Economics - 3 Flashcards
How do international trade restrictions affect domestic consumers?
- They are bad for domestic consumers
- Supply curve shifts left
- Fewer goods bought due to higher prices
What is Accounting Cost?
- Accounting Cost = Explicit (Actual) cost of operating a business
- Implicit costs are opportunity costs
What is Accounting Profit?
Revenue - Accounting Cost
Accounting Profit is revenue minus explicit costs.
What is Economic Cost?
Explicit + Implicit Cost
What is Economic Profit?
Revenue - Economic Cost
Economic Profit is accounting profit minus implicit costs. It is the residual amount that goes to the owners of the firm. Its existence provides a strong signal to other firms to enter the industry.
Monetary Policy to Deal with Deflation
- With nominal interest rates near zero, the Fed can no longer use traditional monetary policy tools to deal with deflation.
- The Fed can act in a preventative mode by preserving a “buffer zone” for inflation in the 1%–3% range to reduce the probability that a large and expected drop in aggregate demand will drive the economy to a level that will drive nominal interest rates to zero.
- The Fed should act more preemptively and more aggressively in cutting interest rates when signs of potential deflation occur.
- The Fed would need to reduce the value of the dollar in terms of purchasing power (that is, aggressively promote inflation), which is the equivalent of raising the price in dollars of goods and services.
- The Fed would need to expand the level of asset purchases and expand the menu of the assets it is willing to purchase.
(a) Use existing authority to purchase agency debt such as mortgage-backed securities.
(b) Buy foreign government debt, but with concern about the impact on exchange rates.
- The Fed would act to lower interest rates out further along the yield curve by purchasing assets with longer maturities and provide a commitment to keep short-term interest rates near zero for a specified period of time.
Monetary Policy to Contain Inflation
- The Fed would have a restrictive monetary policy and sell bonds.
- Excess reserves would fall, and the money supply would fall.
- Interest rates would rise, and business investment would decline.
- Aggregate demand would fall, and the inflation rate would decline.
Exchange Rate Determinants
a. Changes in demand and/or supply of the currency—As the demand for a currency increases, the exchange rate will also increase. As the supply of a currency increases, the exchange rates will decrease.
b. Changes in consumer tastes—If consumers desire a foreign product, the demand for that product and the resulting increase in demand for the foreign currency will affect exchange rates.
c. Relative income changes—As incomes rise, the demand for imports increases, thus having an effect on exchange rates.
d. Relative price changes—As prices decrease for a particular foreign product relative to domestic prices, the demand for that product will increase, thus having an effect on exchange rates.
e. Relative interest rates—As interest rates increase in a given country, interest in investing in securities in that country rises. As investing activities increase, the supply and demand for those currencies are affected as well as the exchange rates.
f. Relative inflation rates—Changes in inflation can have an effect on international trade activity. The changes in this activity will in turn influence the supply and demand for various currencies, resulting in changes in exchange rates.
g. Government controls—Governments can influence exchange rates by imposing exchange and trade barriers, buying and selling securities in foreign exchange markets, and changing interest rates in their home country.
Net Domestic Product (NDP)
National Income (NI)
Personal Income (PI)
Disposable Income (DI)
- Net Domestic Product (NDP) = Gross Domestic Product - Capital Consumption Allowance
- National Income (NI) = NDP - Net Foreign Factor Income - Indirect Business Taxes
- Personal Income (PI) = NI - Social Security contributions - corporate income tax - undistributed corporate profits + transfer payments
- Disposable Income (DI) = PI - personal taxes
Sovereign wealth funds (SWFs)
Sovereign wealth funds (SWFs) are government investments funded by foreign currency reserves but managed separately from official currency reserves and invested for profit.
- A key driver of SWF (sovereign wealth fund) investment in agriculture is to ensure food security for their country in the event worldwide food shortages would curtail the availability of foodstuffs in traditional agricultural markets.
- Other investments by SWFs are designed to acquire technologies, brands, resources, and better access to international markets and to use technology to enhance productivity.
- Many SWFs are attempting to learn how U.S. companies operate and transfer those skills to improve the operation of their domestic firms.
- The primary sources of funds for sovereign wealth funds are export earnings from commodity (energy)-based exports and the trade surplus generated by the export of manufactured goods.
Some of the key characteristics of emerging market economies
- Low debt-to-GDP ratios,
- a significant increase in trade among and between emerging market economies,
- low-cost labor,
- high savings rates,
- large currency reserves, and
- high investment in infrastructure.
Federal budget deficit
The federal budget deficit is the amount by which the federal government’s expenditures exceed its revenues in a given year.
- Total accumulation of the federal government’s surpluses and deficits over time is the national debt.
- Excess of state, local, and federal spending over their revenues would represent aggregate government budget deficit.
- The amount by which liabilities exceed assets on the federal government’s balance sheet represents a negative fund balance.
What is the Risk-Free Rate?
Rate for a loan with 100% certainty of payback.
- Usually results in a lower rate.
- US Treasuries are an example.
What is included in the M1 money supply?
Currency- Coins- and Deposits
What is included in the M2 money supply?
Highly liquid assets other than currency- coins or deposits
