Economics (10%) Flashcards
Elasticity of Supply
(►Q / Avg Q)
————————
(►P / Avg P)
Economic Profit
Total Revenue - Total Costs
Both Implicit and Explicit
Marginal Propensity
to Consume
MPC
Consumption
——————————
(1 - t)
(Consumpion / Disposable Income)
Fiscal Multiplier
1
———————
1 - MPC(1 - t)
GDP Deflator
Nominal GDP
————————
Real GDP
Unemployment Rate
Unemployed
———————
Labor Force
Current Account
of a Country
S - I + (T - G - R)
Savings - Investments + (Taxes - Gov’t Spending - Transfers)
Tools of Fiscal Policy
- Taxation
- Government Spending
Tools of Monetary Policy
- Open Market Operations
- Discount Rate
- Reserve Ratios
Consumer Price Index
CPI
ΣQc * Pc
————— * 100
ΣQb * Pb
Percent change of CPI basket relative to the base * 100.
What is the crowding out effect?
- Increase in government borrowing, leads to increase in int. rates, firms then reduce spending and borrowing as a result. This decreases the impact of aggregate demand of deficit spending.
- Known as crowding out b/c gov. borrowing takes place of private borrowing.
- What is a quota?
- What is an import license?
- What is a tariff?
- What is an export subsidy?
- What is a voluntary export restraint
- limit on amnt imported.
- right to export to domestic country. Gov. can sell these.
- tax on imported good collected by gov.
- Gov pymnt to firm that export goods.
- Country voluntary limits amount of a good exported. Often in hope of avoiding tariff or quotas imposed by trading partner.
- case of quota, if gov gets full value of import license, result =same as tariff.
What is a recessionary Gap?
What are good/bad investments during this time?
- excess supply. Business will see build up inventory and decrease P and Q and result.
- Long term bonds and commodities are good investments
- int. rates will decrease. So long term bonds P will increase.
- Commodities will decrease in p. so bad.
What is an inflationary gap?
Bad investments?
- Excess demand in econ
- bonds. B/c int. rates will increase.
What is stagflation?
increase in unemployment
increase in inflation.
What is the cross price elasticity?
delta in Qd / delta in P *( Price/Qd)
- Note: first part is the slope of function.
*
what does it mean to mean perfectly inelastic, or highly elasctic?
What does it mean to be elastic or low elasticity?
- Elasticity = 0. Ex:heroin. No matter what price addicts will buy.
- Elasticity = undefined. flat demand curve. Price sensitive.
- Explain cost-push inflation?
- Explain demand-pull inflation?
- results in decrease in aggregate supply
- results in increase in aggregate demand
- see written note cards for graphs.
real exchange rate (d/f) =?
- nominal exchange rate (d/f) * (CPI f/CPI d)
- Ex: At a base period, the CPis ofthe U.S. and U.K. are both 100, and the exchange rate is $ 1 .70/£. Three years later, the exchange rate is $ 1 .60/£, and the CPI has risen to 1 1 0 in the United States and 1 1 2 in the U.K. What is the real exchange rate?
- A: 1.60* (112/110) = $1.629
No arbitrage relation, int. rate parity =?
Forward/Spot = (1+ int. ratedomestic) /(1+int. rateforeign)
- If spot and int expressed as domestic/foreign, then domestic int. rate goes in numerator on right hand side of eqn. If given as foreign/domestic, then foreign goes in numerator in right side.
- Ex: Consider two currencies, the ABE and the DUB. The spot ABE/DUB exchange rate is 4.5671, the 1-year riskless ABE rate is 5o/o, and the 1-year riskless DUB rate is 3o/o. What is the forward exchange rate that will prevent arbitrage profits?
Answer:
Rearranging our formula, we have:
forward = spot [1 +IABE] and we can calculate the forward rate as l +Ious
forward=4.5671 (1.05)=4.6558(AB%uB) 1.03
Note that the forward rate is greater than the spot rate by 4.65 58 I 4.5671 - 1 = 1 .94%. This is approximately equal to the interest rate differential of 5o/o - 3o/o = 2o/o. The currency with the higher interest rate should depreciate over time by approximately the amount o f the interest rate differential.
Crowding-Out Effect
When a government budget deficit causes a decrease in private investment.
What is consumer surplus?
Difference between value consumer sees and amnt they pay.
federal reserve most often uses what tool to manipulate Ms?
what tools does fed have to manipulate Ms?
- Policy rate (discount rate).
- Reseve requirements
- Open market operations - bying and selling securties?
custom union?
free trade area but you have trade restrictions for non union members.
common market
free trade zone, restrictions against non-members, and free trade among members.
Marginal Product
MP
►Total Product
—————————
►Labor
Amount of additional output resulting from one additional unit of input.
Marginal Revenue Product
MRP
►Total Product
————————— * Price
►Labor
or
MP * P
What is the hirschman hirshfield index?
- find total market share of companies after merger.
- take square of market shares and add them up.
what is the arc price elasticity of demand?
Arc price elasticity of demand is calculated as: %ΔQ/%ΔP = (ΔQ/Qavg) / (ΔP/Pavg)
paasche index
current total amnt paid/prior X 100
Price discrimination?
charge consumers different prices
ex- airline tickets
Normal profit
- level of accounting profit needed to just cover the implicit opportunity costs ignored in accounting costs.
- need this to go in LR.
Giffen and Veblen Goods
Giffen Goods
Inferior, Do not violate fundamental axioms, income effect dominates substitution effect. ex- irish potatoe famin. Gimme some MEAT!
Veblen Goods
High-Status, violate fundamental axioms
GUCCI
labor force participation rate
unemployment rate
Labor force/working age population
unemployed/labor force
real exchange rate
(nominal spot exchange rate * CPI foreign)/CPI domestic
Real GDP
nominal gdp * 100/GDP deflator
Neoclassical Economics
- Shifts in aggregate supply/demand are primarily driven by changes in technology.
- Economies have a strong tendency toward full-employment equilibrium.
- Recessions put downward pressure on the money wage rate.
- Over-full employment puts upward pressure on the money wage rate.
- Business cycles are temporary deviations from long-run equilibrium.
Keynesian Economics
- Wages and prices of productive inputs (other than labor) are “downward sticky”.
- Use monetary and fiscal policy to increase aggregate demand.
Monetarist Economics
- Variations of aggregate demand are caused by inappropriate decisions made by monetary authorities.
- Recessions can be created by inappropriate decreases in the money supply or external shocks.
- Central bank should increase the money supply steadily and predictably.
Austrian Economics
- Business cycles are caused by government intervention in the economy.
New Classical Economics
- Real Business Cycle Theory (RBC)
- Emphasizes effect of real economic variables such as changes in technology and external shocks.
- Applies Utility Theory to Macroeconomics.
- Individuals and firms maximize utility.
- Policymakers should not try to counteract business cycles.
Frictional Unemployment
The time lag necessary to match employees who seek work with employers needing their skills.
Structural Unemployment
Caused by long run changes in the economy that eliminate some jobs while creating others for which unemployed workers are not qualified.
Cyclical Unemployment
Caused by changes in the general level of economic activity. Positive when the economy is operating at less than full capacity and can be negative when employment is over the full employment level.
second price sealed bid auction
vickrey auction
bidder submitting highest bid wins item and pays amount bid by second highest bidder.
descending price auction
dutch auction
- begins with highest price anyone willing to pay, and price reduced until bidder agrees to pay it.
- If many units, then each bidder specifies how many units they want and offer price reduced until a bidder agrees to pay it.
- modified dutch auction - winnig bidders pay same price which is reservation price of bidder whose bid wins the last units offerred.
*
taxes
subsidies
quotas
INCREASE PRICE BUYER PAYS, and decrease amount sellers recieve
increase amount sellers receive and decrease the price buyers pay, leading to production of more than efficient quantity of good.
government imposed production limits, resulting in production of less than efficient quantity of good.
external costs
costs imposed on others by the production of goods which are not taken into account in the production decision.
ex- costs associated with fisherman polluting ocean while fishing.
statutory incidence
- who is legally responsible for paying the tax.
Price elasticity
- measure of responsiveness of quantity demanded to a change in price.
- %►Qd/%►P
- when quantity demanded is responsive to change in price - elastic
- when quantity demanded not responsive we say - inelastic
- unitary elasticity % change in price = % change in quantity so change in price will not effect total revenue.
income elasticity of demand
- sensitivity of quantity demanded to change in income.
