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CFA level I > Economics > Flashcards

Economics Flashcards

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1
Q

What is defined as short-run?

A

Timeframe when some factors are fixed

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2
Q

What is defined to as long-run?

A

Timeframe when all factors are variable

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3
Q

When should firm operate in perfect market?

A

When AR>=ATC

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4
Q

When should firm operate in short-run only in perfect market?

A

When AR>=AVC but AR<ATC

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5
Q

When should firm firm shut-down in perfect market?

A

AR<AVC

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6
Q

When is break-even point?

A

TR=TC

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7
Q

When should firm operate in short-term market in imperfect environment?

A

TC>TR>TVC

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8
Q

When should firm shut down in imperfect market?

A

TR<TVC

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9
Q

Why do we compare averages for perfect and total costs for imperfect markets?

A

Because price is not equal to marginal revenues

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10
Q

What are conditions of the perfect market?

A

many firms, very low barriers of entry, very good substitutes, competes on price only, none pricing power

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11
Q

What are conditions of the monopolistic competition?

A

many firms, low barriers of entry, goods have substitutes but are differentiated, competes on price, makreting and features, some pricing power

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12
Q

What are conditions of the oligopoly?

A

There are few firms in the market, high barriers of entry, goods have substitutes but are differentiated, competes on price, marketing and festures, some to significant pricing power

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13
Q

What are conditions on monopoly?

A

There is single firm, very high barriers of entry, no good substitutes, competes on adversiting, have significant pricing power

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14
Q

What is long-term equilibirium of monopolistic competition?

A

P=ATC

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15
Q

What is the most significant cost for monopolists?

A

Marketing costs

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16
Q

What is a distinct feature of oligopoly?

A

They are interdependent

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17
Q

What is kinked demand theory?

A

Competitors are likely to match the price decrease, but not the price increase

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18
Q

How does demand elasticity reflected in the kinked demand theory?

A

It is more elastic on the left and less elastic on the right

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19
Q

What is Cornot duopoly model?

A

Two firms with identical MC curves will chose their price based on the price of the other firm in the previous periods

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20
Q

What is the assumption of Cournot duopoly model?

A

Prices would not change and firms set prices simultaneously

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21
Q

What is equilibrium of duopoly model?

A

Sell the same quantity, as the price would be less than a single monopolist would charge, but greater under perfect competition

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22
Q

What is Stackelberg model?

A

Pricing decisions of the firms are based sequentially and the leader gets higher price and more of total profits

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23
Q

What is Nash equilibrium?

A

Choices of firms are that no other choice would make any firm better off.

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24
Q

What is collusion?

A

Joint agreement to charge given price or take speficit output.

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25
Q

What is dominant firm model?

A

Single firm has advantage of larger market share as a result of greater scale or lower cost.

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26
Q

What would happen if competitive firm would decrease the price?

A

Dominant firm would decrease the price, competitive firms output would fall and dominant firm would increase their market share.

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27
Q

What are concentration measures?

A

Indications of market power

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28
Q

What is n-firm concentration ratio?

A

It is sum of % of market shares of largest N-firms in a market.

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29
Q

What is HHI?

A

Sum of squares of the market shares of the largest firms in the market.

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30
Q

What is the limitation of the concentration ratios?

A

Limitation is that barriers to enter are not considered.

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31
Q

What is business cycle?

A

Fluctuation in economic activity

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32
Q

What is expansion?

A

Real GDP is growing

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33
Q

What is peak?

A

Real GDP stops increasing and begins decreasing

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34
Q

What is contraction/recession?

A

Real GDP decreasing

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35
Q

What is through?

A

GDP stops decreasing and begins increasing

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36
Q

What is growth cycle?

A

Changes in the % difference between real GDP and potential value

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37
Q

What is growth rate cycle?

A

Changes in the annualized % growth rate from one to next

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38
Q

What is a credit cycle?

A

It is cyclical fluctuation in the interest rates and the availability of loans.

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39
Q

What is investory/sales ratio?

A

It is representation of a business cycle.

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40
Q

What is expansion & peak in business cycle?

A

When inventory to sales ratio begins increasing as sales start to slow and inventory starts accumulating

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41
Q

How does firms react to businness fluctuations?

A

They adjust labor and physical capital

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42
Q

What is largest component of the GDP?

A

Consumer spending

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43
Q

Spending on which goods is rather cyclical?

A

Durable goods and services

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44
Q

What are leading economic indicators?

A

It is change in the direction before peak on throughs

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45
Q

What are coincident indicators?

A

They change direiction at the same time as the cycle

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46
Q

What are lagging indicators?

A

They change direction when business cycle is already underway

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47
Q

What is fiscal policy?

A

Government spending and taxation with the objective of boosting AD.

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48
Q

What is monetary policy?

A

It is quantity of money and credit in the economy.

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49
Q

What is balanced budget?

A

tax reevenues=government expenditures

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50
Q

What is budget deficit?

A

Expenditures>revenues

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51
Q

What is budget surplus?

A

Revenues>expenditures

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52
Q

What are objectives of fiscal policy?

A

Influence economic activity and AD, redistribute wealth and income among segments, allocate resources among economic agents and sectors

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53
Q

What does Keneysian theory say?

A

Fiscal policy has an affect when economy is below its full employment

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54
Q

What does Monetarist theory say?

A

Fiscal policy effect is temporary and monetary policy should be used to increase or decrease the inflationary pressure.

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55
Q

What is discretionary fiscal policy?

A

It is spending and taxing decisions to stabilise the economy

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56
Q

What are automatic stabilizers?

A

They are built-in fiscal devices trigerred by the state economy

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57
Q

What is debt ratio?

A

Debt/GDP

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58
Q

What is crowding out?

A

It is when government borrowing increases IR and then private sector cannot borrow

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59
Q

What is Ricardian equivalence?

A

People look into the future and adjust their spending patterns to correspond to future tax changes.

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60
Q

What are fiscal policy tools?

A

Revenue and spending tools

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61
Q

What is transfer payment?

A

Redistribution of wealth by taxing ones and making payments to others

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62
Q

What is current spending?

A

government expenditures on goods and services on the routine basis

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63
Q

What is capital spending?

A

It is spending on infrastructure to boost future productivity of economy

64
Q

What are direct taxes?

A

Taxes levied on income and wealth

65
Q

What is indirect taxes?

A

Taxes levied on goods and services

66
Q

What are attributes of taxing policy?

A

Simplicity, efficiency, fairness and sufficiency

67
Q

What is fiscal multiplier?

A

It is potential increase in AD increasing from government spending

68
Q

Fiscal multiplier equation

A

1/1-MPC(1-t)

69
Q

What is balance budget multiplier?

A

Net effect on the budget from decrease/increase in the AD

70
Q

How does negative effect is calculated?

A

AmountMPCfiscal multiplier

71
Q

What is recognition lag?

A

Policymakers might take time to recognize the nature and extent of the economic problems

72
Q

What is action lag?

A

Enaction of the policy takes time

73
Q

What is impact lag?

A

Lag between enactment and impact of the changes on the economy

74
Q

Which policy is increase in budget surplus?

A

Contractionary

75
Q

Which policy is increase in budget deficit?

A

Expansionary

76
Q

What are structural budget deficit?

A

Deficit that would occur based on current policies if economy were at full employment

77
Q

What is fiat money?

A

Currency that is not backed by any tangible value

78
Q

What are the roles of central bank?

A

Supplier of currency, banker to government and other banks, regulator and supervisor of payment system, lender of the last resort, holder of gold and forex, conductor of monetary policy

79
Q

What is primary objective of the central bank?

A

To control inflation

80
Q

What is menu costs?

A

Businesses contrantly having to change prices

81
Q

What is shoe leather costs?

A

Costs of trips to banks to minimize deposits since they depreciate

82
Q

What is inflation target rate?

A

2+-1%

83
Q

What is pegging?

A

It is attaching currency rate to that of other country

84
Q

How effective is pegging?

A

It is effective in the short-run, but in the long-run we need to manage interest rates.

85
Q

What is policy rate?

A

Rate at which banks can borrow if they have shortfalls

86
Q

What is policy rate named in US and Europe?

A

US -> discount rate, Europe -> refinancing rate

87
Q

What is repurchase agreement?

A

Central bank purchases securities from the banks as they promise to repurchase them at the higher price in the future

88
Q

What is effect of reserve requirement change?

A

If reserve requirement increases, money supply will decrease and interest rates will go up.

89
Q

What are open market operations?

A

Buying and selling securities

90
Q

What are monetary policy transmission mechanism?

A

It is ways that monetary policy affects price level and inflation

91
Q

What are central banks essential qualities?

A

Independence, credibility and transparency

92
Q

What is meant by independence?

A

Political powers might try to intervene as it conflicts with their goals

93
Q

What is operational independence?

A

Independently determine policy rate

94
Q

What is target independence?

A

Determine how inflation is computed, targeted and the time horizon for the achievement

95
Q

What is meanth by credibility?

A

Following through on their stated intentions

96
Q

What is meant by transparency?

A

Aiding credidibility by disclosing the state of the economic environment by issuing reports

97
Q

What is interest rate targeting?

A

Using money supply to adjust interest rates

98
Q

What is exchange rate targeting?

A

Maintaining a set exchange rate between local and other currency, usually the dollar.

99
Q

What is net effect of the exchange rate targeting?

A

Targeting country will have he same inflation rate and have to adopt monetary policy and accept interest rates.

100
Q

What are bond market vigilantes?

A

Traders who threatens or sells a large amount of bonds to protest or signal distate with policies of issuers

101
Q

What is liquidity trap?

A

It is when demand for money becomes elastics and individuals hold more money even with decrease in the short-run interest rates.

102
Q

What is quantitative easing?

A

Central bank purchases securities in attempt to increase money supply to reduce interest rates

103
Q

What are geopolitics?

A

Interactions of nations including actors of state and nonstate

104
Q

What is globalization?

A

Long-term trend toward worldwide integration of economic activity and cultures

105
Q

What is economic openess?

A

International trade as % of total output

106
Q

What is autarky?

A

Goal of national self-reliance, state-dominates society with government control of industry and media

107
Q

What is hegemony?

A

Open to globalization, but have size and scalo to influence other countries without cooperating

108
Q

What is bilateralism?

A

Cooperation of two nations, might have multiple agreements

109
Q

What is multilateralism?

A

Cooperation with multiple countries

110
Q

What is regionalism?

A

Form of multilateralism with nearby countries

111
Q

What is portfolio investment flows?

A

Buy and sell foreign securities

112
Q

What is foreign direct investment?

A

Own physical production capacity in other countries

113
Q

What is the role of IMF?

A

Facilitate trade by promoting international monetary cooperation and exchange rate stability, assists in setting up payment systems and make resources available to other countries by BoP.

114
Q

What is the role of world trade organization?

A

Trade flows freely and works smoothly

114
Q

What is the role of World Bank?

A

Low interest loans, interest free credits, grants to developing countries, resources to public/private partnerships with goal of fighting poverty

115
Q

What is geopolitical risk?

A

Probability of events that interupt peaceful international relations

116
Q

What are events risks?

A

Events that we know the timing, but not the outcome

117
Q

What are exogenous risk?

A

Unanticipated events

118
Q

What are thematic risk?

A

Known factors that have effects on long period

119
Q

What are black-swan risks?

A

Risk of low likelihood exogenous events that have substantial effects

120
Q

What are economic tools?

A

Cooperative and noncooperative

121
Q

What are financial tools?

A

FDI and exchange of currencies

122
Q

What are discrete impacts?

A

Company or industry, broad impacts on country, region or the world

123
Q

What are the reasons for trade restrictions?

A

Infant industry protection, national security, protecting domestic jobs and protecting domestic industries

124
Q

What are tariffs?

A

Taxes on imported goods

125
Q

What are quotas?

A

Limits on imported goods

126
Q

What is minimum domestic content?

A

Requirement that % of goods must be from domestic country

127
Q

What is voluntarily export restraint?

A

Restrict amount of goods exported

128
Q

What are free trade areas?

A

all barriers among member countries are eliminated

129
Q

Whar are custom unions?

A

FTA + set of rules are adopted for non-members

130
Q

What are common market?

A

Custom union + barriers for labor and capital among members are removed

131
Q

What is economic union?

A

Common market + common institution and economic policy

132
Q

What is monetary union?

A

Economic union + single currency

133
Q

What does it mean to hedge the risk?

A

Taking position in the foreign exchange market to reduce on existing risk

134
Q

What is speculating?

A

When transaction in the FX market increases currency risk

135
Q

What are the buyers of FX?

A

Corporations, investment accounts, gov and its entities, retail FX markets

136
Q

What are leveraged accounts?

A

Investment firms that use derivatives

137
Q

What are real money accounts?

A

Accounts that do not engage in the derivative trading

138
Q

What is direct quote?

A

currency/base quotation from a point of view of investor in the price currency country

139
Q

What is indirect quote?

A

Quatation from a point of view of base currency country

140
Q

What is nominal exchange rate?

A

Exchange rate in point in time

141
Q

What is real exchange rate?

A

Purchasing power relative to the earlier base period

142
Q

Formula for the real P/B exchange rate

A

nominal P/B * (CPIbase/CPIprice)

143
Q

What is spot exchange rate?

A

Exchange rate with immediate delivery

144
Q

What is forward exchange rate?

A

Exchange rate to be done in the future

145
Q

What is formal dollarization?

A

Country that use currency of another country

146
Q

What is currency board agreement?

A

Commitment to exchange domestic currency for a specified foreign currency at a fixed rate.

147
Q

What is conventional fixed peg arrangement?

A

Currency is pegged within margins of +-1% versus another currency or basket of currencies of major trading partners

148
Q

What is crawling peg?

A

Exchange rate is adjusted periodically, usually for higher inflation

149
Q

What is managed floating exchange rate?

A

Exchange rate with attempts to influence the exchange rate with response to specific indicators

150
Q

What is independent floating exchange rate?

A

Exchange rate determines in the market

151
Q

What is the equation for trade equilibrium?

A

X-M=S-I+T-G

152
Q

What are the objections of capital flow restrictions?

A

Reduce volatility of asset prices, maintain fixed exchange rate, keep domestic interest rates low, protect strategic industries

153
Q

What is a cross rate?

A

Exchange rate between two currencies implied by their exchange rates with a common third currency

154
Q

What is no-arbitrage condition?

A

Difference between spot and forward exchange is equal to countries interest rate so no riskless profits can be made

155
Q

What is formula of spot exchange rate?

A

[(1+rforeign)/(1+domestic)]*forward

156
Q

What is formula of forward exchange rate?

A

[(1+rdomestic/1+foreign)]*spot

CFA level I (12 decks)

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