BEC - B5: Econ

Question 1

An increase in the federal debt may create inflationary pressures for which of the following reasons?

• Lenders may charge higher interest rates
• Economy’s money supply may increase
• Businesses may have difficulty raising investment capital
• Government may need to cut spending

Answer 1

• Economy’s money supply may increase.
  (1) As debt transactions impact the money supply, an increase in debt would lead to an increase in the money supply.
  (2) Increase in the money supply leads to a decrease in overall interest rates.
  (3) Decreasing interest rates causes the demand curve to shift right (increase), which leads to rising price levels.

Question 2

Feds raise the discount rate. Which of the following is likely to occur?

• Fixed interest rates on mortgages decrease
• Short-term interest rates will increase
• Corporate profits will increase
• Consumer spending will increase

Answer 2

-Short-term interest rates will increase

Explain:
-Increasing the discount rate leads to (1) reduction in borrowing from member banks
-Reduction in borrowing leads to (2) reduction in the money supply
-(3) reduced money supply leads to increased interest rates
-Further…
Consumer spending will likely decline (rising interest rates means higher cost to borrow funds)

Question 3

CPI jumps from 131 in year 1 to 136.5 in year 2. What is the annual inflation rate?

Answer 3

Inflation rate as a % = (CPI now - CPI last period) / CPI last period

(136.5 - 131) / 131 = .042

Question 4

An increase in the market supply of beef would result in a…?

• Decrease in demand for beef
• Decrease in quantity of beef demanded
• Increase in price of beef
• Increase in quantity of beef demanded

Answer 4

Increase in the quantity of beef demanded.

Supply curve goes out to the right. What are the effects…

Question 5

What is the best definition of stagflation?

Answer 5

A combination of:

• rising unemployment
• rising price level

(falling output too)

Question 6

Which of these is not likely to cause a rightward shift in aggregate demand curve?

• increase in general confidence about the economic outlook
• increase in government spending
• increase in wealth
• increase in the level of real interest rates

Answer 6

-increase in the level of real interest rates will not shift demand curve right. The others will.

Increase in real interest rates will increase the cost of capital, which will shift the demand curve left.

Increase in government spending is a direct increase in demand (more money going into economy)

Question 7

What are the three ways to increase the money supply? Use the following tactics:

• Lower/raise the required reserve ratio
• Increase/decrease the discount rate
• Sell/buy bonds in the open market

Answer 7

• Lower the required reserve ratio.
• Decrease the discount rate.
• Buy bonds in the open market.

Question 8

A sharp rise in oil prices would lead to ?

• cost push inflation?
• demand pull inflation?

Answer 8

Cost push.

Question 9

The process of developing macro level flow charts of business processes that produce products/services, and then identifying the value added by each process, is called?

Answer 9

Value chain analysis.

Other common mistake answer choices:

• Continuous quality improvement - focus on customer satisfaction and quality, not the steps in the chain.
• Process improvement = the results of total quality management efforts

Question 10

Under monopolistic competition, strategic plans focus on:

Answer 10

• Maintaining market share.
• Planning for enhanced product differentiation.
• Allocation of resources to advertising, research, etc.

Not focused on coordinating production volume and price changes. This is a characteristic of oligopoly.

Question 11

Under perfect competition, strategic plans focus on:

Answer 11

• Keep market share.

- Be able to quickly adjust to price changes.

Question 12

Under monopolistic competition, strategic plans focus on:

Answer 12

• Keep market share
• Look to invest in R&D and advertising to help differentiate the product

Other characteristics:
Fairly elastic demand curve. More influence on quantity than price.

Question 13

Under oligopoly, strategic plans focus on:

Answer 13

• 1) Focus on market share (characteristic most resembling perfect comp)
• 2) Differentiate the product (characteristic most resembling monopolistic comp)
• 3) Be able to adapt to price and volume changes (characteristic resembling part perfect comp (quick price changes) and monopoly (volume changes))

Oligopolies have a little bit of all 3. They also have consistent positive economic profits, sensitivity to competition’s prices.

Question 14

Under monopoly, strategic plans focus on:

Answer 14

• Profitability

- Produce at a level at which profits can be maximized

Question 15

To decrease (shrink) the money supply, the Fed might:

• Lower the discount rate?
• Sell government securities on the open market
• Decrease the required reserve ratio
• Buy government securities on the open market

Answer 15

• No, they would not lower the rate. Lowering the rate would actually encourage the money supply to grow
• Yes, they would sell securities. Selling securities would take money out of the market. Buying securities would put money back in.
• Decrease the ratio? No, they would not decrease the ratio. Decreasing the ratio would encourage more money in the market, while increasing the ratio would force banks to keep more money in the bank, and leave less money supply for the market
• Buy government securities? No. Buying securities would put money back in the market. Selling them would take money out (decreasing the supply)

Question 16

When we measure an increase or decrease in real GDP, what are we really measuring?

Answer 16

the X axis changes (shifts left or right in output). If Output (supply) (real GDP) shifts right… then we’ve got an increase in real GDP (more is being produced)

Question 17

Which of the following would lead to the most inflation?

• Aggregate demand decreases, a. supply increases
• Both a. demand and a. supply decrease
• Both a. demand and a. supply increase
• A. demand increases and a. supply decreases

Answer 17

Inflation can be affected by demand-pull inflation (demand curve shifts right), and cost-push inflation (short run aggregate supply curve shifts left).

Look for the answer choice that pushes demand curve right (Demand-Pull inflation), and the supply curve left (Cost-Push inflation)

Question 18

Which of the following would most likely lead to a rise in cyclical unemployment?

• Mismatch between the skills held by workers and the skills demanded by employers?
• Large decline in wealth?
• Reduction in input costs?
• Seasonal changes in the demand for labor?

Answer 18

Large decline in wealth would most likely lead to a rise in cyclical unemployment.

Cyclical unemployment is the unemployment due to the rise and fall of economic activity relative to its long-term trend. A large decline in wealth would cause a shift in the demand curve (left), real GDP to fall. Slow down in activity will cause cyclical unemployment to rise.

Question 19

What’s the different between cyclical unemployment, structural unemployment, and seasonal unemployment?

Answer 19

Cyclical unemployment: unemployment due to the rise and fall of economic activity, relative to a long-term trend

Structural unemployment = mismatch between the skills held by workers, and the skills demanded by employers. Can’t work together, structure is set up to lead to unemployment

Seasonal unemployment is the result of seasonal changes in the demand for labor.

Question 20

How do we calculate GDP (expenditure approach)?

Answer 20

GICE.

(G)overnment purchases of goods and services
gross private domestic (I)nvestment
personal (C)onsumption expenditures
net (E)xports

Government,
Investment (gross private domestic),
Consumption (personal),
Exports (net)

Question 21

What is the substitution effect as it relates to the Law of Demand?

Answer 21

People tend to substitute one similar good for another when the price of a good they usually purchase increases.

Question 22

What is the income effect as it relates to the Law of Demand?

Answer 22

As income increases but prices stay consistent, consumers will purchase more of all the lower priced products.

Question 23

A large decline in investment spending, caused by a sharp rise in interest rates, will likely:

• shift short run supply curve right / left?
• shift aggregate demand curve right / left?

Answer 23

-Come back to this one-

Question 24

Company in California contracted with a separate company in India to handle its customer service call center. This practice is most accurately described using the term:

• Globalization
• Shared services
• Outsourcing
• Offshore operations

Answer 24

-Believe it or not… it’s NOT (c)

(a) no, globalization is better described as the “distribution of industrial and service activities across an increasing number of nations.” Does not describe the actions of a single company
(b) no, shared services would involve splitting the cost of a service with another organization, not contracting out to a separate entity
(c) nope, not outsourcing either. Technically, it is outsourcing, but it’s outsourcing within another country… which is more accurately described as:
(d) offshore operations

Question 25

An oligopolist faces a ‘kinked” demand curve. What does that term mean?

Answer 25

When an oligopolist lowers its prices, other firms in the oligopoly will respond accordingly and match the price reduction. When an oligopolist raises its prices however… other firms will ignore the change.

Long story short: other firms will match price reductions, but ignore price increases. Airline and auto industries are good examples of this.

Above the kink: demand is highly elastic. Below the kink: demand is very inelastic. That’s the kink.

Just remember: above = highly elastic (price changes tend to greatly affect demand swings)
below = not very elastic (highly inelastic) - (price changes tend to not swing demand very much)

Question 26

When does competition NOT become an even stronger force impacting the profitability of a firm

• The market consists of several equal sized firms
• Customers do not have strong brand affinity
• The market is fast-growing
• The costs of exiting the market > costs of continuing to operate

Answer 26

(c) - bingo.

The market is fast growing, so it reduces or offsets the strong force of competition affecting firm profitability.