Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CPA Business > Economics > Flashcards

Economics Flashcards

1
Q

How does a price increase affect supply?

A

When the prices of an item increases supply increases- because more sellers are willing to sell.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is a supply curve shift?

A

When supply changes due to something other than price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the characteristics of a positive supply curve shift (shift right)?

A

Supply increases at each price point

Higher Equilibrium GDP

Number of sellers increases - market can get flooded

Examples: Government subsidies or technology improvements that decrease costs for suppliers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the characteristics of a negative supply curve shift (shift left)?

A

Supply decreases at each price point

Lower Equilibrium GDP

Cost of producing item increases

Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

How does price affect the demand for an item?

A

When the prices of an item increases- demand for it decreases.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is a Demand Curve Shift?

A

When demand changes due to something other than price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is a Positive Demand Curve Shift (Shift Right)?

A

When demand increases at each price point

Price of substitutes go up - price of beef rises- so people buy more chicken

Future price increase is expected - War in Middle East- people go out and buy gas

Market expands - i.e. people get new free health care plan- demand at clinic rises

Expansion - more spending increases equilibrium GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is a Negative Demand Curve Shift (Shift Left)?

A

Demand decreases at each price point.

Price of complement goes up - price of beef goes up- less demand for ketchup

Boycott - Company commits social blunder- consumers boycott

Consumer income rises - Demand for inferior goods drops as people have more money to spend

Consumer tastes change

Contraction - less spending decreases equilibrium GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the Marginal Propensity to Consume?

A

How much you spend when your income increases

Calculate: Change in Spending / Change in Income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the Marginal Propensity to Save?

A

How much you save when income increases

Calculate: Change in Savings / Change in Income

Also equals 1 - Marginal Propensity to Consume

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How is the multiplier effect calculated?

A

(1 / 1-MPC) x Change in Spending

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How does increased spending by consumers and the government affect the demand curve?

A

As spending by consumers or the government increases- the demand curve increases (shifts right).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How does spending change due to the multiplier effect?

A

The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect.

One consumer spends money- which:
*Increases the income of a business
*Increases the income of a vendor
*Increases income of employees
*Increases tax revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

How is Price Elasticity of Demand calculated?

A

% Change in Quantity Demand / % Change in Price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Under elastic demand- how does price affect revenues?

A

Price increases- Revenue decreases

Price decreases- Revenue increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What conditions would indicate Elastic Demand?

A

Many substitutes (luxury items)
Considered elastic if elasticity is greater than 1
10% drop in demand / 8% increase in price : 1.25 (Elastic)

Price increases- Revenue decreases
Price decreases- Revenue increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How does revenue react to price under Inelastic Demand?

A

Price increases- Revenue increases

Price decreases- Revenue decreases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What conditions would indicate Inelastic Demand?

A

Few substitutes (groceries- gasoline)
Considered inelastic if coefficient of elasticity is less than 1
5% drop in demand / 10% increase in price : .5 (inelastic)

Price increases- Revenue increases
Price decreases- Revenue decreases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is Unitary Demand?

A

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

How is Income Elasticity of Demand calculated?

A

% Change Quantity Demanded / % Change in Income

Normal goods greater than 1 (demand increases more than income)

Inferior goods less than 1 (demand increases less than income)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What conditions occur under periods of inflation?

A

Interest rates increase
Reduced demand for loans
Reduced demand for houses- autos- etc.
Value of bonds and fixed income securities decrease
Inferior good demand to increase
Foreign goods more affordable than domestic
Demand for domestic goods decrease

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What happens under Demand-Pull inflation?

A

A cause for inflation = when overall spending increases Demand increases (shifts right)Market equilibrium price increases

Or when aggregate spending exceeds economy’s normal full-employment output capacity. Generally during at peak of a bus cycle and is characterized by real GDP > potential GDP. Bc labor is short, companies bid up price and inflation occurs.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What happens under Cost-Push inflation?

A

A cause for inflation = when overall production costs increase Supply decreases (shifts left)Market equilibrium price increases Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase

Characterized by decreases in aggregate output and unemployment bc consumers are not willing to pay the inflated prices.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is the Equilibrium Price?

A

The price where Quantity Supplied : Quantity Demanded

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is Optimal Production?

A

When Marginal Revenue : Marginal Cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What is the result of a Price Floor?

A

Causes a surplus if above equilibrium price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is GDP (Gross Domestic Product)?

A

The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests

Included: Foreign company has US Factory

Not included: US company has foreign factory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is included under the income approach for calculating GDP?

A

Sole Proprietor and Corp Income
Passive Income
Taxes
Employee Salaries
Foreign Income Adjustments
Depreciation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What is included under the Expenditure Approach for calculating GDP?

A

Individual Consumption

Private Investment

Government Purchases

Net Exports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What is Nominal GDP?

A

Measures goods/services in current prices.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

For what is a GDP Deflator used?

A

Used to convert GDP to Real GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What is Real GDP?

A

Nominal GDP / GDP Deflator x 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What is Gross National Product (GNP)?

A

Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

What is the Consumer Price Index (CPI)? How is it applied?

A

Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 1.0

((CPI Current - CPI Last) / CPI Last) * 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

How is disposable income calculated?

A

Personal Income - Personal Taxes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

How is Return to Scale calculated?

A

% Increase in output / % Increase in input Greater than 1 : Increasing returns to scale Less than 1 : Decreasing returns to scale

Incr return: “double ALL inputs -> more than double outputs”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

When is the economy in Recession?

A

When GDP growth is negative for two consecutive quarters.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

What is a Depression?

A

A prolonged- severe recession with high unemployment rates

No requisite period of time for the economy to officially be in a depression

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

What are the stages of the Economic Cycle?

A

Peak (highest)
Recession (decreasing)
Trough (lowest)
Recover (increasing)
Expansion (higher again)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

What are leading indicators?

A

Conditions that occur before a recession or before a recovery

Example: Stock Market or New Housing Starts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

What are lagging indicators?

A

Conditions that occur after a recession or after a recovery

Examples: Prime Interest Rates- Unemployment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

What are coincident indicators?

A

Conditions that occur during a recession or during a recovery

Example: Manufacturing output

43
Q

Which people are included in the calculation of unemployment?

A

Only people looking for jobs

44
Q

What is Cyclical Unemployment?

A

GDP doesn’t grow fast enough to employ all people who are looking for work

Example: People are unemployed in 2010 because there aren’t enough jobs available due to the economy

45
Q

What is Frictional Unemployment?

A

People are changing jobs or entering the work force. This is a normal aspect of full employment.

Example: A recent college graduate is looking for a job

46
Q

What is Structural Unemployment?

A

A worker’s job skills do not match those necessary to get a job so they need education or training

Example: A construction worker wants to work in an office- so they quit their job and get computer training

47
Q

How does inflation relate to unemployment?

A

High Unemployment : Low Inflation (Vice Versa)

48
Q

What is the Discount Rate?

A

The rate a bank pays to borrow from the Fed.

49
Q

What is the Prime Rate?

A

The rate a bank charges their best customers on short-term borrowings.

50
Q

What is the Real Interest Rate?

A

Inflation-adjusted interest rate

51
Q

What is the Nominal Rate?

A

Rate that uses current prices

52
Q

What is the Risk-Free Rate?

A

Rate for a loan with 100% certainty of payback.

Usually results in a lower rate.

US Treasuries are an example.

53
Q

What is included in the M1 money supply?

A

Currency- Coins- and Deposits

54
Q

What is included in the M2 money supply?

A

Highly liquid assets other than currency- coins or deposits

55
Q

What is Deficit Spending?

A

Increased spending levels without increased tax revenue.

Lower taxes without decrease in spending

Gamble that the multiplier effect will take over and boost economy

56
Q

How can the Fed control the money supply?

A

By buying and selling the government’s securities.

57
Q

How does the Fed control economy-wide interest rates?

A

By adjusting the discount rate charged to banks

58
Q

What is a Tariff?

A

A tax on imported goods

59
Q

What is a quota?

A

A limit on the number of goods that can be imported

60
Q

How do international trade restrictions affect domestic producers?

A

They are good for domestic producers.

Demand curve shifts right

Fewer substitutes

They can charge higher prices

61
Q

How to international trade restrictions affect foreign producers?

A

They are bad for foreign producers

Demand curve shifts left

Fewer buyers

They must charge lower prices

62
Q

How do international trade restrictions affect foreign consumers?

A

They are good for foreign consumers

Supply curve shifts right

Goods purchased at lower prices in the foreign markets

63
Q

How do international trade restrictions affect domestic consumers?

A

They are bad for domestic consumers

Supply curve shifts left

Fewer goods bought due to higher prices

64
Q

What is Accounting Cost?

A

Explicit (Actual) cost of operating a business

Implicit costs are opportunity costs

65
Q

What is Accounting Profit?

A

Revenue - Accounting Cost

66
Q

What is Economic Cost?

A

Explicit + Implicit Cost

67
Q

What is Economic Profit?

A

Revenue - Economic Cost

68
Q

What are normal goods?

A

commodities for which demand is positively (directly) related to income (steak, new clothes, airline travel). The demand shifts to right as income increases.

69
Q

What are inferior goods?

A

commodities for which demand is negatively (inversely) related to income (potatoes, used clothing and bus transportation). The demand shifts to the left as income increases.

70
Q

What are substitute products?

A

If a price increase for A results in an increase in demand for B. (when beef prices rise, the demand for chicken increases.

71
Q

What are substitute products?

A

If a price increase for A results in an increase in demand for B. (when beef prices rise, the demand for chicken increases.

72
Q

What are complements products?

A

If a price increase for A results in an decrease in demand for B. (when bread prices rise, the demand for jelly decreases.

73
Q

When does a surplus results?

A

When the market price exceeds the equilibrium price and the quantity supplied exceeds the quantity demanded.

Gvt intervention can create a mkt surplus. ex price floor, such as min wage laws where the price of labor may cause less demand.

74
Q

Market Structure - Pure Competition Characteristics?

A

a. very large number of buyers and sellers act independently.
b. the product is homogeneous or standardized
c. each firm produces an immaterial amount of industry’s total output and this cannot influence market price.
d. No barriers to entry or exit
e. Every firm has perfect information

75
Q

Market Structure - Pure Competition Characteristics?

A

a. very large number of buyers and sellers act independently.
b. the product is homogeneous or standardized
c. each firm produces an immaterial amount of industry’s total output and this cannot influence market price.
d. No barriers to entry or exit
e. Every firm has perfect information

Aka Price takers because they must sell at market price

76
Q

Market Structure - Monopoly Characteristics?

A

a. the industry consists of one firm
b. The product has no close substitutes
c. The firm can strongly influence price because it is the sole supplier of the product
d. Entry by other firms is completely blocked

aka Price maker and Price searcher(price that maximizes its profits)

77
Q

Market Structure - Monopolistic Competition Characteristics?

A

a. industry has a large number of firms
b. products are differentiated.(advertising is crucial)
c. Few barriers to entry and exit exist. (cost of product differentiation is most significant barrier).

78
Q

Market Structure - Oligopoly Characteristics?

A

a. The industry has few large firms (mutually aware and mutually interdependent)
b. Products can be differentiated (cars) or standardized (steel)
c. each firm sets price and production level after considering its mutual interdependence with others.
d. Entry is difficult bc barriers can be natural.

79
Q

What is a kinked demand curve?

A

Theory is that firms will follow along with a price decrease by a competitor but not a price increase.

Typical in Oligopoly industries.

80
Q

What is a Cartel?

A

This arises when a group of oligopolistic firms agree to set prices. This is illegal except in international markets.

81
Q

What is a monopsony market?

A

when for example: in labor markets, workers only have the option of a single employer

82
Q

When does a currency appreciate?

A

When one currency can be exchanged for more units of another currency, the first currency appreciated with respect to the second, thus gaining purchasing power.

83
Q

What factors affect foreign currency exchange rates?

A

1) Trade-Related factors:
a) Relative inflation rates
b) Relative income levels
c) Government intervention
2) Financial factors:
a) Relative interest rates
b) Ease of capital flow (most important bc of speed)

84
Q

What factors affect foreign currency exchange rates?

A

1) Trade-Related factors:
a) Relative inflation rates: as this rises, product demand decr. bc product prices incr.
b) Relative income levels: as this rises, intl product demand rises, driving up foreign currency
c) Government intervention
2) Financial factors:
a) Relative interest rates: as this rises, the demand for this currency rises.
b) Ease of capital flow (most important bc of speed)

85
Q

What is a spot rate?

A

is the number of units of a foreign currency that can be received today in exchange for a single unit of the domestic currency

86
Q

What is a spot rate?

A

is the number of units of a foreign currency that can be received today in exchange for a single unit of the domestic currency

87
Q

What is a forward rate?

A

is the number of units of a foreign currency that can be received at some definite date in the future in exchange for a single unit of the domestic currency

88
Q

What is a forward premium?

A

When the domestic currency can get more units of a foreign currency in the forward market than in a spot market.

89
Q

What is a forward premium?

A

When the domestic currency can get more units of a foreign currency in the forward market than in a spot market. = expected to gain purchasing power.

90
Q

What is a forward discount?

A

When the domestic currency can get less units of a foreign currency in the forward market than in a spot market. = expected to lose purchasing power.

91
Q

What is exchange rate transaction exposure?

A

It is the exposure to fluctuations in exchange rates between the date a transaction is entered and the settlement date.
Hedging in Response can be:
1) Money Market Hedges: least complex
2) Forward Contracts: for large corporations
3) Futures Contracts: avail to anyone but only at predetermined amounts.
4) Options Contracts: unlike future contracts, only exercised if chooses to.

92
Q

What is exchange rate economic exposure?

A

it is the exposure to fluctuations in exchange rates resulting from overall economic conditions.

93
Q

How to mitigate economic exposure when foreign currency inflows are greater?

A

If relying on Sales to foreign customers = Reduce foreign sales.
If relying on Purchases from foreign suppliers = Increase foreign orders.

94
Q

How to mitigate economic exposure when foreign currency outflows are greater?

A

If relying on Sales to foreign customers = Increase foreign sales.
If relying on Purchases from foreign suppliers = Reduce foreign orders.

95
Q

What is exchange rate economic exposure?

A

it is the exposure to fluctuations in exchange rates resulting from overall economic conditions.

96
Q

What is exchange rate translation exposure?

A

It is the risk that a foreign subsidiary’s BS items and results of operations, denominated in a currency different from parents, will change in value as a result of exchange rate fluctuations.

97
Q

What is deflation?

A

It is a decrease in the general price level. Its causes and effects are the opposite of those of inflation. The purchasing power of the nation’s currency increases. Thus, increasing the money supply is a preventive measure for deflation because it decreases the purchasing power of a unit of the currency.

98
Q

Impact on Intl Trade Restrictions

A

IF >DP than FC and

99
Q

efficient market hypothesis

A

relates to the degree to which past or current information is incorporated in and/or influences the current market prices of securities.

100
Q

efficient market hypothesis: Strong

A

The strong form of the hypothesis states that all available information is incorporated in the current market prices of securities, and thus the investor cannot find undervalued securities and would be unable to make choices that would allow him or her to outperform the market index in the long run.

101
Q

efficient market hypothesis: semi-strong

A

The semi-strong form of the hypothesis assumes that all readily available information is incorporated into current market prices of securities and that fundamental analysis would be unlikely to identify inaccurately valued securities.

102
Q

efficient market hypothesis: weak

A

The weak form of the hypothesis assumes that current market prices reflect all past prices and information, and therefore this information cannot be used for predictive purposes.

103
Q

Herfindahl index

A

is a measure of the size of firms in relation to the market, not a way to understand behavior of firms in such a market

104
Q

Game theory model

A

a useful tool in choosing responses to actions of competitors in such a market.

CPA Business (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions