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BEC > Economic Concepts and Strategy > Flashcards

Economic Concepts and Strategy Flashcards

1
Q

appreciate/depreciate currencies of stable/unstable economies

A

During financial crises, the currencies of stable countries appreciate relative to those of other countries.

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2
Q

lower inflation leads currencies to

A

appreciates

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3
Q

higher interest rate leads currencies to

A

appreciates

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4
Q

Trade surpluses lead currencies to

A

appreciates

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5
Q

difficulties in macroeconomic management

A
  1. Economists do not have reliable estimates of the effects of various policy tools on macroeconomic goals (e.g., if we reduce interest rates by x, unemployment will fall by y, within z months)
  2. Many policy tools impact the macroeconomy with lags that are long and variable
  3. The effects of some policy tools may help reach some macroeconomic goals (unemployment), but make it harder to reach other macroeconomic goals (inflation)
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6
Q

IMF

international monetary fund

A
  • IMF does not have a blanket recommendation for types of exchange rate systems.
  • IMF charges relatively-low interest rates.
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7
Q

Perfectly competitive markets are characterized by

A

No single trader or traders can have a significant impact on market prices

the inability of individual buyers and sellers to influence the market price.

For any single trader, prices are perfectly elastic and any attempt to sell a good or service at a price above the market price will result in no buyers.

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8
Q

WTO

A

world trade organization

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9
Q

to impose countervailing duties legally under WTO rules

A

the other country must have disobeyed a WTO panel that told it to correct a problem

country A can legally impose countervailing duties against country B, once a WTO panel rules against country B, and if country B still refuses to remove the subsidies

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10
Q

With technological advances, companies will

A

increase production, and given the same demand, they will reduce prices.

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11
Q

if market is in equilibrium

A
  1. price ceilings would not be binding (or effective)
  2. quantity supplied equals quantity demanded
  3. no surpluses and there no shortages
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12
Q

For a price control to have no effect,

A

it must not be binding,

e.g., a price floor set lower than equilibrium price, or a price ceiling set higher than equilibrium price.

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13
Q

Opening markets to foreign investment tends to lead to

A
  1. increase in investment growth rates.
  2. increases the interconnectivity of local and world markets, thus changing the volatility of emerging stock market returns
  3. Local firms’ cost of capital tends to decrease because of the greater supply of providers of capital.
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14
Q

marginal propensity to consume (MPC)

A

percentage of dollar of income the consumer is expected to spend

=change in consumption(spending)/change in disposable income

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15
Q

Opportunity cost is

A

the forgone value of the next best use of an asset.

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16
Q

Price elasticity of demand is defined as:

A

% Change in Quantity Demanded/% Change in Price

measure how responsive the quantity demanded is to change in price

= (change in quantity demanded/avg quantity demanded) DIVIDED BY
(change in price/avg price)

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17
Q

When demand for a product is significantly elastic

A

greater than 1

the increase in quantity demanded is proportionally more than the decrease in price.

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18
Q

Product differentiation strategies seek to

A

make the demand for a firm’s products more inelastic.

Seek to make a firm’s products less responsive to changes in competitor’s prices

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19
Q

Inflation is characterized by

A

price levels rising over a period of time.

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20
Q

Hyperinflation

A

refers to extremely sharp increases in price levels over a period of time.

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21
Q

Deflation is characterized by

A

declining price levels.

lower interest rate

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22
Q

Recession refers to

A

an overall contraction in economic production

inventory increases as consumer spending drops

wages grow slowly
unemployment increases
business investment in plants and equipment drop
profits fall

interest rates fall
stocks prices fall
potential income exceeds actual income

economy is typically considered in recession following two consecutive quarters of negative GDP growth

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23
Q

Dumping

A

is the practice of selling product below its cost, generally, in an effort to reduce competition

In international trade, this involves a manufacturer exporting a product at an unjustifiably low price that harms domestic producers in the importing country

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24
Q

Predatory pricing

A

involves companies attempting to eliminate competitors by charging prices that are lower than competitors’ production costs

Consumers benefit from lower prices in the short term. Consumers, however, may suffer from higher prices in the long term

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25
Q

New Keynesians

A

favor a more active role for the government in both monetary and fiscal policy

worry less about the long-term effects of excessively-loose monetary policy

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26
Q

monetarists

A

favor simply advocate stable growth in the money supply

Monetarists recognize that prices and wages may fail to be flexible

Monetarists argue for stable monetary growth, which permits interest rates to rise during expansions (along with loan demand) and fall during recessions (along with loan demand).

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27
Q

stagflation

A

Unemployment far above NAIRU

high inflation (in double digits)

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28
Q

if actual output exceeds potential output,

A

unemployment would be below NAIRU

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29
Q

deflation involves

A

an inflation rate below 0%

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30
Q

SWOT stands for

A

strengths, weaknesses, opportunities, and threats and is used in industry analysis.

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31
Q

structural unemployment

A

Structural unemployment represents a mismatch between the skills of workers and the needs of the labor market.

This usually occurs due to technological advances that change or eliminate the need for the specific skills many workers possess.

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32
Q

Cyclical unemployment is caused

A

by variations in the business cycle

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33
Q

Frictional unemployment

A

is caused by workers changing jobs or those who are new to the workforce

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34
Q

The discount rate is

A

the rate that the Federal Reserve (the Fed) charges to commercial banks for short-term loans of reserves

reserves: money bank has to keep on hand

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35
Q

increase in discount rate

A

tend to raise the fixed interest rates on mortgages

Short-term interest rates will likely increase

As interest rates increase, consumer spending and corporate profits generally decrease

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36
Q

The concentration ratio

A

is a measure of the total output of an industry by a certain number of firms in that industry, such as the 4 largest

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37
Q

The Herfindahl index

A

is a measure of the size of firms within an industry.

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38
Q

the game theory model

A

focuses on payoffs of multiple courses of actions among a small group of competitor

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39
Q

inferior product

A

their sales fall when incomes rise

When consumer incomes fall, consumers purchase more of those products

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40
Q

Quantitative easing

A

involves the Fed buying securities to add liquidity to the economy, when short-term interest rates are already close to zero

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41
Q

Gross domestic product (GDP) is the value of all goods and services produced by a domestic economy for a year at current market prices

A 
GDP = 
Consumption by households 
\+ Investment 
\+ Government spending 
\+ Net exports
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42
Q

When the dollar depreciates,

A

additional dollars are required to buy the same amount of foreign currency required to pay for imports.

43
Q

To reduce inflationary pressures, fed reserve will

A

likely adopt policies that are designed to reduce spending

done by contractionary monetary policies, such as decreasing the money supply, which reduce the amount of money circulating in the economy

Increasing margin requirements, for example, reduces the amount of borrowed funds an investor can use to buy securities, thereby reducing the funds the investor has available for investing and spending

44
Q

At the peak of the business cycle,

A

output is at maximum and unemployment is as low as possible—or at the “natural” rate.

45
Q

when unemployment rates fall particularly low,

A

wages tend to rise

inflation rates tend to increase more quickly

46
Q

Globalization

A

is a process that has been ongoing for many decades. It has many aspects, including more savers having more internationally diversified portfolios (i.e., reduced home bias), more firms operating internationally, and increased international trade occurring within companies

47
Q

strategic planning

A

process that an organization uses to identify its long-term goals and determines the best approach to achieve those goals

process is used to establish the general direction of the organization.

48
Q

Full employment

A

implies that theres frictional and structural unemployment

Implies that the cyclical component of unemployment equals zero

full employment unemployment rate is the lowest rate that can be sustained without having repercussions on the overall economy and is not affected by changes in the composition of employment opportunities.

49
Q

laffer curve

A

if tax rates are high, lowering tax rates might increase tax revenue.

ex: people will work less if tax is at 100%, rather than 50%.

50
Q

The Federal Reserve attempting to fight inflation

A

through higher interest rates

51
Q

transfer pricing

A

Transfer pricing is the process for setting prices that are charged for the transfer of goods or services between related parties such as departments of a large entity.

In international trade, it refers to the price charged by one entity to a related entity as goods or services are transferred across international borders.

Transfer pricing is the amount used to measure the cost of goods transferred between entities that are part of a related group of entities

52
Q

The Phillips Curve implies that,

A

in the short term, policies resulting in higher inflation may also reduce unemployment.

53
Q

An effective price floor would cause

A

quantity supplied to exceed quantity demanded.

54
Q

pure competition market

A

products are all same

many firms
prices are lower and quantity higher

55
Q

Competitors in a monopolistically competitive industry

A

Competitors in a monopolistically competitive industry attempt to differentiate their products from each other, greater variety

The monopolistically competitive industry produces a greater variety of products at a higher cost per unit

many firms sell slightly different versions of similar products

56
Q

expansionary policy

A

reduce discount rate so more banks can loan out money, increasing money in circulation

buy federal securities. fed use cash to buy back securities, increasing money in circulation.

57
Q

assets that appreciate in high inflation

A

precious metals like gold and silver

58
Q

If actual GDP exceeds potential GDP,

A

economic growth is not sustainable and eventually prices and wages will be bid up, resulting in inflation.

59
Q

GDP

A

gross domestic product

total dollar value of FINAL goods and services within one country.

The economy will overheat, and inflation will eventually result.

60
Q

consumer price index (CPI) measures

A

the rate of inflation. The CPI collects data on the cost of a market basket of CONSUMER goods and services purchased in U.S. urban areas.

compare price changes over time

measured monthly by bureau of labor statistics (BLS)

compares the price of goods in a given year to a base year

61
Q

collusion pricing

A

competing suppliers agree that they will not compete on the basis of price, setting a uniform price to be charged by all suppliers. This enables the suppliers to establish higher than market prices.

companies agreeing formally or informally to charge prices similarly to one another

62
Q

Dual pricing occurs when

A

a supplier charges a different, generally lower, price to foreign customers than that charged to domestic customers

63
Q

Predatory pricing

A

involves one supplier lowering prices, often below cost, to shift demand from a competitor with the intention of inflicting damage.

64
Q

repatriation restrictions

A

represent restrictions on bringing money into the U.S

65
Q

American depositary receipts

A

are negotiable instruments that represent the securities of a foreign company trading in the U.S. financial markets

66
Q

A default risk premium

A

usually an addition to the interest rate on a note or loan, is the extra amount a borrower will pay to compensate a lender for assuming the risk of default

67
Q

foreign trade decicit

A

more foreign imports than export

68
Q

international trade increase due to

A
  1. falling information cost
  2. falling transportation cost
  3. reduction in tariffs applied to imports
69
Q

invisible hand

A

influences of supply and demand

70
Q

4 types of unemployment

A
  1. frictional
  2. structural
  3. cyclical
  4. institutional
71
Q

frictional unemployement

A

normal turnover of workers between jobs or new entrants into the work place

some workers leave job to find better one

some have discontinued employment but find new one quickly

market economies unavoidable always have some frictional unemployment, even in “full employment”

72
Q

structural unemployment

A

workers who lose job due to changes in demand for goods/services or bc of technical advances that reduce needs for their skills.

-requires retraining to meet new demands and technologies.

73
Q

cyclical unemployment

A

job losses resulting from fluctuation in business cycle.

key concern during recessions

decreases during expansions

74
Q

institutional unemployment

A

workers cant find work due to govt restrictions on economy (wage floors for younger workers, restriction on small business to launch)

part of NAIRU

75
Q

elasticity of demand greater than 1

A

demand is elastic

total revenue will decline if price is increased.

76
Q

elasticity of demand is less than 1

A

demand is inelastic

total revenue will increase if price increase

77
Q

elasticity is equal to 1

A

unit elastic

total revenue is not sensitive to price changes

78
Q

goods that are larger fraction of consumer’s budget (things that cost more)

A

tend to be elastic (cars)

79
Q

goods that are smaller fraction of consumer’s budget (things that cost less)

A

tend to be inelastic (salt)

80
Q

expansions

A

take years

81
Q

recessions

A

last months

few exceeding 2 years

82
Q

price discrimination

A

charging diff customers diff prices

83
Q

measures of inflation

A

consumer price index
producer price index
gross domestic product (GDP) deflator

sometimes: the overall and core personal consumption expenditures (PCE) price index.

84
Q

decreasing money supply

A

decrease money in circulation, therefore increasing interest rate

higher interest rates results in less spending and investment, creating deflation.

deflation is decreased level of price and goods due to less spending and investments.

85
Q

key concerns of macroeconomics.

A

Unemployment, economic growth, and inflation

86
Q

okun’s law

A

Provides a general rule of thumb showing how economic growth rates (faster than average) often result in reductions in unemployment.

87
Q

perfect competition

A

Prices are higher and quantity lower than under perfect competition

88
Q

monetary aggregates

A

M1 and M2 are most commonly computed and reported

They have become harder to predict as financial markets have become more complex

Changes in them provide a relatively poor guide to changes in output and inflation in coming months

89
Q

stagflation

A

combination of stagnation (high unemployment) and inflation.

90
Q

what should govt do during times of high unemployment

standard macroeconomic theory

A
  1. reduce taxes, to increase consumer spending
  2. increase govt spending, which will cause deficit.

it’s ok for govt to be in deficit during times of high unemployment

91
Q

phase of business cycle

A

peak, recession, trough, and recovery

trough= lowest

varies in length (duration), lasting several years
varies in degree of fluctuation in the economy (intensity)

92
Q

order of strategic planning process

A
  1. create mission statement
  2. objectives translated into goals
  3. create actions to achieve goals
  4. means of measuring the effectiveness of performance towards achieving them
93
Q

NATO

A

deals chiefly with international defense and security issues, and with economic matters only very tangentially

94
Q

international bodies that deal with international economic issues

A

european union (EU)
G-20
world trade organization (WTO)

95
Q

Gross national product

A

measures the total market value of products and services produced by the entire economy

96
Q

Net national product

A

is gross national product minus depreciation.

97
Q

The law of diminishing returns

A

value of goods decrease as more of them are made available

98
Q

business with shorter, less intense business cycle

intense = fluctuation in economy

A

has competitive advantage

99
Q

cartel

A

companies agreeing to limit production so that all may charge higher prices

100
Q

price war

A

one company seeking to gain market share through temporarily low prices

101
Q

oligopolistic competition

A

firms compete to a large extent through non-price means, such as product differentiation

price wars
collusive pricing
cartels

102
Q

opportunity cost of zero

A

An idle space that does not have any alternative use has no forgone benefit and the related opportunity cost of zero.

103
Q

direct costing

variable

A

fixed cost are period cost

selling cost is always period cost under absorption and direct costing

104
Q

velocity of money

A

velocity of money (VoM) is used to calculate the number of times each dollar in the money supply is exchanged to purchase domestically produced goods and services

=nominal GDP/money supply

BEC (8 decks)

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