Econ

Question 1

Components of GDP

Answer 1

GDP = C + I + G + (X – M).

The four components of gross domestic product are consumption spending, business investment, government spending, and net exports.

Question 2

When currencies are freely traded and forward currency contracts exist, the percentage difference between forward and spot exchange rates is approximately equal to the difference between the two countries’ WHAT?

Answer 2

Interest Rates

Question 3

Define the no-arbitrage forward exchange rate

Answer 3

forward rate / spot rate = (1 + int rate price currency / 1+ int rate base currency)

Question 4

Perfect Competition - Profit maximized at

Answer 4

Produce the quantity for which P = MR = MC = ATC

no firm earns economic profits and each firm is producing the quantity for which ATC is a minimum

Question 5

Perfect Competition - Long Run / Short Run Shutdown

Answer 5

If AR ≥ ATC, the firm should stay in the market in both the short and long run.

If AR ≥ AVC, but AR < ATC, the firm should stay in the market in the short run but will exit the market in the long run.

If AR < AVC, the firm should shut down in the short run and exit the market in the long run.

Question 6

Imperfect Competition - Long Run / Short Run Shutdown

Answer 6

TR = TC: break even.

TC > TR > TVC: firm should continue to operate in the short run but shut down in the long run.

TR < TVC: firm should shut down in the short run and the long run.

Because price does not equal marginal revenue for a firm in imperfect competition, analysis based on total costs and revenues is better suited for examining breakeven and shutdown points.

Question 7

Total Factor Productivity

Answer 7

Growth in potential GDP equals growth in technology plus the weighted average growth rate of labor and capital. Because of diminishing marginal productivity (return), the only way to sustain long-term growth in potential GDP is through technological change or growth in total factor productivity.

Technology is the primary driver in the growth in total factor productivity, a well-known model (the Solow model or neoclassical model)

Question 8

Real Exchange Rate

Answer 8

nominal FX rate * (CPI base currency / CPI price currency)

Question 9

Convert USD/EUR to EUR/USD

Answer 9

1.42 USD/EUR

divide 1 by the current rate = 1/1.42 USD/EUR

= 0.7042 EUR/USD

Question 10

Currency Cross Rate

Answer 10

The cross rate is the exchange rate between two currencies implied by their exchange rates with a common third currency.

CHF/USD = 1.7799, and NZD/USD = 2.2529. Calculate the CHF/NZD spot rate.

Since NZD is in the base of the rate you want, it has to be in the base of the rate you’re using to calc it.

so covert NZD/USD = 2.2529 = 1 / 2.2529 =
USD/NZD = .4439

CHF/USD 1.7799 * USD/NZD .4439 =
CHF/NZD .79

Question 11

Impact of change in INT Rates on exchange rates

Answer 11

The decrease in real interest rates causes the currency to depreciate in the foreign exchange market.

Depreciation of the currency increases foreign demand for domestic goods.

Question 12

Comparative Advantage

Answer 12

a nation will benefit from trade when it imports goods for which it is the high cost producer and exports goods for which it is the low-cost producer.

According to the law of comparative advantage, both trading partners are better off if they specialize in the production of goods for which they are the low-opportunity cost producer and trade for those goods for which they are the high-opportunity cost producer.

Question 13

Unemployment Rate

Answer 13

The unemployment rate of a country is the percentage of people in the labor force who are unemployed. It is calculated as: unemployment rate = (number of unemployed / labor force) × 100. The labor force includes those individuals who are employed or are actively seeking employment.

Question 14

neutral rate of interest

Answer 14

The neutral rate of interest is real trend rate of economic growth plus the inflation target

i.e. An analyst has determined the projected trend rate of real GDP growth is 2.5% and the central bank’s inflation target is 2.5%. If the central bank policy rate is 5.0%, monetary policy is most likely: Neutral

Question 15

Describe the elasticity of the long-run aggregate supply curve

Answer 15

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. Long-run aggregate supply equals potential GDP.

Question 16

Kinked demand model

Answer 16

traditional model of oligopoly, the kinked demand curve model, is based on the assumption that an increase in a firm’s product price will not be followed by its competitors, but a decrease in price will. According to the kinked demand curve model, each firm believes that it faces a demand curve that is more elastic (flatter) above a given price (the kink in the demand curve) than it is below the given price.

Question 17

Money has three primary functions:

Answer 17

it provides a store of value because money received for work or goods can be saved for future consumption; it serves as a unit of account because prices of all goods and services are expressed in units of money; and it serves as a medium of exchange because money is accepted as a form a payment.

Question 18

Equation for Fiscal Balance and interpretation

Answer 18

(G – T) = (S – I) – (X – M)

we can interpret this equation as saying a fiscal deficit must be financed by a combination of domestic and foreign capital.

Question 19

The exchange rate for Japanese yen (JPY) per euro (EUR) changes from 98.00 to 103.00 JPY/EUR. How has the value of the EUR changed relative to the JPY in percentage terms?

Answer 19

Appreciated by by 5.1%. Because the exchange rates are quoted with the EUR as the base currency, the percentage change is simply 103.00 / 98.00 − 1 = 5.1%. The increase in the quoted JPY/EUR exchange rate means it now requires 5.1% more JPY to purchase one EUR. Thus, the EUR has appreciated by 5.1% against the JPY.

Question 20

Define Allocative Efficiency

Answer 20

Allocative efficiency occurs when the quantity produced maximizes the sum of consumer and producer surplus. That is, where marginal benefit equals marginal cost.

Question 21

Describe and Calc the money multipler

Answer 21

$ * (1 / reserve requirement)

The parenthetical is the money multiplier

deposit of $1 million in cash, the reserve requirement is 10%, the maximum increase in the money supply that could result is: 1/0.10 × $1 million = $10 million.

Question 22

Fundamental Relationship between Savings and the other components of GDP

Answer 22

S = I + (G - T) + (X - M)

Savings are either invested, used to finance government deficit or used to fund a trade surplus when both exist.

Question 23

Balance of Payments Consists of

Answer 23

Current Account - (X - M) - which usually measures goods and services

Capital Account - capital transfers, sales/purchases of physical assets, natural resources, intangible assets

Financial Account - records investment flows. domestic owned financial assets abroad.

Question 24

Current Account surplus/deficit

Answer 24

(X - M) = private savings + government savings - Investments

Question 25

Quantile Classes and Formula

Answer 25

Quartile - Quarters or 25% - divide distribution by quarters
Quintile - Fifths or 20% - divide distribution by fifths
Decile - Tenths or 10% - divide distribution by tenths
Percentile - 100%

(1 + # of observations) * (% / 100)

Note: this is going to give you the number of observations in the quintile range. (i.e. if you get 8, 8 observations are in the range)

note: for the %, if question asks for 3rd quintile the % is 60. 3/5
note: what to do with the decimal. (14)(60) / (100) = 8.4. The third quintile falls between 13.6% and 13.9%, the 8th and 9th numbers from the left. Since L is not a whole number, we interpolate as: 0.136 + (0.40)(0.139 − 0.136) = 0.1372, or 13.7%.

Question 26

Fiscal Multiplier

Answer 26

1 / (1 - MPC) * (1 - t)

i.e. increase in govt spend is $100 when mpc is 80%, tax rate is 25%
1/(1-.8)(1-.25) = 2.5. this means an increase in spending of $100 has the potential to increase agg demand by $250 –> 2.5*100

Question 27

Law of Diminishing Returns

Answer 27

The law of diminishing returns states that for a given production process, as more and more resources (such as labor) are added holding the quantities of other resources fixed, output increases at a decreasing rate. This occurs because, at some point, adding more workers results in inefficiencies.

Question 28

Growth in potential GDP =

Answer 28

Growth in potential GDP = growth in labor force + growth in labor productivity.

Question 29

Describe Levels of Price Discrimination

Answer 29

First degree, (perfect price discrimination) involves charging each customer their reservation price. The entire consumer surplus is eliminated.

Second degree, involves using the quantity purchased as the basis for the pricing of a particular good.

Third degree, involves segregating customers by demographic or other traits.

Question 30

Interpret the Demand Function

Qd of x = 4.3 - .7Px + .03I - .05Py

Answer 30

Qd of x = 4.3 - .7Px + .03I - .05Py

The negative sign on the coefficient forPyindicates thatXandYhave a negative cross-price elasticity of demand and are thus complements.

substitutes would be indicated by a positive sign on the coefficient forPy.

positive sign on the coefficient forIindicates thatXhas a positive income elasticity, thereforeXis a “normal”,

Question 31

Gross domestic product (GDP) can be defined in terms of either output or income:

Answer 31

Gross domestic product (GDP) can be defined in terms of either output or income:

• it is the market value of all final goods and services produced within the economy in a given period of time (output definition) or, equivalently,
• it is the aggregate income earned by all households, all companies, and the government within the economy in a given period of time (income definition).

GDP includes the final goods and NOT the resalable (intermediate) goods.

Question 32

Liquidity Trap

Answer 32

A liquidity trap arises when the demand for money is infinitely elastic because individuals elect to hold additional money balances rather than respond to stimulative rate cuts by spending. As a result, weakening consumption leads to deflation.

Question 33

Cost-push Inflation

Answer 33

Cost–push inflation arises due to increases in costs associated with production: wages and raw materials prices. Rising business costs, usually wages, compel businesses to raise prices generally

Question 34

Demand Pull Inflation

Answer 34

increasing demand raise prices generally, which then are reflected in a business’s costs as workers demand wage hikes to catch up with the rising cost of living.

Demand–pull inflation depends upon the relationship between actual and potential GDP and industrial capacity utilization. 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.

Question 35

The inflation rate is measured

Answer 35

[(CPI this year − CPI last year)/CPI last year] × 100

Question 36

Elasticity Formulas - Own price, Income, cross price

Answer 36

Own Price Elasticity of Demand - % Change in Quantity / % Change in Price

Income Elasticity - % change in quantity / % change in income

Cross price elasticity - % change in quantity / % change in price of another good.

Question 37

Normal good, inferior good, giffen good

Answer 37

normal good - an increase in income causes consumers to buy more

inferior good - A good whose consumption decreases as income increases. –> no frills mac and cheese

giffen good - Goods that are consumed more as the price of the good rises because it is a very inferior good whose income effect overwhelms its substitution effect when price changes.

Veblen good - Goods that increase in desirability with increasing price.

Question 38

Wealth Effect

Answer 38

The proportion of disposable income that households save depends partly on the value of the financial and real assets that they have already accumulated. an increase in household wealth increases consumer spending and shifts the aggregate demand curve to the right. In contrast, a decline in wealth will reduce consumer spending and shift the AD curve to the left.

Question 39

dead weight loss

Answer 39

the deadweight loss is the amount of lost welfare from the imposition of the quota or tariff. From the viewpoint of the domestic country, the loss in consumer surplus is only partially offset by the gains in domestic producer surplus and the collection of tariff revenue.

Question 40

structural deficit

Answer 40

The structural deficit is the deficit that would exist if the economy was at full employment (or full potential output).

Question 41

cross price elasticity positive vs negative

Answer 41

If the cross-price elasticity of demand is positive, the goods are substitutes. if negative they are complements

Question 42

Using the expenditures approach GDP consists of

Answer 42

GDP = Consumer spending on goods and services + Business gross fixed investment + Change in inventories + Government spending on goods and services + Government gross fixed investment + Exports − Imports + Statistical discrepancy

Question 43

Money Neutrality

Answer 43

The concept of money neutrality implies that an increase in the money supply will leave real variables like output and employment unaffected. The real rate of interest will be unaffected by money supply changes but inflation and inflation expectations will be affected.

Question 44

frictional unemployment

Answer 44

Frictional unemployment is short term and transitory in nature; it includes people who are “between jobs,” as in this case, and those who are not working because they are taking time to search for a job that better matches their skills, interests, and other preferences.

Question 45

Basic Rule of elasticity regard greater than or less than 1

Answer 45

An item is elastic if the % change in quantity demanded is greater than the % change in price. change in q / change in P. when demand is elastic, the result of this formula is greater than one.

Question 46

sum of value added method for calcing GDP

Answer 46

The sum-of-value-added method involves summing the value added (or income created) at each step in the production and distribution process.