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CFA Level I > Econ > Flashcards

Econ Flashcards

1
Q

Cross-price elasticity is positive:

A

Goods are substitutes

As one good’s price goes up, the other good’s quantity demanded goes down

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2
Q

Cross-price elasticities is negative:

A

Good are compliments

As one good’s price goes up, the other good’s quantity demanded goes down

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3
Q

A decrease in the price of a good that a consumer purchases, leaving consumer with unspent income:

A

Income effect

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4
Q

Positive substitution effect & Positive income effect

A

Normal goods

the substitution and the income effects reinforce one another to cause the demand curve to be negatively sloped

When price decreases, consumption increases, leading to increases levels of unspent income

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5
Q

When the positive substitution effect < negative income effect , consumption:

A

Consumption will decrese

Giffen good

When prices decrease, consumption is not pushed towards the good

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6
Q

The positive substitution effect < negative income effect, causing a positively sloped demand curve, where a drop in prices decreases consumption

A

Giffen good

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7
Q

A normal profit is best described as:

A

Zero economic profit;
Normal profit is the level of accounting profit such that implicit opportunity costs are just covered; thus, it is equal to a level of accounting profit such that economic profit is zero

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8
Q

A company will stay in the market in the long term if:
A company will stay in the market in the short term if:

A

Total revenue (price) >= total costs
the company is exceeding it’s variable costs
Revenue > variable costs

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9
Q

Profit is maximized when:

A

marginal revenue = marginal cost

Total revenue - total cost = is maximized

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10
Q

Output increases in the same proportion as input increases occur at:

A

constant returns to scale

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11
Q

Positive substitution effect > negative income effect:

A

Inferior good

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12
Q

Occurs when a business charges the maximuim possible price a consumer is willing to pay:

A

First-degree price discrimination (perfect price discrimination)

Second degree: invovles using the quantity purchased as the basis for the pricing of a particular good

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13
Q

Oligopoly firms are said to be:

A

Interdependent

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14
Q

Economic profits is different from accounting because it includes:

A

Opportunity costs

Economic profit= accounting profit - opportunity costs

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15
Q

All firms will increase output when:

A

MR > MC

MR= Market price (perfect competition) & will stop production when Price = MR = MC

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16
Q

For all firms, profits are maximized where:

A

MR = MC

(Maximizes profits, not revenue)

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17
Q

Unemployment rate=

A

unemployed / labor force

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18
Q

Labor force=

A

Employed + Unemployed

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19
Q

Competitive market that produces less output, and the sum of consumer and producer surplus is reduced:

A

Monopoly

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20
Q

A firm’s initial response to an emerging economic contraction is:

A

Reduce output, by using less capital and labor

(i.e. reducing overtime hours)

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21
Q
  • unemployment rate
  • average duration of unemployment
  • inventory/sales ratios
  • prime rate
  • services inflation
  • consumer installment debt
A

lagging indicator

Economic growth:
-Increasing average duration of unemployment indicates a downturn has occured and growth is expected, if decreases it means the economic upturn has occured and firms have started hiring again
-increase in consumer installment debt follows increases in average aggregate income
-in economic recovery, new job seekers enter the labor force and increase the unemployment rate

Economic decline:
-Increasing inventory, relative to sales, appear after a peak and show signs of slowing economic growth

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22
Q
  • Real personal income
  • Industrial output
A

Coincident Indicators

Economic growth:
-increased industrial output

Economic Decline:
-decline in real personal income shows a slowdown in business activity

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23
Q
  • Building permits !
  • Stock price
  • initial unemployment claims
  • manufacturing new orders
  • spread of short & long term interest rates !
A

leading indicators

Economic growth:
-Builders are seeking permits in anticipation of an economic expansion

Economic decline:
-Narrowing spread forecasts an economic decline

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24
Q

When the central bank wants to employ open market operations, what does this mean?

A

Expansionary: the fed is buying government securities, to increase reserves/money supply, and decrease rates
Contractionary: the fed is selling government securities, to decrease reserves/money supply, and increase rates

When the fed is buying securities, that puts money into the banking system (and out of the central bank)
When the fed is selling securities, that takes money away from the banking system (and into the central bank)

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25
Q

Increases in transfer payments & decreases in tax revenues that result from an economic contraction without new legislation:

A

Automatic stabilizers

dampen economic cycles

Taxes and transfer payments increases during a recession, thus increasing the deficit

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26
Q

Refers to actions by a government to influence economic activity through changes in taxes and government spending

A

Fiscal policy

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27
Q

Determined by the equilibrium between the demand for money and the supply of money is the ?

A

interest rate

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28
Q

Increased budget deficits will increase the real interest rate and thereby reduce private investment

A

Crowd-out effect (Macroeconomic issues that can hinder usefulness of fiscal policy)
Increased budget deficits will increase the demand for loanable funds and lead to higher interest rates, and thus lower private investment.
Crowding-out implies that an increase in government spending will choke off private investment and reduce the intended impact of fiscal policy changes on aggregate demand

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29
Q

Crowding-out implies that an ______ in government spending will choke off private investment and reduce the intended impact of fiscal policy changes on aggregate demand

A

increase

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30
Q

Economic actors come to believe the inflation rate will be near the central bank’s target and factor this inflation rate into their decisions, show’s the central bank’s:

A

credibility

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31
Q

Periodic inflation reports enhance the ______ of a central bank

A

transparency

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32
Q

A central bank that determines both the policy rate and the method for computing the inflation rate is said to have ______.

A

independence

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33
Q

Balanced budget multiplier condition:

A

government spending = Tax revenue
G = T
taxation matches the level of government spending

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34
Q

Real GDP will _____, when the balance budget multiplier condition is met.

A

Increase
Government spending will increase G in the GDP equation
Taxation will decrease C+I in the GDP equation, but by a lesser amount
GDP= (C+I) + G + (X-M)

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35
Q

Decreasing spending or increasing taxes are:

A

contractionary fiscal policy actions

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36
Q

Expansionary fiscal policy tends to expand the _____ sector. Contractionary monetary policy tends to contract the ____ sector.

A

Public (government); expansionary fiscal policy increases government spending
Private: contractionary monetary policy causes higher interest rates, and thus less business investments

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37
Q

The central bank should increase target interest rates when the economy is:

A

growing at an unsustainable (above-full-employment) level
to try and slow down spending

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38
Q

To determine whether monetary policy is expansionary or contractionary, an analyst should compare the central bank’s policy rate to the:

A

Neutral interest rate:
Expansionary = Neutral > Policy rate
Contractionary = Neutral < Policy rate

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39
Q

Banks are able to borrow from the Fed at the _____.

A

discount rate

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40
Q

The ______ is the interest rate banks charge other banks to borrow reserves from other banks

A

federal funds rate

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41
Q

The rate that commercial banks charge their best customers.

A

prime rate

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42
Q

Fisher effect states that nominal rate of interest=

A

Nominal rate of interest= real rate + expected inflation

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43
Q

Unemployment rate=

A

unemployed / labor force

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44
Q

Labor force=

A

Employed + Unemployed

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45
Q

An increase in the policy rate will impact banks by:

A

Immediate increase in commerical bank’s base rates;
Reduced credit availability

An increase in the policy rate (federal funds rate) will likely raise the potential penalty that banks will have to pay if they run short of liquidity and thereby reduces their willingness to lend.

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46
Q

Neutral interest rate=

A

real trend growth rate + inflation rate (expected or target)

Neutral > policy rate (fed funds rate) = Expansionary
Neutral <policy rate = contractionary

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47
Q

Represents increased productivity that cannot be directly accounted for by increases in capital & labor, driven by changes in technology

A

Total factor productivity

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48
Q

Regulatory practice of setting prices at a level where the monopoly firm’s total average cost curve intersects the demand curve:

A

Average cost pricing

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49
Q

Regulatory practice of setting prices at a level where the monopoly firm’s marginal cost curve intersects the demand curve:

A

Marginal cost pricing

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50
Q

In a perfectly competitive industry, the short-run supply curve for the market is the:

A

Sum of individual supply curves for all firms in the industry

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51
Q
  • reducing the volatility of domestic asset prices
  • maintaining control of exchange rates
  • keeping domestic interest rates low
  • protecting strategic industries from foreign ownership.
A

Reasons for a government to impose restrictions on capital flows into/out of its country

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52
Q

Actual real GDP > potential real GDP

A

Inflationary phase

Real GDP > full employment

Full employment: Actual real GDP = potential real GDP
Recessionary phase: real GDP <potential GDP

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53
Q

Long-run aggregate supply equals:

A

Potential GDP/Full employment

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54
Q

The long-run aggregate supply curve is:

A

Perfectly inelastic; because in the long run wages and other input prices adjust to changes in the overall price level

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55
Q

The short-run aggregate supply curve:

A

Slopes upward; because in the short run some input prices do not adjust fully to changes in the price level
(i.e., is not perfectly inelastic)

Because firms can increase profit in the short run by increasing output in response to higher prices, there is a positive short-run relationship between the price level and quantity supplied.

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56
Q

When the government is spending more and taxing less:

A

Expansionary Fiscal Policy

Deficit: G - T = positive

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57
Q

When the government is spending less and taxing more:

A

Contractionary fiscal policy

Surplus: G - T = negative

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58
Q

Aggregate Demand Equation=

A

AD= C + I + G (X-M)

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59
Q

Functions/Objectives of the Central Bank:

A
  • Keeping inflation within an acceptable range
  • Issuing currency
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60
Q

Three primary functions of Money:

A
  1. Unit of account: because prices of goods and services are expressed in units of money
  2. Store of value: because money received for work or goods can be saved to purchase goods or services at another time
  3. Medium of exchange: because money is accepted as a form a payment
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61
Q
  • Removes barries to goods & services among members
  • Adopt common trade policies with non-members
  • Labor & capital movement barriers are removed
  • Member countries establish common institutions and economic policy for the union
  • Member countries adopt a single currency
  • The most integrated type of trading bloc/free trade agreement
A

Monetary Union

Ex: Eurozone

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62
Q
  • Removes barries to goods & services among members
  • Adopt common trade policies with non-members
  • Labor & capital movement barriers are removed
    *Member countries establish common institutions and economic policy for the union
A

Economic Unions

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63
Q
  • Removes barries to goods & services among members
  • Adopt common trade policies with non-members
    *Labor & capital movement barriers are removed
A

Common markets

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64
Q
  • Removes all barriers to trade goods and services between member countries
  • Does not require member to change their trade policies with non-members
A

Free trade area

FTA + common trade restrictions with non-members

65
Q

Summarizes all transactions that a country’s individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country:

A

Balance of Payments

66
Q

Consists of
* Capital transfers and acquisition
* purchase of non-produced, non-financial assets
* foreign assets

A

BOP: Capital Account

67
Q

Records investment flows:
* gold
* foreign currencies
* foreign securities
* government owned assets aborad
* foreign owned assets in the country

A

BOP: Financial Account

68
Q

Mainly measures the flow of :
* goods and services: exports, imports,
* foreign income from dividends and interest
* unilateral transfers (money from those working abroad, direct foreign aid)
* Lending/investing with foreign countries

A

BOP: Current Account

69
Q

The primary feature of an economic union, that distinguishes it from a common market, is the adoption of a common:

A

Economic policies
Economic union is a common market, that also establish economic policies

70
Q

Promotes international trade and exchange rate stability, and assists member countries that have BOP issues

A

International Monetary fund

71
Q

Reducing global poverty is a role of the:

A

World Bank

72
Q

Resolving trade disputes is a role of the:

A

World Trade Organization

73
Q

The income of a country’s citizens working abroad is included in:

A

it’s its GNP, but not in its GDP
GDP is total value of all goods and services produced within a country

74
Q

In the balance of payments accounts, goods and financial assets that migrants bring to a country are included in the:

A

capital account

purchase of non-produced, non-financial assets (like patents)

75
Q

Imports/exports impact the:

A

Current account

Machinery

76
Q

The difference between Country D’s nominal and real exchange rates with Country F is most closely related to: the ratio of the two countries’ _______

A

price levels

77
Q

A country pegs its currency within a margin of ±1% versus another currency or a basket that includes the currencies of its major trading or financial partners

A

In a conventional fixed peg arrangement

78
Q

Market-determined exchange rates are a characteristic of an ________ exchange rate regime.

A

independently floating

79
Q

FX buy-side investors that do not use derivatives:

A

Real money accounts

pension funds, insurance companies

80
Q

The sell-side of FC markets priimarily consist of:

A

Multinational banks

Primary dealers in currencies & originators of forward exchange contracts

81
Q

Exchange rate regimes without it’s own currency:

A
  • Formal dollarization
  • Monetary Union
82
Q

Exchange rate regimes that a country does not have to give up it’s own currency:

A
  • Currency Board
  • Conventional Fixed peg
  • Pegged exchange rate/target zone
  • Crawling peg
  • Managed floating
  • Independently floating
83
Q

MR = Price, is a defining characteristic of:

A

Perfect competition (price takers)

84
Q

Prices searchers include:

A

All market structures, except for Perfect Competition

85
Q

Limitations of the N-firm concentration measure:

A
  • insensitive to mergers within the industry
  • a high N-firm, may be misleading if there are low barriers to entry and other firms can join the industry
  • does not directly quantify market power
86
Q

Limitations of the HHI concentration measures:

A

Does not include the effects of potential competition:
* Fails to reflect low barriers to entry
* A high HHI, may be misleading if there are low barriers to entry and other firms can join the industry
* does not direct quantify market power

However, it does considers mergers within the industry

87
Q

Economic school of thought: “predictable, steady money supply (Monetary policy)”

A

Monetarists

88
Q

Economic school of thought: “Don’t intervene”

A

Classical:
* Neoclassical
* New classical- Real business cycle theory

Real business cycle theory: utility theory & budget constraints
Things like money wage rates will increase/decrease on their own and pull the economy back to equilibrium

89
Q

Economic school of thought: “Intervene with monetary or fiscal policy”

A

Keynesian:
* Keynesian
* New Keynesian

90
Q

Economic School of thought: “Don’t have incorrect Fiscal policy”

A

Austrian

91
Q

Who loses in an economy with inflation:

A

Those who hold long-term contracts in which they receive fixed payments

Ex: Bank with large quantitiy of fixed rate mortgages for cusomters

Bank will lose because they are receiving fixed payments with money that has less value
Customers win because they are paying less, compared to someone with a variable rate which adjusts with inflation
Inflation: Reduces the value/purchasing power of money

92
Q
  • removes barries to goods & services among members
  • adopt common trade policies with non-members
A

Custom Unions

93
Q

The primary reason for a regional trade agreement:

A

to improve economic welfare for members

94
Q

What is the impact of contractionary monetary policy on the currency:

A

Contraction= increasing rates;
Domestic currency appreciates, when interest rates increase:
Exports decrease & imports increase

95
Q

The tendency for currency depreciation to increase a country’s trade deficit in the short run is known as the:

A

J-curve effect

Currency depreciation should decrease a country’s trade deficit: imports fall because domestic can purchase less and exports increase because foreigners can purchase more
But at first, the J-curve occurs because import purchases were already committed to

96
Q

The money supply schedule is:

A

Vertical

Because it is not affected by changes in interest rate, but is determined by the central bank (the Fed)

97
Q

Exchange rate regime that is most likely used in a transition toward a floating exchange rate system:

A

Crawling bands

width of margin (bands) increase over time

Bands/values around a target exchange rate, that increase over time

98
Q

When income elasticity is positive:

A

Normal good

As income increases, demand for the good increases

99
Q

When income elasticity is negative:

A

Inferior good

As income increases, demand for the good decreases

100
Q

A firm operating in a perfectly competitive market will continue in short run, but exit in long run when:

A

AVC < Price < ATC

Price should equal ATC in the long run

Price = MR = MC= ATC

101
Q

The value of goods & services measured at current prices:

A

Nominal GDP

102
Q

G - T > 0

A

Fiscal Deficit

G > T

G - T = positive

103
Q

G - T < 0

A

Fiscal surplus

G < T

G - T = negative

104
Q

X - M > 0

A

Trade surplus

X - M = postive
Exports > Imports

105
Q

X - M < 0

A

Trade deficit

X - M = negative
Imports > Exports

106
Q

Demand- pull inflation is an increase in:

A

Aggregate demand

increases commodity prices

107
Q

Demand is elastic when:

A

demand increases by a greater percentage than the percentage price change, when prices are reduced

108
Q

Reduction of price causes an increase in total revenue:

A

Demand is elastic

109
Q

A shift in the demand curve results from:

A

Any change in variable, other than the good’s own price;
Change in Price of related good
Change in Income

A change in a good’s own price would refer to movement along the good’s demand curve

110
Q

Own- price Elasticity < 1:

A

Good is inelastic

Necessitites

111
Q

Own- price Elasticity > 1:

A

Good is elastic

112
Q

Total revenue is maximized:

A

Unit elasticity: price elasticity = -1.0

113
Q

When the price of this good increases, more would be consumed:

A

Giffen good

inferior good; positively sloping demand curve

114
Q

Applies to luxury items, for which demand increases when price increases

A

Veblen Good

Positively sloping demand curve

normal goods

115
Q

When fixed costs increase faster than output

A

Diseconomies of scale

Firms should decrese output, by decreasing plant size

116
Q

When output increases, as costs decrease:

A

Economies of scale

117
Q
  • Many firms
  • Low barriers to entry
  • Differentiated products, through advertising
  • Large advertising expense
  • Some pricing power
  • Zero economic profits in LR
A

Monopolistic

Many competitors sell the same product, but each producer attempts at distinguishing it’s product
Ex: Teeth whitening strips- all the same product, tons of them, choose the one that markets themselves the best

118
Q
  • Few firms
  • Products are homogeneous or differentiated
  • High barriers to entry
  • Marketing
  • Some/significant pricing power
A

Oligopoly

119
Q

The increase in revenue from the sale of one additional unit of output:

A

Marginal Revenue

120
Q

A kinked demand curve is cause by the difference in elasticities of an oligopoly’s demand curve:
Above the kink=
Below the kink=

A

Above the kink, prices are more elastic where a small increase in price will cause a greater decrease in quantity demand

Below the kink, prices are less elastic where a small increase in price will cause a lesser decrease in quantity demanded

Price increases: more elastic
Price decrease: less elastic

121
Q

Oligopoly competitors will lower prices to match a price reduction, but will not match a price:

A

Increase

122
Q

Often in a duopoly market, producers agree to share the market to maximize total industry profits, by restricting output and putting upward pressure on prices

A

Collusion

123
Q

A situation where no firm can increase it’s profits by changing it’s price/ouput:

A

Nash equilibrium

Often an opportunity for collusive agreements

124
Q

A government entity that regulates an authorized monopoly will most likely base regulated prices on:

A

Long run average cost

For both marginal cost pricing & average cost pricing regulations, the government attempts to adjust prices in regards to where the ATC curve lies

125
Q

Total MV of all final goods & services produced within a country, during a given time period

A

GDP

126
Q

Aggregate supply in the very short run:

A

elastic

127
Q

Breakeven point for firms:

A

Total revenue = Total cost

Perfect competition: Price= MR= ATC

128
Q

time lag in matching qualified workers with job openings:

A

Frictional unemployment

129
Q

unemployed workers do not have skills to match newly created jobs

A

Structural unemployment

130
Q

unemployment cause by the economy producing at less than capacity during contraction phase of business cycle

A

cyclical unemployment

131
Q

Country adopts a foreign currency

A

Formal dollarization

132
Q

Provides a wider margin than the fixed peg:

A

Target zone

133
Q

Monetary authority acts to influence exchange rate but does not set a target:

A

Managed floating

134
Q

Exchange rate is market determined:

A

Independently floating

135
Q

Represents the level of domestic output that companies will produce at each price level:

A

LRAS curve

136
Q

The time required for wages, prices, and expectations to adjust but not long enough for physical capital to become a variable input:

Capital and available technology to use that capital remain fixed.

A

Long run for LRAS curve

137
Q

The price index that best resolves the substitution bias is the:

A

Fisher price index

geometric mean of the Laspeyres and Paasche indexes, and it will therefore display less of a substitution bias than the other two

Both the Laspeyres index and the Paasche index ignore the substitution effect whereby people may substitute higher priced goods or services with cheaper ones

138
Q

Type of inflation that depends upon the relationship between actual and potential GDP and industrial capacity utilization

A

Demand-pull

The higher the rate of capacity utilization or the closer actual GDP is to potential, the more likely an economy will suffer shortages, bottlenecks, and a general inability to satisfy demand, and hence, price increases.

139
Q

Inflation results from persistent increases in AD that increases the price level, and temporarily increases economic output above it’s potential or full-employment level:

A

Demand–pull

140
Q

Inflation is kicked off by either an increase in the money wage rate or an increase in the prices of raw materials

A

cost–push

Decrease in AS

141
Q

Long-run aggregate supply equals:

A

Potential GDP/Full employment

142
Q

This type of inflation:

Occurs with a high level of unemployment and a slowdown in the economy, accompanied by high inflation

A

Stagflation

143
Q

Government spending has a far bigger impact on aggregate spending and output, compared to:

A

tax cuts or transfer increases

144
Q

Describes how consumption is impacted by changing relative income & prices:

A

Substitution effect

145
Q

Expresses the impact of increased purchasing power on consumption:

A

Income effect

146
Q
  • explains how consumers spend based on income
  • based on the balance between the spending and saving habits of consumers
A

Marginal propensity to consume

147
Q

Negative income effect means that when income increases, consumption

A

Consumption decreases

Inferior goods

148
Q

Veblen goods have a income effect that is:

A

Positive;
when income increases, consumption increases

149
Q

When GDP deflator is less than 100, the country is experiencing:

A

deflation;
price level of the current year is less than the price level of the base year

150
Q

Cycically adjusted budget deficits are appropriate indicators of:

A

Fiscal policy

151
Q

The deficit that would exist if the economy was at full employment:

A

Cyclically adjusted budget deficits

Fiscal policy

152
Q

According to Hecksher-Ohlin model, when trade opens, the abundant factor:

A

When trade opens there is a favorable impact on the abundant factor, and negative impact on the scarce factor

153
Q

Weighted average cost for a basket of goods & services

indexed to a reference base period

A

CPI

154
Q

An increase in the quantity of money will have what long term impact on full employment GDP?

A

Increase in price level
&
No effect on real GDP

155
Q

Monopolies charge the maximizing:

A

Profit maximizing price

156
Q

Elasticities approach:

Currency depreciation will result in greater improvement in the trade deficit when either:

  • Considers trade flows
  • Ignores capital flows
A

import or export demand becomes more elastic

157
Q

Absorption approach:

Currency depreciation will improve the balance of trade if it increases domestic savings;
* Considers trade flows
* Considers capital flows

A

increases national income relative to expenditures

158
Q

For price discrimination, there must be two identifiable groups of customers with:

A
  • different elasticities of demand
  • prevention of reselling the product

CFA Level I (45 decks)

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