Economic Theory

Question 1

What is a market system?

Answer 1

A market economy is a system where the laws of supply and demand direct the production of goods and services.

Question 2

What is voluntary exchange?

Answer 2

A voluntary exchange is the process where customers and merchants freely and without coercion engage in market transactions or exchanges. This is typically accomplished with the exchange of money for a good or service. As a result of this exchange, both the buyer and the seller are better off than they were before.

Question 3

What is market price?

Answer 3

In economics, market price is the economic price for which a good or service is offered in the marketplace. It is of interest mainly in the study of microeconomics. Market value and market price are equal only under conditions of market efficiency, equilibrium, and rational expectations.

Question 4

What is market value?

Answer 4

The major difference between market value and market price is that the market value, in the eyes of the seller, might be much more than what a buyer will pay for the property or it’s true market price. Value can create demand, which can influence price. … Market value and market price can be equal in a balanced market.

Question 5

What is market structure?

Answer 5

How the market will behave, depending on the number of buyers or sellers, its dimensions, the existence of entry and exit barriers, etc. will determine how an equilibrium is reached.

Question 6

What is perfect competition market structure?

Answer 6

the efficient market where goods are produced using the most efficient techniques and the least amount of factors. This market is considered to be unrealistic but it is nevertheless of special interest for hypothetical and theoretical reasons.

Question 7

What is imperfect competition market structure?

Answer 7

includes all situations that differ from perfect competition. Sellers and buyers can influence in the determination of the price of goods, leading to efficiency losses. Imperfect competition includes market structures such as monopoly, oligopoly, and monopolistic competition, monopsony, and oligopsony.

Question 8

What is a monopoly?

Answer 8

This market is composed of a sole seller who will therefore have full power to set prices.

Question 9

What is a oligopoly?

Answer 9

Products are offered by a series of firms. However, the number of sellers is not large enough to guarantee perfect competition prices.

Question 10

What is a monopolistic competition?

Answer 10

This market is formed by a high number of firms which produce a similar good that can be seen as unique due to differentiation, that will allow prices to be held up higher than marginal costs. In other words, each producer will be considered as a monopoly thanks to differentiation, but the whole market s considered as competitive because the degree of differentiation is not enough to undermine the possibility of substitution effects.

Question 11

What is a monopsony?

Answer 11

Similar to a monopoly, but in this case there are many firms selling products, but only one buyer, the monopsonist, who will have full power when negotiating prices.

Question 12

What is a oligopsony?

Answer 12

Similar to oligopolies, but with buyers. Sellers will have to deal with the increased negotiating power of the only few buyers in the market, the oligopsonists.

Question 13

What is economic growth?

Answer 13

An increase in the amount of goods and services produced per head of the population over a period of time.

Question 14

What are some key measures of economic growth?

Answer 14

1. Real GDP growth
2. Inflation
3. Unemployment
4. Current account

Question 15

What is fiscal policy?

Answer 15

The means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy.

Question 16

What is monetary policy?

Answer 16

The actions undertaken by a nation’s central bank to control money supply to achieve macroeconomic goals that promote sustainable economic growth.

Question 17

What is income inequality?

Answer 17

An extreme disparity of income distributions with a high concentration of income usually in the hands of a small percentage of a population.

Question 18

What is the role of governments in the economy?

Answer 18

Governments provide the legal and social framework, maintain competition, provide public goods
and services, redistribute income, correct for externalities, and stabilize the economy.

Question 19

What is market failure?

Answer 19

The economic situation defined by an inefficient distribution of goods and services in the free market. In market failure, the individual incentives for rational behavior do not lead to rational outcomes for the group.

Question 20

What is productive efficiency?

Answer 20

Productive efficiency is concerned with producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost.

To be productively efficient means the economy must be producing on its production possibility frontier. (i.e. it is impossible to produce more of one good without producing less of another).

Question 21

What is rationing?

Answer 21

Rationing is the controlled distribution of scarce resources, goods, services, or an artificial restriction of demand.

Question 22

What are tax incentives for businesses?

Answer 22

Tax incentives aim to attract more business to an area by making it less expensive for businesses to operate relative to other areas. They come in several forms:

–Tax exemptions fully excuse firms from paying certain liabilities.

–Tax reductions partially offset the amount a firm is obligated to pay in taxes.

–Tax refunds and rebates repay a portion of the taxes a firm has already paid.

–Tax credits are more flexible: they allow a firm to offset a portion of its tax obligation, and they can often be carried forward to subsequent tax years or be sold in the secondary market.

Question 23

What is the 1913 Federal Reserve Act?

Answer 23

The 1913 Federal Reserve Act is U.S. legislation that created the current Federal Reserve System. Congress developed the Federal Reserve Act to establish economic stability in the United States by introducing a central bank to oversee monetary policy.

Question 24

What is the Federal Reserve System?

Answer 24

The Federal Reserve System (FRS) is the central bank of the U.S. The Fed, as it is commonly known, regulates the U.S. monetary and financial system.

Question 25

What is contractionary monetary policy?

Answer 25

Contractionary monetary policy is when a central bank uses its monetary policy tools to fight inflation. It’s how the bank slows economic growth. Inflation is a sign of an overheated economy. It’s also called restrictive monetary policy because it restricts liquidity.

Question 26

1797

Answer 26

Resulted from land speculation and deflation from Europe

Question 27

1857

Answer 27

Companies went bankrupt and failed

Question 28

1893

Answer 28

Started with the failure of the Reading Railroad and the subsequent closure of banks

Question 29

1873

Answer 29

Jay Cooke and company (largest U.S. bank) failed. Led to the Railroad Strike of 1877.

Question 30

1907

Answer 30

Collapse of New York Knickerbocker Trust Co, stock market drops. Led to the creation of the Federal Reserve System.

Question 31

1945

Answer 31

Adjusting to Post-War production

Question 32

1949

Answer 32

Continuing market adjustment to a Post-War era

Question 33

1953

Answer 33

Following the demobilization of the Korean War

Question 34

1957

Answer 34

Believed to be caused by the Fed’s contractionary monetary policy

Question 35

1960

Answer 35

Ended with stimulus spending

Question 36

1970

Answer 36

Nothing special - just another recession

Question 37

1973-1975

Answer 37

OPEC quadrupled oil prices, Nixon instituted wage-price controls, took U.S. off the gold standard

Question 38

1980-1982

Answer 38

Fed raised interest rates to combat inflation. Iranian oil embargo which drove up prices.

Question 39

1990-1991

Answer 39

Savings and loan crisis

Question 40

2001

Answer 40

Boom and bust of dot.com industries

Question 41

2008-2009 (Great Recession)

Answer 41

Subprime mortgage crisis

Question 42

What is a command economy?

Answer 42

An economy in which production, investment, prices, and incomes are determined centrally by a government.

Question 43

What is hyperinflation?

Answer 43

Hyperinflation is a term to describe rapid, excessive, and out-of-control price increases in an economy, typically at rates exceeding 50% each month over time.
Hyperinflation can occur in times of war and economic turmoil in the underlying production economy, in conjunction with a central bank printing an excessive amount of money.
Hyperinflation can cause a surge in prices for basic goods—such as food and fuel—as they become scarce.
While hyperinflations are typically rare, once they begin they can spiral out of control.

Question 44

How does the growth of money supply affect prices?

Answer 44

Increasing the money supply faster than the growth in real output will cause inflation. The reason is that there is more money chasing the same number of goods. Therefore, the increase in monetary demand causes firms to put up prices.
If the money supply increases at the same rate as real output, then prices will stay the same.

Question 45

What was the classical economics?

Answer 45

The main idea of the Classical school was that markets work best when they are left alone, and that there is nothing but the smallest role for government. The approach is firmly one of laissez-faire and a strong belief in the efficiency of free markets to generate economic development. Markets should be left to work because the price mechanism acts as a powerful ‘invisible hand’ to allocate resources to where they are best employed.

The Classical school, which is regarded as the first school of economic thought, is associated with the 18th Century Scottish economist Adam Smith, and those British economists that followed, such as Robert Malthus and David Ricardo.

Question 46

What is Keynesian economics?

Answer 46

The Keynesian approach is interventionist, coming from a belief that the self interest which governs micro-economic behaviour does not always lead to long run macro-economic development or short run macro-economic stability. Keynesian economics is essentially a theory of aggregate demand, and how best best to manipulate it through macro-economic policy.

Question 47

What is the difference between micro and macro economics?

Answer 47

Microeconomics studies individuals and business decisions, while macroeconomics analyzes the decisions made by countries and governments.
Microeconomics focuses on supply and demand, and other forces that determine price levels, making it a bottom-up approach.
Macroeconomics takes a top-down approach and looks at the economy as a whole, trying to determine its course and nature.
Investors can use microeconomics in their investment decisions, while macroeconomics is an analytical tool mainly used to craft economic and fiscal policy.

Question 48

What is monetarist economics?

Answer 48

Monetarists are economists and policymakers who subscribe to the theory of monetarism.
Monetarists believe that regulating the money supply is the most effective and direct way of regulating the economy
Famous monetarists include Milton Friedman, Alan Greenspan and Margaret Thatcher.

Question 49

What is supply-side economics?

Answer 49

Supply-side economics is better known to some as “Reaganomics,” or the “trickle-down” policy espoused by 40th U.S. President Ronald Reagan. He popularized the controversial idea that greater tax cuts for investors and entrepreneurs provide incentives to save and invest, and produce economic benefits that trickle down into the overall economy. In this article, we summarize the basic theory behind supply-side economics.

Question 50

What is mercantilism?

Answer 50

Mercantilism was an economic system of trade that spanned from the 16th century to the 18th century. Mercantilism is based on the principle that the world’s wealth was static, and consequently, many European nations attempted to accumulate the largest possible share of that wealth by maximizing their exports and by limiting their imports via tariffs.

Question 51

What is Marxian economics?

Answer 51

Marxian economics is a school of economic thought based on the work of 19th-century economist and philosopher Karl Marx.
Marx claimed there are two major flaws in capitalism that lead to exploitation: the chaotic nature of the free market and surplus labor.
He argued that the specialization of the labor force, coupled with a growing population, pushes wages down, adding that the value placed on goods and services does not accurately account for the true cost of labor.
Eventually, he predicted that capitalism will lead more people to get relegated to worker status, sparking a revolution and production being turned over to the state.

Question 52

What are protectionist policies?

Answer 52

Protectionist policies place specific restrictions on international trade for the benefit of a domestic economy.
Protectionist policies typically seek to improve economic activity but may also be the result of safety or quality concerns.
The value of protectionism is a subject of debate among economists and policy makers.
Tariffs, import quotas, product standards, and subsidies are some of the primary policy tools a government can use in enacting protectionist policies.

Question 53

What is free trade?

Answer 53

International trade left to its natural course without tariffs, quotas, or other restrictions.

Question 54

What is gross domestic product (GDP)?

Answer 54

Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period.
GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate.
GDP can be calculated in three ways, using expenditures, production, or incomes. It can be adjusted for inflation and population to provide deeper insights.
Though it has limitations, GDP is a key tool to guide policymakers, investors, and businesses in strategic decision making.

Question 55

What is per capita GDP?

Answer 55

Per capita gross domestic product (GDP) is a metric that breaks down a country’s economic output per person and is calculated by dividing the GDP of a country by its population.
Per capita GDP is a global measure for gauging the prosperity of nations and is used by economists, along with GDP, to analyze the prosperity of a country based on its economic growth.
Small, rich countries and more developed industrial countries tend to have the highest per capita GDP.

Question 56

What is the difference between absolute and relative poverty?

Answer 56

Absolute poverty – is a condition where household income is below a necessary level to maintain basic living standards (food, shelter, housing). This condition makes it possible to compare between different countries and also over time.
Relative poverty – A condition where household income is a certain percentage below median incomes. For example, the threshold for relative poverty could be set at 50% of median incomes (or 60%)

Question 57

What are property rights?

Answer 57

Property rights define the theoretical and legal ownership of resources and how they can be used. These resources can be both tangible or intangible and can be owned by individuals, businesses, and governments.

Question 58

What is division of labor?

Answer 58

The assignment of different parts of a manufacturing process or task to different people in order to improve efficiency.

Question 59

What is international trade?

Answer 59

International trade is the exchange of goods and services between countries.
Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries, or which would be more expensive domestically.
The importance of international trade was recognized early on by political economists like Adam Smith and David Ricardo.
Still, some argue that international trade actually can be bad for smaller nations, putting them at a greater disadvantage on the world stage.

Question 60

What is fair trade?

Answer 60

Fair trade is an arrangement designed to help producers in developing countries achieve sustainable and equitable trade relationships. Members of the fair trade movement add the payment of higher prices to exporters, as well as improved social and environmental standards.

Question 61

What was the Bretton Woods Agreement & System?

Answer 61

The Bretton Woods Agreement and System created a collective international currency exchange regime that lasted from the mid-1940s to the early 1970s.
The Bretton Woods System required a currency peg to the U.S. dollar which was in turn pegged to the price of gold.
The Bretton Woods System collapsed in the 1970s but created a lasting influence on international currency exchange and trade through its development of the IMF and World Bank.

Question 62

What is the International Monetary Fund (IMF)?

Answer 62

The mission of the IMF is to promote global economic growth and financial stability, encourage international trade, and reduce poverty around the world.
The IMF was originally created in 1945 as part of the Bretton Woods agreement, which attempted to encourage international financial cooperation by introducing a system of convertible currencies at fixed exchange rates.

Question 63

What was the General Agreement on Tariffs and Trade (GATT)?

Answer 63

The General Agreement on Tariffs and Trade (GATT) was signed by 23 countries in October 1947, after World War II, and became law on Jan. 1, 1948.
The GATT’s purpose was to make international trade easier.
The GATT held eight rounds in total from April 1947 to September 1986, each with significant achievements and outcomes.
In 1995 the GATT was absorbed into the World Trade Organization (WTO), which extended it.

Question 64

What is the World Trade Organization (WTO)?

Answer 64

The WTO oversees global trade rules among nations.
The WTO has fueled globalization with both positive and negative effects.
The main focus of the WTO is to provide open lines of communication concerning trade among its members.

Question 65

What is the World Bank?

Answer 65

The World Bank is an international organization dedicated to providing financing, advice, and research to developing nations to aid their economic advancement.
The World Bank and International Monetary Fund were founded simultaneously under the Bretton Woods Agreement with generally the same focus to help serve international governments globally.
The World Bank has expanded to become known as the World Bank Group with five cooperative organizations, sometimes known as the World Banks.
The World Bank Group offers a multitude of proprietary financial assistance products and solutions for international governments as well as a range of research-based thought leadership for the global economy at large.

Question 66

What is a regional trade agreement?

Answer 66

A regional trade agreement (RTA) is a treaty between two or more governments that define the rules of trade for all signatories.

Question 67

What is expansionary fiscal policy?

Answer 67

Expansionary fiscal policy is when the government expands the money supply in the economy using budgetary tools to either increase spending or cut taxes—both of which provide consumers and businesses with more money to spend.

Question 68

What is the FDIC?

Answer 68

The Federal Deposit Insurance Corporation is an independent federal agency insuring deposits in U.S. banks and thrifts in the event of bank failures.
As of 2020, the FDIC insures deposits up to $250,000 per depositor as long as the institution is a member firm.
The FDIC covers checking and savings accounts, CDs, money market accounts, IRAs, revocable and irrevocable trust accounts, and employee benefit plans.
Mutual funds, annuities, life insurance policies, stocks, and bonds are not covered by the FDIC.