Economic Concepts and Analysis

Question 1

What is the formula for the price elasticity of demand?

Answer 1

Price elasticity of demand = % Change in Quantity Demand/% Change in Prince

Question 2

If Average total costs equals marginal revenue then…

Answer 2

This is a zero profit condition for a competitive firm.

Question 3

If average total costs equals average revenue, then economic profits are zero.

Answer 3

If average total costs equals average revenue, then economic profits are zero.

Question 4

If marginal cost equals average revenue then..

Answer 4

This would be a profit maximizing position for a competitive firm only, as competitive firms operate where P = AR = MR = MC (because the firm faces a horizontal demand curve).

Question 5

What is GNP?

Answer 5

GNP is the market value of all final goods and services produced by residents of a country within a given time period. GNP differs from GDP because it includes the income earned by U.S. citizens abroad and excludes the income earned by foreigners in the U.S.

Question 6

How is the inflation rate calculated?

Answer 6

The inflation rate is calculated as follows:

(CPI this period - CPI last period) / CPI last period x 100

Question 7

How do you calculate a country’s GDP?

Answer 7

The two methods of calculating GDP are the expenditure approach and the income approach.

Under the expenditure approach, GDP is calculated as the sum of government purchases, gross domestic investment, personal consumption, and net exports (exports less imports).

Under the income approach, GDP is calculated as the sum of income of proprietors, corporate profits, net interest, rental income, adjustments for net foreign income, indirect business taxes, employee income (wages), and depreciation.

Question 8

What causes increased and decreases in the money supply?

Answer 8

A decrease in the money supply (causing an increase in interest rates) is caused by selling government securities, increasing the discount rate, and increasing the required reserve ratio.

An increase in the money supply (causing a decrease in interest rates) is caused by purchasing government securities, decreasing the discount rate, and decreasing the required reserve ratio.

Question 9

What is the difference between nominal and real GDP and how do you calculate them?

Answer 9

Nominal GDP measures the value of goods and services in current dollars, while real GDP measures the value of goods and services in constant dollars.

Real GDP = Nominal GDP/GDP Deflator x 100