Econ Flashcards
Cross-price elasticity is positive:
Goods are substitutes
As one good’s price goes up, the other good’s quantity demanded goes down
Cross-price elasticities is negative:
Good are compliments
As one good’s price goes up, the other good’s quantity demanded goes down
A decrease in the price of a good that a consumer purchases, leaving consumer with unspent income:
Income effect
Positive substitution effect & Positive income effect
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
When the positive substitution effect < negative income effect , consumption:
Consumption will decrese
Giffen good
When prices decrease, consumption is not pushed towards the good
The positive substitution effect < negative income effect, causing a positively sloped demand curve, where a drop in prices decreases consumption
Giffen good
A normal profit is best described as:
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
A company will stay in the market in the long term if:
A company will stay in the market in the short term if:
Total revenue (price) >= total costs
the company is exceeding it’s variable costs
Revenue > variable costs
Profit is maximized when:
marginal revenue = marginal cost
Total revenue - total cost = is maximized
Output increases in the same proportion as input increases occur at:
constant returns to scale
Positive substitution effect > negative income effect:
Inferior good
Occurs when a business charges the maximuim possible price a consumer is willing to pay:
First-degree price discrimination (perfect price discrimination)
Second degree: invovles using the quantity purchased as the basis for the pricing of a particular good
Oligopoly firms are said to be:
Interdependent
Economic profits is different from accounting because it includes:
Opportunity costs
Economic profit= accounting profit - opportunity costs
All firms will increase output when:
MR > MC
MR= Market price (perfect competition) & will stop production when Price = MR = MC
For all firms, profits are maximized where:
MR = MC
(Maximizes profits, not revenue)
Unemployment rate=
unemployed / labor force
Labor force=
Employed + Unemployed
Competitive market that produces less output, and the sum of consumer and producer surplus is reduced:
Monopoly
A firm’s initial response to an emerging economic contraction is:
Reduce output, by using less capital and labor
(i.e. reducing overtime hours)
- unemployment rate
- average duration of unemployment
- inventory/sales ratios
- prime rate
- services inflation
- consumer installment debt
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
- Real personal income
- Industrial output
Coincident Indicators
Economic growth:
-increased industrial output
Economic Decline:
-decline in real personal income shows a slowdown in business activity
- Building permits !
- Stock price
- initial unemployment claims
- manufacturing new orders
- spread of short & long term interest rates !
leading indicators
Economic growth:
-Builders are seeking permits in anticipation of an economic expansion
Economic decline:
-Narrowing spread forecasts an economic decline
When the central bank wants to employ open market operations, what does this mean?
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)
Increases in transfer payments & decreases in tax revenues that result from an economic contraction without new legislation:
Automatic stabilizers
dampen economic cycles
Taxes and transfer payments increases during a recession, thus increasing the deficit
Refers to actions by a government to influence economic activity through changes in taxes and government spending
Fiscal policy
Determined by the equilibrium between the demand for money and the supply of money is the ?
interest rate
Increased budget deficits will increase the real interest rate and thereby reduce private investment
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
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
increase
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:
credibility
Periodic inflation reports enhance the ______ of a central bank
transparency
A central bank that determines both the policy rate and the method for computing the inflation rate is said to have ______.
independence
Balanced budget multiplier condition:
government spending = Tax revenue
G = T
taxation matches the level of government spending
Real GDP will _____, when the balance budget multiplier condition is met.
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)
Decreasing spending or increasing taxes are:
contractionary fiscal policy actions
Expansionary fiscal policy tends to expand the _____ sector. Contractionary monetary policy tends to contract the ____ sector.
Public (government); expansionary fiscal policy increases government spending
Private: contractionary monetary policy causes higher interest rates, and thus less business investments
The central bank should increase target interest rates when the economy is:
growing at an unsustainable (above-full-employment) level
to try and slow down spending
To determine whether monetary policy is expansionary or contractionary, an analyst should compare the central bank’s policy rate to the:
Neutral interest rate:
Expansionary = Neutral > Policy rate
Contractionary = Neutral < Policy rate
Banks are able to borrow from the Fed at the _____.
discount rate
The ______ is the interest rate banks charge other banks to borrow reserves from other banks
federal funds rate
The rate that commercial banks charge their best customers.
prime rate
Fisher effect states that nominal rate of interest=
Nominal rate of interest= real rate + expected inflation
Unemployment rate=
unemployed / labor force
Labor force=
Employed + Unemployed
An increase in the policy rate will impact banks by:
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.
Neutral interest rate=
real trend growth rate + inflation rate (expected or target)
Neutral > policy rate (fed funds rate) = Expansionary
Neutral <policy rate = contractionary
Represents increased productivity that cannot be directly accounted for by increases in capital & labor, driven by changes in technology
Total factor productivity
Regulatory practice of setting prices at a level where the monopoly firm’s total average cost curve intersects the demand curve:
Average cost pricing
Regulatory practice of setting prices at a level where the monopoly firm’s marginal cost curve intersects the demand curve:
Marginal cost pricing
In a perfectly competitive industry, the short-run supply curve for the market is the:
Sum of individual supply curves for all firms in the industry
- reducing the volatility of domestic asset prices
- maintaining control of exchange rates
- keeping domestic interest rates low
- protecting strategic industries from foreign ownership.
Reasons for a government to impose restrictions on capital flows into/out of its country
Actual real GDP > potential real GDP
Inflationary phase
Real GDP > full employment
Full employment: Actual real GDP = potential real GDP
Recessionary phase: real GDP <potential GDP
Long-run aggregate supply equals:
Potential GDP/Full employment
The long-run aggregate supply curve is:
Perfectly inelastic; because in the long run wages and other input prices adjust to changes in the overall price level
The short-run aggregate supply curve:
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.
When the government is spending more and taxing less:
Expansionary Fiscal Policy
Deficit: G - T = positive
When the government is spending less and taxing more:
Contractionary fiscal policy
Surplus: G - T = negative
Aggregate Demand Equation=
AD= C + I + G (X-M)
Functions/Objectives of the Central Bank:
- Keeping inflation within an acceptable range
- Issuing currency
Three primary functions of Money:
- Unit of account: because prices of goods and services are expressed in units of money
- Store of value: because money received for work or goods can be saved to purchase goods or services at another time
- Medium of exchange: because money is accepted as a form a payment
- 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
Monetary Union
Ex: Eurozone
- 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
Economic Unions
- Removes barries to goods & services among members
- Adopt common trade policies with non-members
*Labor & capital movement barriers are removed
Common markets
- Removes all barriers to trade goods and services between member countries
- Does not require member to change their trade policies with non-members
Free trade area
FTA + common trade restrictions with non-members
Summarizes all transactions that a country’s individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country:
Balance of Payments
Consists of
* Capital transfers and acquisition
* purchase of non-produced, non-financial assets
* foreign assets
BOP: Capital Account
Records investment flows:
* gold
* foreign currencies
* foreign securities
* government owned assets aborad
* foreign owned assets in the country
BOP: Financial Account
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
BOP: Current Account
The primary feature of an economic union, that distinguishes it from a common market, is the adoption of a common:
Economic policies
Economic union is a common market, that also establish economic policies
Promotes international trade and exchange rate stability, and assists member countries that have BOP issues
International Monetary fund
Reducing global poverty is a role of the:
World Bank
Resolving trade disputes is a role of the:
World Trade Organization
The income of a country’s citizens working abroad is included in:
it’s its GNP, but not in its GDP
GDP is total value of all goods and services produced within a country
In the balance of payments accounts, goods and financial assets that migrants bring to a country are included in the:
capital account
purchase of non-produced, non-financial assets (like patents)
Imports/exports impact the:
Current account
Machinery
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’ _______
price levels
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
In a conventional fixed peg arrangement
Market-determined exchange rates are a characteristic of an ________ exchange rate regime.
independently floating
FX buy-side investors that do not use derivatives:
Real money accounts
pension funds, insurance companies
The sell-side of FC markets priimarily consist of:
Multinational banks
Primary dealers in currencies & originators of forward exchange contracts
Exchange rate regimes without it’s own currency:
- Formal dollarization
- Monetary Union
Exchange rate regimes that a country does not have to give up it’s own currency:
- Currency Board
- Conventional Fixed peg
- Pegged exchange rate/target zone
- Crawling peg
- Managed floating
- Independently floating
MR = Price, is a defining characteristic of:
Perfect competition (price takers)
Prices searchers include:
All market structures, except for Perfect Competition
Limitations of the N-firm concentration measure:
- 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
Limitations of the HHI concentration measures:
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
Economic school of thought: “predictable, steady money supply (Monetary policy)”
Monetarists
Economic school of thought: “Don’t intervene”
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
Economic school of thought: “Intervene with monetary or fiscal policy”
Keynesian:
* Keynesian
* New Keynesian
Economic School of thought: “Don’t have incorrect Fiscal policy”
Austrian
Who loses in an economy with inflation:
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
- removes barries to goods & services among members
- adopt common trade policies with non-members
Custom Unions
The primary reason for a regional trade agreement:
to improve economic welfare for members
What is the impact of contractionary monetary policy on the currency:
Contraction= increasing rates;
Domestic currency appreciates, when interest rates increase:
Exports decrease & imports increase
The tendency for currency depreciation to increase a country’s trade deficit in the short run is known as the:
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
The money supply schedule is:
Vertical
Because it is not affected by changes in interest rate, but is determined by the central bank (the Fed)
Exchange rate regime that is most likely used in a transition toward a floating exchange rate system:
Crawling bands
width of margin (bands) increase over time
Bands/values around a target exchange rate, that increase over time
When income elasticity is positive:
Normal good
As income increases, demand for the good increases
When income elasticity is negative:
Inferior good
As income increases, demand for the good decreases
A firm operating in a perfectly competitive market will continue in short run, but exit in long run when:
AVC < Price < ATC
Price should equal ATC in the long run
Price = MR = MC= ATC
The value of goods & services measured at current prices:
Nominal GDP
G - T > 0
Fiscal Deficit
G > T
G - T = positive
G - T < 0
Fiscal surplus
G < T
G - T = negative
X - M > 0
Trade surplus
X - M = postive
Exports > Imports
X - M < 0
Trade deficit
X - M = negative
Imports > Exports
Demand- pull inflation is an increase in:
Aggregate demand
increases commodity prices
Demand is elastic when:
demand increases by a greater percentage than the percentage price change, when prices are reduced
Reduction of price causes an increase in total revenue:
Demand is elastic
A shift in the demand curve results from:
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
Own- price Elasticity < 1:
Good is inelastic
Necessitites
Own- price Elasticity > 1:
Good is elastic
Total revenue is maximized:
Unit elasticity: price elasticity = -1.0
When the price of this good increases, more would be consumed:
Giffen good
inferior good; positively sloping demand curve
Applies to luxury items, for which demand increases when price increases
Veblen Good
Positively sloping demand curve
normal goods
When fixed costs increase faster than output
Diseconomies of scale
Firms should decrese output, by decreasing plant size
When output increases, as costs decrease:
Economies of scale
- Many firms
- Low barriers to entry
- Differentiated products, through advertising
- Large advertising expense
- Some pricing power
- Zero economic profits in LR
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
- Few firms
- Products are homogeneous or differentiated
- High barriers to entry
- Marketing
- Some/significant pricing power
Oligopoly
The increase in revenue from the sale of one additional unit of output:
Marginal Revenue
A kinked demand curve is cause by the difference in elasticities of an oligopoly’s demand curve:
Above the kink=
Below the kink=
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
Oligopoly competitors will lower prices to match a price reduction, but will not match a price:
Increase
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
Collusion
A situation where no firm can increase it’s profits by changing it’s price/ouput:
Nash equilibrium
Often an opportunity for collusive agreements
A government entity that regulates an authorized monopoly will most likely base regulated prices on:
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
Total MV of all final goods & services produced within a country, during a given time period
GDP
Aggregate supply in the very short run:
elastic
Breakeven point for firms:
Total revenue = Total cost
Perfect competition: Price= MR= ATC
time lag in matching qualified workers with job openings:
Frictional unemployment
unemployed workers do not have skills to match newly created jobs
Structural unemployment
unemployment cause by the economy producing at less than capacity during contraction phase of business cycle
cyclical unemployment
Country adopts a foreign currency
Formal dollarization
Provides a wider margin than the fixed peg:
Target zone
Monetary authority acts to influence exchange rate but does not set a target:
Managed floating
Exchange rate is market determined:
Independently floating
Represents the level of domestic output that companies will produce at each price level:
LRAS curve
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.
Long run for LRAS curve
The price index that best resolves the substitution bias is the:
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
Type of inflation that depends upon the relationship between actual and potential GDP and industrial capacity utilization
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.
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:
Demand–pull
Inflation is kicked off by either an increase in the money wage rate or an increase in the prices of raw materials
cost–push
Decrease in AS
Long-run aggregate supply equals:
Potential GDP/Full employment
This type of inflation:
Occurs with a high level of unemployment and a slowdown in the economy, accompanied by high inflation
Stagflation
Government spending has a far bigger impact on aggregate spending and output, compared to:
tax cuts or transfer increases
Describes how consumption is impacted by changing relative income & prices:
Substitution effect
Expresses the impact of increased purchasing power on consumption:
Income effect
- explains how consumers spend based on income
- based on the balance between the spending and saving habits of consumers
Marginal propensity to consume
Negative income effect means that when income increases, consumption
Consumption decreases
Inferior goods
Veblen goods have a income effect that is:
Positive;
when income increases, consumption increases
When GDP deflator is less than 100, the country is experiencing:
deflation;
price level of the current year is less than the price level of the base year
Cycically adjusted budget deficits are appropriate indicators of:
Fiscal policy
The deficit that would exist if the economy was at full employment:
Cyclically adjusted budget deficits
Fiscal policy
According to Hecksher-Ohlin model, when trade opens, the abundant factor:
When trade opens there is a favorable impact on the abundant factor, and negative impact on the scarce factor
Weighted average cost for a basket of goods & services
indexed to a reference base period
CPI
An increase in the quantity of money will have what long term impact on full employment GDP?
Increase in price level
&
No effect on real GDP
Monopolies charge the maximizing:
Profit maximizing price
Elasticities approach:
Currency depreciation will result in greater improvement in the trade deficit when either:
- Considers trade flows
- Ignores capital flows
import or export demand becomes more elastic
Absorption approach:
Currency depreciation will improve the balance of trade if it increases domestic savings;
* Considers trade flows
* Considers capital flows
increases national income relative to expenditures
For price discrimination, there must be two identifiable groups of customers with:
- different elasticities of demand
- prevention of reselling the product
