trend

Question 2

how will firms maximize profits?

Answer 2

by producing marginal revenue = marginal costs

Question 3

How can the fed increase money supply?

Answer 3

1. lower the reserve ratio
2. lower the discount rate
3. buy government securities

Question 4

An increase in the discount rate causes

Answer 4

money supply to decrease and interest rates to rise

Question 5

what is the formula to calculate the price elasticity of demand?

Answer 5

(change in quantity/ old quantity) divided by (change in price/ old price)

Question 6

When demand for a product is inelastic, a decrease in price has what effect on the number of units sold and total revenue?

Answer 6

the percent change in price will be greater than the percent change in quantity, and total revenue will fall

Question 7

Economic fluctuations (business cycles) are best described as?

Answer 7

fluctuations of the level of economic activity, relative to long term growth

Question 8

What is GDP?

Answer 8

GDP is the total dollar (monetary) value of all new final products and services within the economy in a given time period. the emphasis is on FINAL goods and services

Question 9

Under perfect (pure) competition, strategic plan focuses on?

Answer 9

1. maintaining market share
2. responsiveness of the sales price to market conditions

Question 10

Under an oligopoly structure, strategic plan focuses on?

Answer 10

1. maintaining market share
2. proper amount of advertising to ensure product differentiation
3. Ways to properly adapt to price changes or required changes in production volume

Question 11

What’s the difference between monopolistic competition and pure competition?

Answer 11

monopolistic competition has product differentiation whereas pure competition is homogeneous products

Question 12

a natural monopoly exists when?

Answer 12

economic and technical conditions permit only one efficient supplier

Question 13

What is natural rate of employment?

Answer 13

there is frictional, structural, and seasonal unemployment; cyclical unemployment is 0 % and this implies the economy is operating at its highest potential

Question 14

What is the difference between frictional vs structural unemployment?

Answer 14

Frictional unemployment is when a worker is in between jobs, or looking for jobs that meet their education/experience

Structural unemployment is caused by a worker’s specific skills not being needed anymore

Question 15

if demand for a product is price elastic then what will be the impact on total revenue?

Answer 15

total revenue will decline.

Question 16

Movement along the demand curve from one price quantity combination to another is called?

Answer 16

a change in the quantity DEMANDED

not a change in demand

Question 17

if demand for a product is price UNIT elastic then what will be the impact on total revenue?

Answer 17

a change in price will have no impact on total revenue

Question 18

What is the impact of a government price support program?

Answer 18

this acts as a subsidiary that will encourage suppliers to increase supply beyond an equilibrium point (the point where supply and demand curves intersect). this excess of supply over demand will create surpluses in the market

Question 19

What are porter’s 5 forces?

Answer 19

1. bargaining power of customers
2. existence of a substitute
3. barriers to entry
4. market competitiveness
5. bargaining power of suppliers

Question 20

The prime interest rate is?

Answer 20

the rate charged by commercial banks to their best (the largest and financially strongest) business customers. It is traditionally the lowest rate charged by banks.

Question 21

The effect of a boycott on a firm’s demand curve can be depicted as

A. A movement down a given curve.
B. A rightward shift of the entire curve.
C. A movement up a given curve.
D. A leftward shift of the entire curve.

Answer 21

D. A leftward shift of the entire curve.

A boycott is the decision by certain consumers to stop buying from a certain firm. By reducing the number of customers for the firm’s product, the demand curve is driven to the left, resulting, for the duration of the boycott, in a lower equilibrium price and a lower equilibrium quantity.

Question 22

The price of a commodity has decreased from $6 to $2, and the quantity supplied has decreased from 100 units to 50 units. If the midpoint method is used in the calculation, the price elasticity of supply is

A. 2.00
B. .667
C. .75
D. .50

Answer 22

B. .667
Answer (B) is correct.
The price elasticity of supply measures the responsiveness of a change in quantity supplied to a percentage change in price. The numerator (quantity change) and the denominator (price change) are computed as the change over the range (the arc method) as follows:

ES = [(100 – 50) ÷ (100 + 50)] ÷ [($6 – $2) ÷ ($6 + $2)]

= (50 ÷ 150) ÷ ($4 ÷ $8)
= 33.3% ÷ 50.0%
= 0.667

Question 23

A normal profit is

A. The same as an economic profit.
B. A cost of resources from an economic perspective.
C. The same as the accountant’s bottom line.
D. An explicit or out-of-pocket cost.

Answer 23

B. A cost of resources from an economic perspective.

Normal profit is the level of profit necessary to induce entrepreneurs to enter and remain in the market. Economists view this profit as an implicit cost of economic activity.

Question 24

A corporation’s net income as presented on its income statement is usually

A. Equal to its economic profits.
B. More than its economic profits because economists do not consider interest payments to be costs.
C. More than its economic profits because opportunity costs are not considered in calculating net income.
D. Less than its economic profits because accountants include labor costs, while economists exclude labor costs.

Answer 24

C. More than its economic profits because opportunity costs are not considered in calculating net income.

Economic (pure) profit equals total revenue minus economic costs. Economic costs are defined by economists as total costs, which are the sum of outlay costs, and opportunity costs, which are the values of productive resources in their best alternative uses. The return sufficient to induce the entrepreneur to remain in business (normal profit) is an implicit (opportunity) cost. Net income as computed under generally accepted accounting principles considers only explicit costs, not such implicit costs as normal profit and the opportunity costs associated with not using assets for alternative purposes. Thus, net income will be higher than economic profit because the former fails to include a deduction for opportunity costs, for example, the salary forgone by an entrepreneur who chooses to be self-employed.

Question 25

The change in total product resulting from the use of one unit more of the variable factor is known as

A. The point of diminishing marginal productivity.
B. The point of diminishing average productivity.
C. Marginal cost.
D. Marginal product.

Answer 25

D. Marginal product.

Marginal product is the output obtained by adding one extra unit of a variable input factor. If the cost of the input factor is constant, a rising marginal product will result in a declining marginal cost of output. If marginal product is falling, marginal cost is rising. Hence, marginal cost is at a minimum when marginal product is at a maximum.

Question 26

In the economic theory of production and cost, the short run is defined to be a production process

A. That spans a time period of less than 1 year in length.
B. In which there is insufficient time to vary the amount of all inputs.
C. That always produces economic profits.
D. That is subject to economies of scale.

Answer 26

B. In which there is insufficient time to vary the amount of all inputs.

The short run is defined as a period so brief that a firm has insufficient time to vary the amount of all inputs. Thus, the quantity of one or more inputs is fixed. The long run is a period long enough that all inputs, including plant capacity, can be varied.

Question 27

A government price support program will

A. Improve the rationing function of prices.
B. Lead to surpluses.
C. Encourage firms to leave the industry.
D. Lead to shortages.

Answer 27

B. Lead to surpluses.

A government price support program, which sets a price higher than the market price, will cause producers to supply more goods than can be absorbed by the market. The effect will be surpluses because the amount supplied will exceed the amount demanded. In these cases, the government must buy up the surplus and either destroy it or seek other distribution channels; both are highly inefficient outcomes.

Question 28

The amounts paid to laborers are

A. Real wages.
B. Productivity wages.
C. Minimum wages.
D. Nominal wages.

Answer 28

D. Nominal wages.

Nominal wages are the amounts actually paid (and received), while real wages represent the purchasing power of goods and services that can be acquired by the nominal wages. The level of real wages is determined by the productivity of labor. As productivity increases, the demand for labor also increases.

Question 29

At what point in the industry life cycle should a firm in a monopolistic competitive market consider acquiring other firms?

A. Firms begin to differentiate their products further, increasing their average total costs.
B. New entrants flood the market due to profitability in the industry.
C. Higher costs eliminate economic profits that attracted the new entrants.
D. At no point in the monopolistic competition industry life cycle should the firm be looking to make an acquisition.

Answer 29

D. At no point in the monopolistic competition industry life cycle should the firm be looking to make an acquisition.

The theories of Monopolistic Competition are that (1) each firm produces one specific variety, or brand, of the industry’s differentiated product, (2) the industry contains so many firms that each one ignores the possible reactions of its competitors when it makes price and output decisions, and (3) there is freedom of entry and exit in the industry. If a firm was looking to make an acquisition, they would no longer be producing one specific variety of product and would no longer be operating in a monopolistically competitive environment.

Question 30

What is the amount needed to close the recessionary gap if the economy’s full-employment real gross domestic product (GDP) is $1.2 trillion and its equilibrium real GDP is $1.0 trillion?

A. $200 billion multiplied by the multiplier.
B. $200 billion.
C. $200 billion divided by the multiplier.
D. $200 billion times the reciprocal of the marginal propensity to consume (MPC).

Answer 30

C. $200 billion divided by the multiplier.

The $200 billion difference between full-employment GDP and equilibrium GDP can be eliminated by additional consumption, government spending, or exports. Because of the multiplier effect, the amount of the increase can be less than $200 billion. The amount of additional activity necessary to close the gap is ($200 billion ÷ Multiplier).

Question 31

Bank is willing to lend a business $1 million at an annual real interest rate of 6%. What is the nominal rate Bank will charge the firm if the rate of inflation is anticipated to be 2%?

A. 6%
B. 2%
C. 8%
D. 4%

Answer 31

C. 8%

If the bank requires a real return of 6%, a 2% inflation rate results in an 8% nominal rate.

Question 32

The full-employment gross domestic product (GDP) is $1.3 trillion, and the actual gross domestic product is $1.2 trillion. The marginal propensity to consume (MPC) is 0.8. When inflation is ignored, what increase in government expenditures is necessary to produce full employment?

A. $100 billion.
B. $80 billion.
C. $20 billion.
D. $10 billion.

Answer 32

C. $20 billion.

The gap between full-employment GDP and actual GDP is $100 billion ($1.3 trillion – $1.2 trillion). Using the multiplier effect, the government can spend an amount less than this to achieve an ultimate increase of $100 billion. This lower amount can be found by dividing the desired increase by the multiplier. The multiplier equals 1 divided by the marginal propensity to save (MPS), which is 1 minus the marginal propensity to consume (MPC). Since the MPS is .20 (1.0 – .80 MPC), the multiplier is 5 (1.0 ÷ .20 MPS). Therefore, the government only needs to increase expenditures by $20 billion ($100 billion total needed ÷ 5 multiplier) to achieve the desired effect.

Question 33

The table below concerns the money supply for the economy of the hypothetical country of Petasus.

Checkable deposits 2,400
Small time deposits 500
Currency 60
Noncheckable savings deposits 950
Money market deposits accounts 300
Money market mutual funds 550

The size of Petasus’ M1 money supply is

A. $3,010 billion
B. $2,960 billion
C. $2,400 billion
D. $2,460 billion

Answer 33

D. $2,460 billion

M1 and M2 are the most common measures of the money supply. M1, or the narrow money stock, includes coins, currency, and checking deposits. Thus, M1 equals $2,460 billion ($2,400 billion + $60 billion).

Question 34

The table below concerns the money supply for the economy of the hypothetical country of Petasus.

Checkable deposits 2,400
Small time deposits 500
Currency 60
Noncheckable savings deposits 950
Money market deposits accounts 300
Money market mutual funds 550

The size of Petasus’ M2 money supply is

A. $2,300 billion
B. $3,910 billion
C. $4,760 billion
D. $2,960 billion

Answer 34

C. $4,760 billion

M2 includes coins and currency, checking deposits, nonchecking savings, and small (less than $100,000) time deposits. Also included are money market accounts and money market mutual funds. Thus, M2 equals $4,760 billion ($2,400 billion + $500 billion + $60 billion + $950 billion + $300 billion + $550 billion).

Question 35

A country reduces its rate of monetary growth. Which of the following is the expected result for the country’s economy?

A. Lower GDP growth.
B. Lower interest rates.
C. Higher investment.
D. Higher net exports.

Answer 35

A. Lower GDP growth.

A reduction in the money supply growth rate (decrease in money supply) leads to higher interest rates. Higher interest rates discourage investment spending by businesses. Since the GDP consists of consumer spending, investment spending, government spending, and net exports, a reduction of investment spending by businesses will lower the GDP growth.

Question 36

The primary mechanism of monetary control of the Federal Reserve System is

A. Conducting open market operations.
B. Changing reserve requirements.
C. Changing the discount rate.
D. Using moral persuasion.

Answer 36

A. Conducting open market operations.

Open market operations (buying and selling government securities) are the primary means used by the Fed to control the money supply. Fed purchases are expansionary. They increase bank reserves and the money supply. Fed sales are contractional. If money is paid into the Federal Reserve, bank reserves are reduced, and the money supply decreases.

Question 37

What are the characteristics of Perfect Competition?

Answer 37

1. al large number of firms
2. very little product differentiation
3. no barriers to entry
4. firms are price takers

Question 38

What are the characteristics of Monopolistic Competition?

Answer 38

1. a relatively large # of firms
2. differentiated products sold by the firms in the market
3. few barriers to entry
4. firm has control over quantity produced with price set by the market

Question 39

What are the characteristics of Oligopoly?

Answer 39

1. very few firms selling differentiated products
2. fairly significant barriers to entry
3. firms are interdependent (ie the actions of one firm affect the actions of another firm)
4. firms face kinked demand curves (match price cuts; ignore price increases)

Question 40

What are the characteristics of Monopoly?

Answer 40

1. a single firm in a market
2. significant barriers to entry
3. no substitute products for the goods
4. the ability of a firm to set output and prices

Question 41

what is the fundamental law of demand?

Answer 41

states that the price of a product/service and the quantity demanded of that product/service are inversely related due to:

1. substitution effect - consumes tend to purchase more (less) of a good when its price falls (rises) in relation to the price of other goods
2. income effect - when prices are lowered (income kept constant) consumers will purchase more of the lowered price products

Question 42

What factors cause a shift in the demand curve?

Answer 42

wealth, price of related goods (substitute and complements) consumer income, consumer tastes or product preferences, consumer expectations, number of buyers served by the market

Question 43

What is the fundamental law of supply?

Answer 43

states that price and quantity supplied are positively correlated

Question 44

What are factors that shift the supply curve?

Answer 44

price expectations of the supplying firm, product costs price or demand of other goods, subsidies or taxes, and product technology

Question 45

What is a circular business combination?

Answer 45

this occurs when different business units with relatively removed connections come together under single management

Question 46

What is a diagonal business combination?

Answer 46

occurs when a company that engages in an activity integrates with another company that provides ancillary support for that primary activity

Question 47

What is a tender offer?

Answer 47

when a company makes an offer directly to the shareholders to buy the outstanding shares of another company at a specified price

Question 48

What is a sell off divestiture?

Answer 48

is an outright sale of a subsidiary b/c there is a lack of synergy between the company and its subsidiary

Question 49

What is a spin off divestiture?

Answer 49

this creates a new independent company by separating a subsidiary business from a parent company

Question 50

What is an equity carve out divestiture?

Answer 50

occurs when a subsidiary is made public through an IPO, thereby creating a new publicly listed company

Question 51

Below are the recent monthly unemployment figures for an economy:

Persons moving to a new city and seeking work - 100,000

Persons out of work because their industry has just been rendered obsolete by technological change - 12,000

Persons in all industries laid off due to general economic slowdown - 120,000

Persons taking 2 months off from work to pursue education - 100,000

Applying the Bureau of Labor Statistics’ guidelines for calculating the official unemployment statistics, what is the “natural” level of unemployment for this economy?

Answer 51

212,000

The natural level of unemployment includes (1) the frictionally unemployed (those moving to another city, those ceasing work temporarily to pursue further education and training, those who are simply between jobs) and (2) the structurally unemployed (those put out of work by changes in consumer demand, technology, and geographical location of industries). The remainder are the cyclically unemployed, that is, those who are out of work because of the generally low output of the economy as a whole (called deficient-demand unemployment for this reason). In this example, frictional unemployment amounts to 200,000 (100,000 + 100,000), and structural unemployment amounts to 12,000, for a total natural level of unemployment of 212,000.

Question 52

Which one of the following would cause the demand curve for a normal good to shift to the left?

A. A rise in average household income.
B. A change in consumers’ tastes in favor of the commodity.
C. A rise in the price of a complementary commodity.
D. A rise in the price of a substitute product.

Answer 52

C. A rise in the price of a complementary commodity.

A shift to the left represents a decline in demand. A leftward shift may be caused by an unfavorable change in the tastes and preferences of consumers, a decline in consumer income (if the commodity is a normal good), a decrease in the price of a substitute good, an increase in the price of a complementary product, or the expectation of future price decreases.

Question 53

A firm has a perfectly inelastic supply curve, and it faces a downward sloping demand curve and increased demand. Which of the following results best describes an increase in demand when the supply curve is constant?

A. Price will fall, and quantity will increase.
B. Price will rise, and quantity will increase.
C. Price will rise, and quantity will be constant.
D. Price will fall, and quantity will be constant.

Answer 53

C. Price will rise, and quantity will be constant.

A perfectly inelastic supply curve is insensitive to any change in price. The quantity supplied is fixed (constant) and represented by a vertical supply curve. An increase in demand shifts the demand curve to the right. The demand curve then intersects the supply curve at a higher price.

Question 54

In any competitive market, an increase in both demand and supply can be expected to always

A. Increase both price and market-clearing quantity.
B. Increase market-clearing quantity.
C. Decrease both price and market-clearing quantity.
D. Increase price.

Answer 54

B. Increase market-clearing quantity.

In a competitive market, equilibrium exists when demand is exactly equal to supply. If both demand and supply increase in equal amounts, the market will still be in equilibrium, but the new price may be higher, lower, or unchanged depending upon the slopes of the demand and supply curves. Whatever the new price, the quantity of products cleared by the market should increase.

Question 55

A lender and a borrower signed a contract for a $1,000 loan for 1 year. The lender asked the borrower to pay 3% interest. Inflation occurred and prices rose by 2% over the next year. The borrower repaid $1,030. What is the amount worth in real terms, after inflation?

A. $1,009.80
B. $1,050.60
C. $1,060.90
D. $1,019.80

Answer 55

A. $1,009.80

The amount repaid in nominal terms at the end of the year is $1,030.00 ($1,000 × 1.03). To convert this amount to real terms, that is, to state it in terms of its actual buying power, it must be adjusted for inflation ($1,030.00 ÷ 1.02 = $1,009.80).

Question 56

The value of money varies
A. Directly with government spending.
B. Directly with the tax rates.
C. Inversely with the general level of prices.
D. Directly with investment.

Answer 56

C. Inversely with the general level of prices.

Part of the value of money comes from its usefulness as a store of value or wealth. As prices rise, the purchasing power of a stock of money held diminishes. Accordingly, the value of money and the general level of prices must be inversely related.

Question 57

Which of the following is correct regarding the consumer price index (CPI) for measuring the estimated decrease in a company’s buying power?

A. The products a company buys should differ from what a consumer buys.
B. The CPI is skewed by foreign currency translations.
C. The CPI is measured only once every 10 years.
D. The CPI measures what consumers will pay for items.

Answer 57

A. The products a company buys should differ from what a consumer buys.

For a company to maintain its margins in times of rising prices, it must purchase lower-priced, if not lower-quality, products. The consumer may continue to buy the higher-priced products that (s)he is used to purchasing.

Question 58

Which of the following results could be expected from an open market operation of the Federal Reserve?

A. A sale of securities would lower interest rates.
B. A sale of securities would raise interest rates.
C. A purchase of securities would lower security prices.
D. A purchase of securities would raise interest rates.

Answer 58

B. A sale of securities would raise interest rates.

A sale of securities removes money from the economy and reduces bank reserves. Thus, banks cannot lend as much as previously, and higher interest rates follow. Money supply and interest rates are inversely related.

Question 59

The velocity of money is generally measured as a ratio of the

A. Value of imported and exported goods to the money supply.
B. Nominal gross domestic product to the money supply.
C. Total federal debt to the money supply.
D. Value of domestic manufactured goods to the money supply.

Answer 59

B. Nominal gross domestic product to the money supply.

The velocity of money is the average number of times each unit of currency is used to purchase a final product in a given period. The velocity of money can be calculated as nominal gross domestic product divided by the money supply.

Question 60

If the coefficient of elasticity is zero, then the consumer demand for the product is said to be

A. Unit inelastic.
B. Perfectly inelastic.
C. Unit elastic.
D. Perfectly elastic.

Answer 60

B. Perfectly inelastic.

When the coefficient of elasticity (Percentage change in quantity ÷ Percentage change in price) is less than one, demand is inelastic. When the coefficient is zero, demand is perfectly inelastic.

Question 61

An American importer of English clothing has contracted to pay an amount fixed in British pounds 3 months from now. If the importer worries that the U.S. dollar may depreciate sharply against the British pound in the interim, it would be well advised to

A. Sell pounds in the forward exchange market.
B. Buy dollars in the futures market.
C. Buy pounds in the forward exchange market.
D. Sell dollars in the futures market.

Answer 61

C. Buy pounds in the forward exchange market.
Answer (C) is correct.
The American importer should buy pounds now. If the dollar depreciates against the pound in the next 90 days, the gain on the forward exchange contract offsets the loss from having to pay more dollars to satisfy the liability.

Question 62

If the coefficient of elasticity is zero, then the consumer demand for the product is said to be

A. Unit inelastic.
B. Unit elastic.
C. Perfectly inelastic.
D. Perfectly elastic.

Answer 62

C. Perfectly inelastic.

When the coefficient of elasticity (Percentage change in quantity ÷ Percentage change in price) is less than one, demand is inelastic. When the coefficient is zero, demand is perfectly inelastic.

Question 63

Domestic content rules

A. Restrict demand for affected products.
B. Exclude products not made domestically.
C. Tend to be imposed by capital-intensive countries.
D. Tend to be imposed by labor-intensive countries.

Answer 63

C. Tend to be imposed by capital-intensive countries.

Domestic content rules require that at least a portion of any imported product be constructed from parts manufactured in the importing nation. This rule sometimes is used by capital-intensive nations. Parts can be produced using idle capacity and then sent to a labor-intensive country for final assembly.