Econ Flashcards
What is defined as short-run?
Timeframe when some factors are fixed
What is defined to as long-run?
Timeframe when all factors are variable
When should firm operate in perfect market?
When AR>=ATC
When should firm operate in short-run only in perfect market?
When AR>=AVC but AR<ATC
When should firm firm shut-down in perfect market?
AR<AVC
When is break-even point?
TR=TC
When should firm operate in short-term market in imperfect environment?
TC>TR>TVC
When should firm shut down in imperfect market?
TR<TVC
Why do we compare averages for perfect and total costs for imperfect markets?
Because price is not equal to marginal revenues
What are conditions of the perfect market?
many firms, very low barriers of entry, very good substitutes, competes on price only, none pricing power
What are conditions of the monopolistic competition?
many firms, low barriers of entry, goods have substitutes but are differentiated, competes on price, makreting and features, some pricing power
What are conditions of the oligopoly?
There are few firms in the market, high barriers of entry, goods have substitutes but are differentiated, competes on price, marketing and festures, some to significant pricing power
What are conditions on monopoly?
There is single firm, very high barriers of entry, no good substitutes, competes on adversiting, have significant pricing power
What is long-term equilibirium of monopolistic competition?
P=ATC
What is the most significant cost for monopolists?
Marketing costs
What is a distinct feature of oligopoly?
They are interdependent
What is kinked demand theory?
Competitors are likely to match the price decrease, but not the price increase
How does demand elasticity reflected in the kinked demand theory?
It is more elastic on the left and less elastic on the right
What is Cornot duopoly model?
Two firms with identical MC curves will chose their price based on the price of the other firm in the previous periods
What is the assumption of Cournot duopoly model?
Prices would not change and firms set prices simultaneously
What is equilibrium of duopoly model?
Sell the same quantity, as the price would be less than a single monopolist would charge, but greater under perfect competition
What is Stackelberg model?
Pricing decisions of the firms are based sequentially and the leader gets higher price and more of total profits
What is Nash equilibrium?
Choices of firms are that no other choice would make any firm better off.
What is collusion?
Joint agreement to charge given price or take speficit output.
What is dominant firm model?
Single firm has advantage of larger market share as a result of greater scale or lower cost.
What would happen if competitive firm would decrease the price?
Dominant firm would decrease the price, competitive firms output would fall and dominant firm would increase their market share.
What are concentration measures?
Indications of market power
What is n-firm concentration ratio?
It is sum of % of market shares of largest N-firms in a market.
What is HHI?
Sum of squares of the market shares of the largest firms in the market.
What is the limitation of the concentration ratios?
Limitation is that barriers to enter are not considered.
What is business cycle?
Fluctuation in economic activity
What is expansion?
Real GDP is growing
What is peak?
Real GDP stops increasing and begins decreasing
What is contraction/recession?
Real GDP decreasing
What is through?
GDP stops decreasing and begins increasing
What is growth cycle?
Changes in the % difference between real GDP and potential value
What is growth rate cycle?
Changes in the annualized % growth rate from one to next
What is a credit cycle?
It is cyclical fluctuation in the interest rates and the availability of loans.
What is investory/sales ratio?
It is representation of a business cycle.
What is expansion & peak in business cycle?
When inventory to sales ratio begins increasing as sales start to slow and inventory starts accumulating
How does firms react to businness fluctuations?
They adjust labor and physical capital
What is largest component of the GDP?
Consumer spending
Spending on which goods is rather cyclical?
Durable goods and services
What are leading economic indicators?
It is change in the direction before peak on throughs
What are coincident indicators?
They change direiction at the same time as the cycle
What are lagging indicators?
They change direction when business cycle is already underway
What is fiscal policy?
Government spending and taxation with the objective of boosting AD.
What is monetary policy?
It is quantity of money and credit in the economy.
What is balanced budget?
tax reevenues=government expenditures
What is budget deficit?
Expenditures>revenues
What is budget surplus?
Revenues>expenditures
What are objectives of fiscal policy? (3)
Influence economic activity and AD, redistribute wealth and income among segments, allocate resources among economic agents and sectors
What does Keneysian theory say?
Fiscal policy has an affect when economy is below its full employment
What does Monetarist theory say?
Fiscal policy effect is temporary and monetary policy should be used to increase or decrease the inflationary pressure.
What is discretionary fiscal policy?
It is spending and taxing decisions to stabilise the economy
What are automatic stabilizers?
They are built-in fiscal devices trigerred by the state economy
What is debt ratio?
Debt/GDP
What is crowding out?
It is when government borrowing increases IR and then private sector cannot borrow
What is Ricardian equivalence?
People look into the future and adjust their spending patterns to correspond to future tax changes.
What are fiscal policy tools?
Revenue and spending tools
What is transfer payment?
Redistribution of wealth by taxing ones and making payments to others
What is current spending?
government expenditures on goods and services on the routine basis
What is capital spending?
It is spending on infrastructure to boost future productivity of economy
What are direct taxes?
Taxes levied on income and wealth
What is indirect taxes?
Taxes levied on goods and services
What are attributes of taxing policy?
Simplicity, efficiency, fairness and sufficiency
What is fiscal multiplier?
It is potential increase in AD increasing from government spending
Fiscal multiplier equation
1/1-MPC(1-t)
What is balance budget multiplier?
Net effect on the budget from decrease/increase in the AD
How does negative effect is calculated?
AmountMPCfiscal multiplier
What is recognition lag?
Policymakers might take time to recognize the nature and extent of the economic problems
What is action lag?
Enaction of the policy takes time
What is impact lag?
Lag between enactment and impact of the changes on the economy
Which policy is increase in budget surplus?
Contractionary
Which policy is increase in budget deficit?
Expansionary
What are structural budget deficit?
Deficit that would occur based on current policies if economy were at full employment
What is fiat money?
Currency that is not backed by any tangible value
What are the roles of central bank?
Supplier of currency, banker to government and other banks, regulator and supervisor of payment system, lender of the last resort, holder of gold and forex, conductor of monetary policy
What is primary objective of the central bank?
To control inflation
What is menu costs?
Businesses contrantly having to change prices
What is shoe leather costs?
Costs of trips to banks to minimize deposits since they depreciate
What is inflation target rate?
2+-1%
What is pegging?
It is attaching currency rate to that of other country
How effective is pegging?
It is effective in the short-run, but in the long-run we need to manage interest rates.
What is policy rate?
Rate at which banks can borrow if they have shortfalls
What is policy rate named in US and Europe?
US -> discount rate, Europe -> refinancing rate
What is repurchase agreement?
Central bank purchases securities from the banks as they promise to repurchase them at the higher price in the future
What is effect of reserve requirement change?
If reserve requirement increases, money supply will decrease and interest rates will go up.
What are open market operations?
Buying and selling securities
What are monetary policy transmission mechanism?
It is ways that monetary policy affects price level and inflation
What are central banks essential qualities?
Independence, credibility and transparency
What is meant by independence?
Political powers might try to intervene as it conflicts with their goals
What is operational independence?
Independently determine policy rate
What is target independence?
Determine how inflation is computed, targeted and the time horizon for the achievement
What is meanth by credibility?
Following through on their stated intentions
What is meant by transparency?
Aiding credidibility by disclosing the state of the economic environment by issuing reports
What is interest rate targeting?
Using money supply to adjust interest rates
What is exchange rate targeting?
Maintaining a set exchange rate between local and other currency, usually the dollar.
What is net effect of the exchange rate targeting?
Targeting country will have he same inflation rate and have to adopt monetary policy and accept interest rates.
What are bond market vigilantes?
Traders who threatens or sells a large amount of bonds to protest or signal distate with policies of issuers
What is liquidity trap?
It is when demand for money becomes elastics and individuals hold more money even with decrease in the short-run interest rates.
What is quantitative easing?
Central bank purchases securities in attempt to increase money supply to reduce interest rates
What are geopolitics?
Interactions of nations including actors of state and nonstate
What is globalization?
Long-term trend toward worldwide integration of economic activity and cultures
What is economic openess?
International trade as % of total output
What is autarky?
Goal of national self-reliance, state-dominates society with government control of industry and media
What is hegemony?
Open to globalization, but have size and scalo to influence other countries without cooperating
What is bilateralism?
Cooperation of two nations, might have multiple agreements
What is multilateralism?
Cooperation with multiple countries
What is regionalism?
Form of multilateralism with nearby countries
What is portfolio investment flows?
Buy and sell foreign securities
What is foreign direct investment?
Own physical production capacity in other countries
What is the role of IMF?
Facilitate trade by promoting international monetary cooperation and exchange rate stability, assists in setting up payment systems and make resources available to other countries by BoP.
What is the role of world trade organization?
Trade flows freely and works smoothly
What is the role of World Bank?
Low interest loans, interest free credits, grants to developing countries, resources to public/private partnerships with goal of fighting poverty
What is geopolitical risk?
Probability of events that interupt peaceful international relations
What are events risks?
Events that we know the timing, but not the outcome
What are exogenous risk?
Unanticipated events
What are thematic risk?
Known factors that have effects on long period
What are black-swan risks?
Risk of low likelihood exogenous events that have substantial effects
What are economic tools?
Cooperative and noncooperative
What are financial tools?
FDI and exchange of currencies
What are discrete impacts?
Company or industry, broad impacts on country, region or the world
What are the reasons for trade restrictions?
Infant industry protection, national security, protecting domestic jobs and protecting domestic industries
What are tariffs?
Taxes on imported goods
What are quotas?
Limits on imported goods
What is minimum domestic content?
Requirement that % of goods must be from domestic country
What is voluntarily export restraint?
Restrict amount of goods exported
What are free trade areas?
all barriers among member countries are eliminated
Whar are custom unions?
FTA + set of rules are adopted for non-members
What are common market?
Custom union + barriers for labor and capital among members are removed
What is economic union?
Common market + common institution and economic policy
What is monetary union?
Economic union + single currency
What does it mean to hedge the risk?
Taking position in the foreign exchange market to reduce on existing risk
What is speculating?
When transaction in the FX market increases currency risk
What are the buyers of FX?
Corporations, investment accounts, gov and its entities, retail FX markets
What are leveraged accounts?
Investment firms that use derivatives
What are real money accounts?
Accounts that do not engage in the derivative trading
What is direct quote?
currency/base quotation from a point of view of investor in the price currency country
What is indirect quote?
Quatation from a point of view of base currency country
What is nominal exchange rate?
Exchange rate in point in time
What is real exchange rate?
Purchasing power relative to the earlier base period
Formula for the real P/B exchange rate
nominal P/B * (CPIbase/CPIprice)
What is spot exchange rate?
Exchange rate with immediate delivery
What is forward exchange rate?
Exchange rate to be done in the future
What is formal dollarization?
Country that use currency of another country
What is currency board agreement?
Commitment to exchange domestic currency for a specified foreign currency at a fixed rate.
What is conventional fixed peg arrangement?
Currency is pegged within margins of +-1% versus another currency or basket of currencies of major trading partners
What is crawling peg?
Exchange rate is adjusted periodically, usually for higher inflation
What is managed floating exchange rate?
Exchange rate with attempts to influence the exchange rate with response to specific indicators
What is independent floating exchange rate?
Exchange rate determines in the market
What is the equation for trade equilibrium?
X-M=S-I+T-G
What are the objections of capital flow restrictions?
Reduce volatility of asset prices, maintain fixed exchange rate, keep domestic interest rates low, protect strategic industries
What is a cross rate?
Exchange rate between two currencies implied by their exchange rates with a common third currency
What is no-arbitrage condition?
Difference between spot and forward exchange is equal to countries interest rate so no riskless profits can be made
What is formula of spot exchange rate?
[(1+rforeign)/(1+domestic)]*forward
What is formula of forward exchange rate?
[(1+rdomestic/1+foreign)]*spot
