Econ Flashcards
Q: When should a firm continue operating in the short run under perfect competition?
A: A firm should continue operating if average revenue (AR) is greater than average variable cost (AVC), even if it incurs losses. If AR < AVC, the firm should shut down.
Q: When should a firm shut down in the long run?
A: A firm should shut down in the long run if AR < ATC, meaning it cannot cover total costs. If AR = ATC, the firm breaks even, earning zero economic profit.
Q: How do shutdown and breakeven points differ for price-searcher firms?
A: Price-searcher firms (downward-sloping demand curve) use total revenue (TR) and total cost (TC) for shutdown analysis:
TR = TC → Breakeven
TC > TR > TVC → Continue in the short run but shut down in the long run
TR < TVC → Shut down immediately
Q: A firm has TR = $700,000, TVC = $800,000, and TFC = $400,000. Should it shut down?
A: Yes. Since TR < TVC, the firm cannot cover variable costs and should shut down to minimize losses.
Q: What are economies of scale, and how do they affect costs?
A: Economies of scale occur when increasing production reduces long-run average total cost (LRATC), due to factors like labor specialization, mass production, and bulk purchasing.
Q: What are diseconomies of scale, and why do they occur?
A: Diseconomies of scale occur when LRATC rises due to inefficiencies from large-scale operations, such as bureaucracy, workforce management issues, and reduced innovation.
If a firm increases its plant size by 10% and its minimum average total cost increases by 10%, the firm is experiencing:
A)
constant returns to scale.
B)
diseconomies of scale.
C)
economies of scale.
Explanation
If minimum average total costs increase as plant size is increased, the firm is experiencing diseconomies of scale. (Module 12.1, LOS 12.a)
Q: What are the key characteristics of perfect competition?
A: Many firms, identical products, very low barriers to entry, price competition only, no pricing power, perfectly elastic (horizontal) demand curve.
Q: How does monopolistic competition differ from perfect competition?
A: Many firms with differentiated products, low barriers to entry, price and non-price competition (marketing, features), downward-sloping demand curve, some pricing power.
Q: What are the defining characteristics of an oligopoly market?
A: Few firms, high barriers to entry, interdependent pricing, products may be similar or differentiated, significant pricing power, firms compete on price, marketing, and features.
Q: What are the main features of a monopoly?
A: Single firm, very high barriers to entry, no good substitutes, significant pricing power, downward-sloping demand curve, competition mainly through advertising (if any).
Q: How does the demand curve differ across market structures?
A: Perfect competition: horizontal (perfectly elastic); Monopolistic competition: relatively elastic downward slope; Oligopoly: varies between elastic and inelastic; Monopoly: steep downward slope.
Q: What factors determine where a market falls on the spectrum from perfect competition to monopoly?
A: Number of firms, product differentiation, pricing power, barriers to entry/exit, and competition beyond price.
Would you like me to adjust anything or add more details?
We can analyze where a market falls along the spectrum from perfect competition to pure monopoly by examining five factors:
Number of firms and their relative sizes
Degree to which firms differentiate their products
Bargaining power of firms with respect to pricing
Barriers to entry into or exit from the industry
Degree to which firms compete on factors other than price
Compared to a perfectly competitive industry, in an industry characterized by monopolistic competition:
A)
both price and quantity are likely to be lower.
B)
price is likely to be higher, and quantity is likely to be lower.
C)
quantity is likely to be higher, and price is likely to be lower.
Explanation
Monopolistic competition is likely to result in a higher price and lower quantity of output compared to perfect competition. (Module 12.2, LOS 12.c)
A firm will most likely maximize profits at the quantity of output for which:
A)
price equals marginal cost.
B)
price equals marginal revenue.
C)
marginal cost equals marginal revenue.
Explanation
The profit-maximizing output is the quantity at which marginal revenue equals marginal cost. In a price-searcher industry structure (i.e., any structure that is not perfect competition), price is greater than marginal revenue. (Module 12.2, LOS 12.c)
Consider a firm in an oligopoly market that believes the demand curve for its product is more elastic above a certain price than below this price. This belief fits most appropriately to which of the following models?
A)
Cournot model.
B)
Dominant firm model.
C)
Kinked demand model.
Explanation
The kinked demand model assumes that each firm in a market believes that at some price, demand is more elastic for a price increase than for a price decrease. (Module 12.2, LOS 12.d)
Which of the following is most likely an advantage of the Herfindahl-Hirschman Index (HHI) relative to the N-firm concentration ratio?
A)
The HHI is simpler to calculate.
B)
The HHI considers barriers to entry.
C)
The HHI is more sensitive to mergers.
Explanation
Although the N-firm concentration ratio is simple to calculate, it can be relatively insensitive to mergers between companies with large market shares. Neither the HHI nor the N-firm concentration ratio consider barriers to entry. (Module 12.3, LOS 12.e)
A market characterized by low barriers to entry, good substitutes, limited pricing power, and marketing of product features is best characterized as:
A)
oligopoly.
B)
perfect competition.
C)
monopolistic competition.
Explanation
These characteristics are associated with a market structure of monopolistic competition. Firms in perfect competition do not compete on product features. Oligopolistic markets have high barriers to entry. (Module 12.3, LOS 12.e)
Flashcard 1
Q: What are the four phases of the business cycle?
A: Expansion, Peak, Contraction (Recession), and Trough.
Q: How do credit cycles interact with business cycles?
A: Credit cycles, which involve fluctuations in interest rates and loan availability, can amplify business cycles. Loose credit can create asset bubbles, while tight credit can deepen contractions.
Q: How does consumer spending vary over the business cycle?
A: Spending on durable goods is highly cyclical, increasing in expansions and decreasing in contractions, while nondurable goods and essential services remain more stable.
Q: What factors influence housing sector activity in the business cycle?
A: Mortgage rates, housing costs relative to income, speculative activity, and demographic trends.
Q: How do imports and exports change with the business cycle?
A: Rising domestic GDP increases imports, while rising foreign GDP boosts exports. Currency appreciation reduces exports and increases imports, and vice versa.
Flashcard 6
Q: What are the three types of economic indicators?
A: Leading indicators (predict turning points), coincident indicators (move with the cycle), and lagging indicators (confirm trends after they occur).
In the early part of an economic expansion, inventory-sales ratios are most likely to:
A)
increase because sales are unexpectedly low.
B)
increase because businesses plan for expansion.
C)
decrease because of unexpected increases in sales.
Explanation
Early in an expansion, inventory-sales ratios typically decrease below their normal levels as accelerating sales draw down inventories of produced goods. (Module 13.1, LOS 13.c)
Which economic sector would most likely correlate strongly and positively with credit cycles?
A)
Exports.
B)
Food retail.
C)
Construction.
Explanation
Credit cycles are associated with interest rates and the availability of credit, which is important in the financing of construction and the purchase of property. (Module 13.1, LOS 13.b)
An economic indicator that has turning points that tend to occur after the turning points in the business cycle is classified as a:
A)
lagging indicator.
B)
leading indicator.
C)
trailing indicator.
Explanation
Lagging indicators have turning points that occur after business cycle turning points. (Module 13.1, LOS 13.c)
When they recognize the beginning of a recession, companies are most likely to adjust their stock of physical capital by:
A)
selling physical assets.
B)
deferring maintenance of equipment.
C)
canceling orders for new construction equipment.
Explanation
Physical capital adjustments to downturns typically are made through aging of equipment plus postponing maintenance. (Module 13.1, LOS 13.c)
Q: What is the difference between a budget deficit and a budget surplus?
A: A budget deficit occurs when government expenditures exceed tax revenues, while a budget surplus occurs when tax revenues exceed expenditures.
Q: How do expansionary and contractionary fiscal policies affect GDP?
A: Expansionary fiscal policy (higher deficits or lower surpluses) increases GDP, while contractionary fiscal policy (lower deficits or higher surpluses) decreases GDP.
Q: What are the key differences between Keynesian and monetarist views on fiscal policy?
A: Keynesians believe fiscal policy strongly affects economic growth when unemployment is high, while monetarists argue that fiscal stimulus has only temporary effects and prefer monetary policy for managing inflation.
Q: What is the crowding-out effect in fiscal policy?
A: The crowding-out effect occurs when increased government borrowing raises interest rates, reducing private-sector borrowing and investment.
Q: What are the two main categories of fiscal policy tools?
A: Spending tools and revenue tools.
Q: What are the three types of government spending, and how do they differ?
A:
Transfer payments: Redistribute wealth (e.g., unemployment benefits, Social Security).
Current spending: Ongoing government purchases of goods and services.
Capital spending: Investment in infrastructure to boost future productivity.
Q: How do direct taxes differ from indirect taxes?
A:
Direct taxes: Levied on income or wealth (e.g., income tax, corporate tax).
Indirect taxes: Levied on goods/services (e.g., sales tax, VAT, excise tax).
Q: What is Ricardian Equivalence?
A: The theory that taxpayers may save more today in anticipation of higher future taxes, offsetting the impact of government deficit spending on aggregate demand.
Q: What are the three types of lags in implementing fiscal policy?
A:
Recognition lag: Time to identify economic issues.
Action lag: Time to pass and enact policy.
Impact lag: Time for the policy to affect the economy.
Q: What is fiat money, and how does it differ from money backed by gold?
A: Fiat money is currency that has no tangible backing (e.g., gold) but is deemed legal tender by law. Unlike gold-backed money, its value depends on public confidence and government regulation.
Q: What are the six key roles of central banks?
A: 1) Sole supplier of currency
2) Banker to the government and banks
3) Regulator of the payments system
4) Lender of last resort
5) Holder of gold and foreign exchange reserves
6) Conductor of monetary policy
Q: What are the primary objectives of a central bank?
A: The main goal is price stability by controlling inflation. Other objectives may include exchange rate stability, full employment, economic growth, and moderate long-term interest rates.
Q: What are the three main tools of monetary policy?
A: 1) Policy rate (e.g., discount rate, repo rate)
2) Reserve requirements (banks’ required reserves)
3) Open market operations (buying/selling securities to influence money supply)
Q: How does a contractionary monetary policy affect the economy?
A: Raising the policy rate leads to higher borrowing costs, lower asset prices, reduced demand, a stronger currency, and ultimately, downward pressure on inflation.
Q: What happens in an expansionary monetary policy?
A: The central bank buys securities, lowers interest rates, depreciates the currency, increases business investments and consumer spending, and boosts aggregate demand, GDP, and inflation.
Q: What are the three essential qualities a central bank must have to succeed in inflation targeting?
A: Independence, credibility, and transparency.
Q: What is the difference between operational and target independence for a central bank?
A: Operational independence allows the central bank to set policy rates, while target independence lets it define inflation measurement, set the target level, and determine the target horizon.
Q: Why do some countries use exchange rate targeting instead of inflation targeting?
A: Exchange rate targeting stabilizes the currency against another (e.g., the U.S. dollar), but it forces the country to match the inflation rate and monetary policy of the targeted currency’s country.
Q: What is a liquidity trap, and how does it limit monetary policy?
A: A liquidity trap occurs when individuals hold money instead of investing, making monetary policy ineffective because increasing money supply does not lower interest rates or boost spending.
Q: What happens when monetary and fiscal policies are both expansionary?
A: Interest rates usually fall, boosting both private and public sector growth, leading to a highly expansionary economic environment.
Monetary policy is likely to be least responsive to domestic economic conditions if policymakers employ:
A)
inflation targeting.
B)
interest rate targeting.
C)
exchange rate targeting.
Explanation
Exchange rate targeting requires monetary policy to be consistent with the goal of a stable exchange rate with the targeted currency, regardless of domestic economic conditions. (Module 15.2, LOS 15.c)
Monetary policy is most likely to fail to achieve its objectives when the economy is:
A)
growing rapidly.
B)
experiencing deflation.
C)
experiencing disinflation.
Explanation
Monetary policy has a limited ability to act effectively against deflation because the policy rate cannot be reduced below zero, and demand for money may be highly elastic (liquidity trap). (Module 15.2, LOS 15.c)
Roles and objectives of fiscal policy most likely include:
A)
controlling the money supply to limit inflation.
B)
adjusting tax rates to influence aggregate demand.
C)
using government spending to control interest rates.
Explanation
Influencing the level of aggregate demand through taxation and government spending is an objective of fiscal policy. Controlling inflation and interest rates are typical objectives of monetary policy. (Module 14.1, LOS 14.b)
When investing for a long time horizon, a portfolio manager should most likely devote resources to analyzing:
A)
event risks.
B)
thematic risks.
C)
exogenous risks.
Explanation
Thematic risks are those that have effects over the long term. Event risks and exogenous risks are more likely to have high-velocity impacts on investment values, but they are less of a focus for investors with longer time horizons. (Module 16.1, LOS 16.d)
Which international organization is primarily concerned with providing economic assistance to developing countries?
A)
World Bank.
B)
World Trade Organization.
C)
International Monetary Fund.
Explanation
The World Bank provides technical and financial assistance to economically developing countries. The World Trade Organization is primarily concerned with settling disputes among countries concerning international trade. The International Monetary Fund promotes international trade and exchange rate stability and assists member countries that experience balance of payments trouble. (Module 16.1, LOS 16.c)
Q: What is geopolitics?
A: Geopolitics refers to interactions among nations, including the actions of state actors (governments) and nonstate actors (corporations, NGOs, and individuals). It also involves studying how geography affects these interactions.
Q: How does a country’s cooperation in geopolitics vary?
A: Cooperation exists on a spectrum, with countries being more cooperative on some issues and less on others. Factors influencing cooperation include domestic politics, decision-makers, and political cycles.
Q: What are the four archetypes of globalization and cooperation?
A:
Autarky (noncooperation & nationalism) – national self-reliance.
Hegemony (noncooperation & globalization) – global influence without cooperation.
Bilateralism (cooperation & nationalism) – selective country-to-country agreements.
Multilateralism (cooperation & globalization) – extensive global cooperation.
What are the main functions of the IMF, World Bank, and WTO?
A:
IMF: Promotes monetary cooperation, exchange stability, and assists countries in financial distress.
World Bank: Provides financial aid and resources to reduce poverty and support development.
WTO: Ensures smooth and fair global trade, resolving disputes between nations.
Q: What are the three types of geopolitical risk?
A:
Event risk – Known timing but uncertain outcomes (e.g., elections).
Exogenous risk – Unanticipated events (e.g., wars, rebellions).
Thematic risk – Long-term risks (e.g., migration, cyber threats).
Q: How do geopolitical risks impact investments?
A: Geopolitical risks affect investment values by increasing required risk premiums. Investors analyze risks based on likelihood, impact, and velocity, using qualitative and quantitative scenario analysis to manage exposure
Q: What is the principle of comparative advantage in trade?
A: Comparative advantage occurs when countries specialize in producing goods with lower relative costs and trade with others, increasing total output and wealth. It results from differences in technology and resource endowments.
Q: What are the key benefits of free trade beyond comparative advantage?
A: Free trade enhances economies of scale, increases product variety, lowers costs through competition, improves quality, and reduces domestic monopolies’ pricing power.
Q: What are the common types of trade restrictions?
A: Trade restrictions include tariffs (taxes on imports), quotas (import limits), export subsidies (government payments to exporters), minimum domestic content rules, and voluntary export restraints (VERs).
Q: How do tariffs and quotas impact domestic economies?
A: Tariffs and quotas raise domestic prices, reduce consumer surplus, increase producer surplus, and generate government revenue. Quotas may also create quota rents for foreign exporters.
Q: What are the different levels of economic integration in trading blocs?
A: From least to most integrated: Free Trade Area (no trade barriers), Customs Union (common trade policy), Common Market (free movement of labor/capital), Economic Union (shared institutions/policies), and Monetary Union (shared currency).
Q: What are some common arguments for and against trade restrictions?
A: Arguments for include protecting infant industries and national security. Arguments against include higher consumer prices, reduced efficiency, and job losses in competitive industries.
Which of the following effects is most likely to occur in a country that increases its openness to international trade?
A)
Increased prices of consumer goods.
Incorrect Answer
B)
Greater specialization in domestic output.
C)
Decreased employment in exporting industries.
Explanation
Openness to international trade increases specialization as production shifts to those products in which domestic producers have a comparative advantage. Greater competition from imports will tend to decrease prices for consumer goods. Increasing international trade is likely to increase profitability and employment in exporting industries, but it may decrease profitability and employment in industries that compete with imported goods. (Module 17.1, LOS 17.a)
An agreement with another country to limit the volume of goods and services sold to them is best described as a:
A)
quota.
B)
voluntary export restraint.
C)
minimum domestic content rule.
Explanation
Voluntary export restraints are agreements to limit the volume of goods and services exported to another country. Minimum domestic content rules are limitations imposed by a government on its domestic firms. Import quotas are limitations on imports, not on exports. (Module 17.1, LOS 17.b)
hich of the following groups would be most likely to suffer losses from the imposition of a tariff on steel imports?
A)
Domestic steel producers.
B)
Workers in the domestic auto industry.
C)
Workers in the domestic steel industry.
Explanation
Imposing a tariff on steel imports benefits domestic steel producers and workers by increasing the domestic price of steel and benefits the national government by increasing tax (tariff) revenue. However, the increase in the domestic price of steel would increase costs in industries that use significant amounts of steel, such as the automobile industry. The resulting increase in the price of automobiles reduces the quantity of automobiles demanded, and it ultimately reduces employment in that industry. (Module 17.1, LOS 17.b)
The most likely motivation for establishing a trading bloc is to:
A)
increase economic welfare in the member countries.
B)
increase tariff revenue for the member governments.
C)
protect domestic industries in the member economies.
Explanation
The motivation for trading blocs is to increase economic welfare in the member countries by eliminating barriers to trade. Joining a trading bloc may have negative consequences for some domestic industries and may decrease tariff revenue for the government. (Module 17.1, LOS 17.c)
In which type of regional trade agreement are economic policies conducted independently by the member countries, while labor and capital are free to move among member countries?
A)
Free trade area.
B)
Common market.
C)
Economic union.
Explanation
These characteristics describe a common market. In a free trade area, member countries remove restrictions on goods and services and trade with one another but may still restrict movement of labor and capital among member countries. In an economic union, member countries also coordinate their economic policies and institutions. (Module 17.1, LOS 17.c)
Q: What are the two exchange rate regimes for countries that do not issue their own currencies?
.
A: 1. Formal dollarization – A country uses another country’s currency and has no independent monetary policy.
2. Monetary union – Several countries adopt a common currency, like the Eurozone, where monetary policy is set collectively
Q: What is a currency board arrangement?
A: A system where a country commits to exchanging its currency for a specified foreign currency at a fixed rate. The domestic currency is only issued when fully backed by foreign reserves, limiting independent monetary policy. Example: Hong Kong.
Q: What is the difference between a conventional fixed peg and a pegged exchange rate with horizontal bands?
A: - Conventional fixed peg: A currency is pegged within ±1% of another currency or a currency basket.
Horizontal bands: Allows for wider fluctuations (e.g., ±2%), providing more policy flexibility than a conventional peg.
Q: What are the key features of a crawling peg and crawling bands?
A: - Crawling peg: Exchange rate is periodically adjusted, either passively (to match inflation) or actively (pre-announced adjustments).
Crawling bands: The allowed exchange rate band widens over time, facilitating a transition to a floating exchange rate.
Q: How do capital flows affect exchange rates and trade balances?
A: - Capital flows adjust faster than trade flows and primarily determine short- to intermediate-term exchange rates.
Over time, trade flows influence long-term exchange rates as asset prices and investment decisions adjust.
A trade deficit (imports > exports) must be offset by foreign capital inflows (capital account surplus).
Q: What are common objectives of capital restrictions imposed by governments?
A: 1. Reduce asset price volatility by preventing sudden capital outflows.
2. Maintain fixed exchange rates by controlling foreign capital movement.
3. Keep domestic interest rates low by limiting capital outflows.
4. Protect strategic industries like defense and telecommunications from foreign ownership.
The monetary authority of the Stoddard Islands will exchange its currency for U.S. dollars at a one-for-one ratio. As a result, the exchange rate of the Stoddard Islands currency with the U.S. dollar is 1.00, and many businesses in the Islands will accept U.S. dollars in transactions. This exchange rate regime is best described as:
A)
a fixed peg.
B)
dollarization.
C)
a currency board.
Explanation
This exchange rate regime is a currency board arrangement. The country has not formally dollarized because it continues to issue a domestic currency. A conventional fixed peg allows for a small degree of fluctuation around the target exchange rate. (Module 18.2, LOS 18.b)
The goal of a government that imposes restrictions on foreign capital flows is most likely to:
A)
stimulate domestic interest rates.
B)
decrease domestic asset price volatility.
C)
encourage competition with domestic industries.
Explanation
Decreasing the volatility of domestic asset prices may be a goal of a government that imposes capital restrictions. Other typical goals include keeping domestic interest rates low and protecting certain domestic industries, such as the defense industry. (Module 18.2, LOS 18.c)
