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CFA > Economics > Flashcards

Economics Flashcards

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CFA flashcards
1
Q

Accounting Profit

A

Net income minus cost of resources the firm uses in producing its output. Includes interest paid on debt.

accounting profit = total revenue - total accounting (explicit costs)

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2
Q

Economic Profit

A

Accounting profit less implicit costs such as salary from another job or investment costs.

economic profit = accounting profit - implicit costs
economic profit = total revenue - economic costs

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3
Q

Normal Profit

A

the accounting profit that makes economic profit equal to $0

economic profit = (accounting profit - normal profit) = 0

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4
Q

What does an economic profit of 0 mean?

A

The firm is in equilibrium. The firm is covering all costs of production, returning a competitive rate of return to suppliers of debt and equity capital, paying competitive wages to their workers, and compensating top management. Firms have no incentive to leave the industry and other firms have no incentive to enter.

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5
Q

Total Revenue Equation

A

Price * Quantity Sold

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6
Q

Average Revenue

A

Total Revenue divided by quantity sold

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7
Q

Short run

A

Time period over which some factors of production are fixed.

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8
Q

Breakeven Point

A

Average Revenue equals average fixed plus average variable cost

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9
Q

Short run shutdown point

A

Average revenue equals average variable cost

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10
Q

Monopolistic competition

A

many sellers and differentiated products

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11
Q

Oligopoly

A

few firms that compete

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12
Q

4 stages of business cycle

A
  1. Expansion
  2. Peak
  3. Contraction or Recession
  4. Trough
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13
Q

Neoclassical School of Thought

A

Shifts in aggregate supply and demand are caused by change in technology, economy has tendency to full employment.

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14
Q

Keynesian School of Thought

A

Business cycles fluctuations are due to level of optimism of business operators.

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15
Q

Monetarist School of Thought

A

Variations in aggregate demand are due to variations in the growth of the money supply, likely from inappropriate decisions by the monetary authorities.

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16
Q

Austrian School of Thought

A

Business cycles are caused by government intervention in the economy.

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17
Q

New-classical School of Thought

A

Introduced Real Business Cycle (RBC) theory. Business cycle variation is caused by change in technology and external shocks, not monetary variables. Government should not counteract business cycles.

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18
Q

What are the three types of unemployment?

A
  1. Frictional
  2. Structural
  3. Cyclical
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19
Q

Frictional Unemployment

A

Results from the time lag necessary to match employees with employers seeking their skills. Always happening.

20
Q

Structural Unemployment

A

Caused by long run changes in the economy that eliminate some jobs while generating others for which unemployed workers are not qualified.

21
Q

Cyclical Unemployment

A

Caused by changes in the general level of economic activity

22
Q

Fiscal Policy

A

governments use of spending and taxation to influence economic activity

23
Q

Monetary Policy

A

Central Bank’s actions that affect the quantity of money and credit available in an economy to influence economic activity

24
Q

Expansionary Monetary Policy

A

Central Bank increases money supply and credit available

25
Q

Contractionary Monetary Policy

A

Central Bank decreases money supply and credit available

26
Q

Budget Surplus

A

Government tax revenues exceed expenditures

27
Q

Budget Deficit

A

Government expenditures exceed tax revenues

28
Q

Money Multiplier Equation

A

1/Reserve Requirement

29
Q

Quantity theory of money equation

A

money supply x velocity = price x real output

30
Q

Velocity

A

average number of times each year each unit of money is used to buy goods and services

31
Q

What is the Fisher Equation and what does it measure?

A

Nominal interest rate is a sum of real interest rate and expected inflation

Rnom = Rreal + E[I] + RP
RP = risk premium
32
Q

Discount rate

A

Rate at which banks can borrow funds from the Fed

33
Q

Refinancing rate

A

Rate at which European banks can borrow from the European Central Bank (ECB)

34
Q

Repurchasing agreement

A

Central bank will purchase securities from a bank with the agreement that the bank will buy back the securities at a higher price

35
Q

Federal funds rate

A

Rate banks charge each other for overnight loan of reserves. This is set by the Fed.

36
Q

What relationship do money supply and interest rate tend to have?

A

Inverse

37
Q

Open Market Operations

A

Buying and selling of securities by the Central Bank

38
Q

What happens when the Fed buys securities from banks?

A

Cash in banks increase, excess reserves increase, more funds are available for lending, money supply increases, and interest rates decrease.

39
Q

What happens when the Fed sells securities to the banks?

A

Reduces the cash in investor accounts, excess reserves, funds available for lending, and the money supply. Interest rates will increase.

40
Q

Absolute advantage

A

a country can produce a good at lower cost than that of another country

41
Q

Comparative advantage

A

a country’s opportunity cost in terms of production of another good that could be produced instead is lower than that of another country

42
Q

Free Trade Areas

A
  1. All barriers to import and exports of goods and services among member countries are lifted.
43
Q

Customs Union

A
  1. All barriers to import and exports of goods and services among member countries are lifted.
  2. Adopt a single set of trade restrictions with non-members.
44
Q

Common Market

A
  1. All barriers to import and exports of goods and services among member countries are lifted.
  2. Adopt a single set of trade restrictions with non-members.
  3. All barriers to movement of labor and capital goods among member countries are removed.
45
Q

Economic Union

A
  1. All barriers to import and exports of goods and services among member countries are lifted.
  2. Adopt a single set of trade restrictions with non-members.
  3. All barriers to movement of labor and capital goods among member countries are removed.
  4. Members establish common institutions and economic policy for the union.
46
Q

Monetary Union

A
  1. All barriers to import and exports of goods and services among member countries are lifted.
  2. Adopt a single set of trade restrictions with non-members.
  3. All barriers to movement of labor and capital goods among member countries are removed.
  4. Members establish common institutions and economic policy for the union.
  5. Member countries adopt a single currency.

CFA (2 decks)

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