Economics Flashcards
How does a price increase affect supply? –> When the prices of an item increases supply ___.
When the prices of an item increases supply** increases. **
When a positive supply curve shift (shift right) occurs, supply ___ at each price point.
Supply increases at each price point
What causes a supply curve to shift?
When supply changes due to something other than price.
What are the characteristics of a negative supply curve shift (shift left)?
Supply ___ at each price point.
___ Equilibrium GDP.
Cost of producing an item ___.
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 does price affect the demand for an item? When the prices of an item ___ , the demand for it ___ .
When the prices of an item increases- demand for it decreases.
In general, what causes a Demand Curve Shift?
When demand changes due to something other than price.
What is the Marginal Propensity to Consume? How much you ___ when your income ___.
How is it calculated?
How much you spend when your income increases.
Calculate: Change in Spending / Change in Income
What is the Marginal Propensity to Save? How much you ___ when income ___.
How is it calculated?
How much you save when income increases
Calculate: Change in Savings / Change in Income Also equals 1 - Marginal Propensity to Consume
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
How does increased spending by consumers and the government affect the demand curve?
As spending by consumers or the government ___- the demand curve ___ (shifts ___).
As spending by consumers or the government increases- the demand curve increases (shifts right).
How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
Under elastic demand- how does price affect revenues?
Price ___ - Revenue ___
Price ___- Revenue ___
Price increases- Revenue decreases
Price decreases- Revenue increases
How does revenue react to price under Inelastic Demand?
Price ___ - Revenue ___
Price ___- Revenue ___
Price increases- Revenue increases
Price decreases- Revenue decreases
What is the Equilibrium Price? The price where Quantity ___ = Quantity ___
The price where Quantity Supplied = Quantity Demanded
What is Optimal Production? When Marginal ___ = Marginal ___
When Marginal Revenue = Marginal Cost
What is the result of a Price Floor that is above the equilibrium price for a good?
Causes a surplus if above equilibrium price.
What is GDP (Gross Domestic Product)?
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
What is included under the income approach for calculating GDP?
Sole Proprietor and Corp Income
Passive Income
Taxes
Employee Salaries
Foreign Income Adjustments
Depreciation
What is included under the Expenditure Approach for calculating GDP?
Individual Consumption
Private Investment
Government Purchases
Net Exports
What does Nominal GDP measure?
Measures final goods/services in current prices.
For what is a GDP Deflator used?
Used to convert GDP to Real GDP
How is Real GDP calculated?
Nominal GDP / GDP Deflator x 100
What is Gross National Product (GNP)?
Like GDP; It is the price of all final goods and products produced by labor and property supplied by a nation’s residents . Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
How is disposable income calculated?
Personal Income - Personal Taxes
When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
What are the stages of the Economic Cycle?
- Peak (highest)
- Recession (decreasing)
- Trough (lowest)
- Recover (increasing)
- Expansion (higher again)
Conditions that occur before a recession or before a recovery during a business cycle are called ___ ___.
leading indicators
Example: Stock Market or New Housing Starts
Conditions that occur after a recession or after a recovery in a business cycle are called ___ ___
Lagging Indicators
Examples: Prime Interest Rates- Unemployment
What are coincident indicators in an economic business cycle? Conditions that occur during a ___ or during a ___
Conditions that occur during a recession or during a recovery
Example: Manufacturing output
Which people are included in the calculation of unemployment?
- people looking for jobs - labor force
- 16 yrs old or older
- NOT retired
- NOT in an institution
- NOT active military
What is the relationship between inflation and unemployment?
INVERSE RELATIONSHIP!
High Unemployment = Low Inflation (Vice Versa)
What is the Discount Interest Rate?
The rate a bank pays to borrow from the Fed.
What is the Prime Interest Rate?
The rate a bank charges their best customers on short-term borrowings.
What is the Real Interest Rate?
Inflation-adjusted interest rate
What is the Nominal Interest Rate?
Rate that uses current prices
What is the Risk-Free Interest 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
How can the Fed control the money supply?
By buying and selling the government’s securities.
How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
What is a Tariff?
A tax on imported goods
What is a quota?
A limit on the number of goods that can be imported
What is Accounting Cost?
Explicit (Actual) cost of operating a business Implicit costs are opportunity costs
What is Accounting Profit?
Revenue - Accounting Cost
What is Economic Cost?
Explicit + Implicit Cost
What is Economic Profit?
Revenue - Economic Cost
Describe the income effect as it applies to individual demand.
A given amount of income buys more units at a lower price.
Define “demand”.
Desire, willingness and ability to acquire a commodity.
Distinguish between a change in quantity demanded and a change in demand.
A change in quantity demanded is movement along a given demand curve as a result of change in price only. A change in demand is a shift in a demand curve as a result of changes in variables other than price.
Define “individual demand”.
The quantity of a commodity that will be demanded by an individual (or other entity) at various prices during a specified time, ceteris paribus.
What are the factors that change market demand?
Size of market; Income or wealth of market participants; Preferences of market participants; Change in prices of other goods and services.
Describe the substitution effect as it applies to individual demand.
Lower-priced items will be purchased as substitutes for higher-priced items.
Describe the principle of increasing cost.
Production costs increase in the short-run as the quantity produced increases, because new resources are not used as efficiently as the resources used previously .
What is the slope of a normal supply curve?
A normal supply curve has a positive slope: at a higher price, a greater the quantity will be supplied.
What are the variables that change aggregate supply?
Changes in: Number of providers; Cost of inputs; Government taxation or subsidization; Technological advances.
Define an “individual supply schedule”.
A schedule that shows the quantity of goods that an individual producer is willing to provide (supply) at various prices during a specified time.
Distinguish between a change in quantity supplied and a change in supply.
A change in quantity supplied is movement along a given supply curve as a result of change in price only. A change in supply is a shift of a supply curve as a result of changes in variables other than price.
Define “supply”.
Supply is the quantity of a commodity (good or service) that will be provided at alternative prices during a specified time.
How can government directly influence market equilibrium?
Taxation increases the cost and shifts the market supply curve up and to the left; tax decreases have the opposite effects; Subsidization decreases the cost and shifts the market supply curve down and to the right; decreases in subsidization have the opposite effects; Rationing reduces demand, thus shifting the demand curve downward and to the left, thus lowering the equilibrium quantity and price.
Define “market equilibrium price”.
Price at which the quantity of a commodity supplied is equal to the quantity of that commodity demanded; The intersection of the market demand and supply curves
What causes a market surplus?
A market surplus is created when actual price (AP) of a commodity is more than the equilibrium price; therefore, quantity supplied is more than quantity demanded (e.g., minimum wage).
Describe the results of a change in market demand (only) on equilibrium.
Increase in market demand = Demand curve shifts up and to the right; Decrease in market demand = Demand curve shifts down and to the left; Increase in market demand w/no change in supply = Increase in both equilibrium price and equilibrium quantity; Decrease in market demand w/no change in supply = Decrease in both equilibrium price and equilibrium quantity.
What causes a market shortage?
A market shortage is created when actual price (AP) of a commodity is less than the equilibrium price; therefore, quantity supplied is less than quantity demanded at AP (e.g., rent controls).
Describe the results of a change in market supply (only) on equilibrium.
Increase in market supply = Supply curve shifts down and to the right; Decrease in market supply = Supply curve shifts up and to the left; Increase in market supply w/no change in demand = Decrease in equilibrium price and increase in equilibrium quantity; Decrease in market supply w/no change in demand = Increase in equilibrium price and a decrease in equilibrium quantity.
What does “demand is elastic” mean?
If demand is elastic, the percentage change in demand is greater than the percentage change in price, the elasticity coefficient is greater than 1 and total revenue will change in the opposite direction as the change in price.
Define “elasticity of demand”.
The percentage change in quantity of a commodity demanded as a result of a given percentage change in the price of the commodity.
Identify four measures of elasticity.
Elasticity of Demand; Elasticity of Supply; Income Elasticity of Demand; Cross Elasticity of Demand.
Define “elasticity” (as used in economics).
Measures the percentage change in a market factor (ie demand) as a result of a given percentage change in another market factor (ie price).
Define “elasticity of supply”.
The percentage change in the quantity of a commodity supplied as a result of a given percentage change in the price of the commodity.
What is represented by an indifference curve?
Various quantities of two commodities that give an individual the same total utility as plotted on a graph.
Define “utils”, as used in economics.
Hypothetical unit of measure used to measure satisfaction derived from a commodity.
Define the “law of diminishing marginal utility”.
Decreasing utility (satisfaction) is derived from each additional (marginal) unit of a commodity acquired.
Define “marginal utility”.
The utility derived from each (additional) marginal unit (i.e., from the last unit acquired).
Define “utility”, as used in economics.
Satisfaction derived from the acquisition or use of a commodity.
What is meant by the term “budget constraint”?
The limited amount of income available to consumers to spend on goods and services.
What is the term for the highest-valued alternative that must be given up to engage in an activity?
opportunity cost
When a positive supply curve shift (shift right) occurs, what happens to the Equilibrium GDP?
Higher Equilibrium GDP
When a positive supply curve shift (shift right) occurs, the number of sellers ___, and the market can get ___.
Number of sellers increases - market can get flooded
List some examples of what would cause a positive supply curve shift (shift right).
Examples: Government subsidies or technology improvements that decrease costs for suppliers
What are the three major kinds (types) of cost used in short-run economic analysis?
Total Cost = Total Fixed Cost + Total Variable Cost; Average Cost = Cost per-unit of commodity produced; Marginal Cost = Cost of the last acquired unit of an input.
Give three examples of variable cost.
Raw materials; Most labor; Electricity.
Describe economies of scale (also called increasing return to scale).
The long-run average cost curve is decreasing, reflecting that the quantity of output is increasing in greater proportion than the increase in inputs, largely due to specialization of labor and equipment.
Identify and describe the kinds (types) of cost that make up total cost.
- Total Fixed Cost (FC): Costs which cannot be changed with changes in the level of output; 2. Total Variable Cost (VC): Costs for variable inputs which will vary directly with changes in the level of output; 3. Total Cost (TC) = FC + VC.
Define the “law of diminishing returns”.
The point at which the quantity of variable inputs begins to overwhelm the fixed factors, resulting in inefficiencies and diminishing return on marginal units of variable inputs.
Give three examples of fixed cost.
Property taxes; Contracted rent; Insurance.
Which short-run average cost curves have a “U” shape?
Average variable cost, Average total cost and Marginal cost curves have a “U” shape. Average fixed cost has a continuously downward-sloped curve.
Identify and describe the time periods of analysis used in economics.
Short-run time period: At least one input to the production process cannot be varied (i.e., and at least one input is fixed.); Long-run time period: Quantity of all inputs to the production process can be varied.
What are the four market structures normally considered in economic analysis?
Perfect competition; Perfect monopoly; Monopolistic competition; Oligopoly.
List the characteristics of perfect competition
A large number of independent buyers and sellers, each of which is too small to separately affect the price of a commodity; All firms sell homogeneous products or services; Firms can enter or leave the market easily; Resources are completely mobile; Buyers and sellers have perfect information; Government does not set prices.
What is a “price taker” firm?
The assumption that a firm in a perfectly competitive market must accept (“take”) the price set by the market and can sell any quantity of its commodity at that price. Thus, the demand curve faced by a single firm in perfect competition is a straight horizontal line at the market price.
Describe the point of short-run profit maximization for a firm in perfect competition.
Short-run profit is maximized where marginal revenue is equal to rising marginal cost; total revenue will exceed total costs by the greatest amount at that point.
How are long-run profits determined for a firm in perfect competition?
There are no long-run profits possible in a perfectly competitive market. If profits are made in the short-run, more firms will enter the market and increase supply, thus decreasing market price until all firms just break even.
What is the shape of the demand curve for a firm in perfect competition?
The demand curve faced by a single firm in a perfectly competitive market is a straight horizontal line originating at the price set by the market (of all firms).
What is the shape of the demand curve for a firm in perfect monopoly?
Downward sloping (and, since the firm is the only firm in the industry, it is also the industry demand curve).
List the characteristics of a perfect monopoly.
A single seller A commodity for which there are no close substitutes; Restricted entry into the market.
List examples of reasons why monopolies exist.
Control of raw materials or processes; Government granted franchise (i.e., exclusive right); Increasing return to scale (i.e., natural monopolies).
Describe the point of short-run profit maximization for a firm in perfect monopoly.
Short-run profit is maximized where marginal revenue is equal to rising marginal cost. The price charged at that quantity will depend on the level of the demand curve.
In the long-run, how may a monopoly firm increase its profits?
A monopoly firm may increase its profits in two ways: 1. Reduce cost by changing the size if its operations; 2. Increase demand through advertising, promotion, etc.
Identify the five major sectors (or elements) of a macroeconomic free-market flow model.
- Individuals;
- Business entities;
- Governmental entities;
- Financial entities;
- Foreign entities.
In a macroeconomic free-market flow model, what are “leakages?”
Leakages are the purposes for which individual income is used other than for domestic consumption expenditures.
These leakages include amounts of income that go for:
- taxes,
- savings and
- payments for imports.
In a macroeconomic free-market flow model, what are “injections?”
Injections are the sources of amounts added to domestic production that are do not result from domestic consumption expenditures.
These injections include amounts that come from:
- government spending and subsidies,
- investment spending and
- amounts received for exports.
___ ___ includes expenditures other than domestic consumption.
Domestic production
The amount of expenditures included in domestic production that does not come from domestic consumption is called ___?
“injections.”
In a macroeconomic free-market flow model, the amount of individual income not spent on domestic consumption is called ___?
“leakages.”
Macroeconomics includes the study of ___? cycles.
business
True or False?–
Domestic consumption equals domestic production.
FALSE
Which of the following forms of economic activity is considered in macroeconomics, but not in microeconomics?
a. Individuals providing economic resources to business entities.
b. Individuals paying taxes to the federal government.
c. Individuals paying business entities for goods/services.
d. Individuals receiving payments from business entities.
b. Individuals paying taxes to the federal government.
Which of the following sectors is most likely to be relevant in both microeconomic and macroeconomic models of free-market flows?
a. Business entities.
b. Governmental entities.
c. Financial entities.
d. Foreign entities.
a. Business entities.
Identify important gross measures used in macroeconomics.
Measures of total activity or output in an economy including:
- Nominal Gross Domestic Product (GDP);
- Real Gross Domestic Product;
- Potential Gross Domestic Product;
- Gross National Product (GNP);
- Net National Product;
- National Income;
- Personal Disposable Income.
Define “real gross domestic product (real GDP)”.
Total output of final goods and services produced for exchange in the domestic market during a period (usually a year), measured at constant prices.
Define “national income (NI)”.
The total payments for economic resources included in all production of all G&S, including payments for wages, rents, interest, and profits, but not including taxes, in the cost of the final output.
Define “nominal gross domestic product (nominal GDP)”.
Total output of final goods and services produced for exchange in the domestic market during a period (usually a year), without adjustment for changing price levels.
Define “net national product (NNP)”.
Total output of all goods and services produced worldwide using economic resources of U.S. entities, but only including the cost of investment in new capital (excludes depreciation).
Define “potential gross domestic product (potential GDP)”.
The maximum final output that can occur in the domestic economy at a point in time, without creating upward pressure on the general level of prices in the economy.
Define “gross national product (GNP)”.
Total output of all goods and services produced world-wide using economic resources of U.S. entities, including BOTH the cost of replacing capital (the depreciation factor) and the cost of investment in new capital.
Define “personal disposable income”.
Amount of income that individuals have available for spending, defined as total personal income after taxes are deducted.
Nominal GDP can be quantified in what 2 ways?
Expenditure approach
Income approach
What is the effect of a a Positive Demand Curve Shift (Shift Right) on equilibrium GDP?
Expansion - more spending increases equilibrium GDP
Describe the “expenditure approach” to GDP.
This measures GDP using the value of final sales and is derived as the sum of the spending of:
- Individuals – In the form of consumption expenditures for durable and non-durable goods and for services;
- Businesses – In the form of investments in residential and non-residential (e.g., plant and equipment) construction and new inventory;
- Governmental entities – In the form of goods and services purchased;
- Foreign buyers – In the form of net exports (exports - imports) of U.S. produced goods and services.
Example:
U.S. 2009 GDP
Components Amounts in Billions
Personal Consumption expenditures $10,089
Gross Private Domestic Investment 1,629
Government Entities 2,931
Net Exports (392)
GROSS DOMESTIC PRODUCT (GDP) $14,257 (Rounded)
Describe the “income approach” to GDP.
This measures GDP as the value of income and resource costs and is derived as the sum of:
Example:
Components Amounts in Billions
1) Compensation to employees $ 7,799
2) Rental income 268
3) Proprietor’s income 1,041
4) Corporate profits 997
5) Net interest 988
6) Taxes on production and inputs 1,024
7) Depreciation (consumption of fixed capital) 1,861
8) Business transfer payments 134
Less: Government enterprise surplus (8)
Plus: Statistical adjustment 209
GROSS DOMESTIC PRODUCT (GDP) $14,256 (Rounded)
GDP does not include?
GDP does not include:
- Goods or services that require additional processing before being sold for final use (i.e., raw materials or intermediate goods);
- Activities for which there is no market exchange (i.e., do-it-yourself productive activities);
- Goods or services produced in foreign countries by U.S.-owned entities;
- Adjustment for changing prices of goods and services over time.
What is the “GDP deflator”?
The GDP deflator is a comprehensive measure of price levels used to derive real GDP.
What measure of GDP adjusts for changing prices using a price index?
Real GDP
Real GDP per capita measures ??
Real GDP per capita measures the GDP per individual.
Real GDP per capita is calculated as: ??
Real GDP/Population
Real GDP is calculated as: ??
Real GDP = (Nominal GDP/GDP Deflator) x 100
What is the measure of GDP that is a common measure of the standard of living in a country?
Real GDP per capita
Changes in real GDP per capita measures changes in the standard of living and, therefore, economic __ or ___?
economic growth or decline.
The ___- ___ ___is the (conceptual) maximum amount of various goods and services an economy can produce at a given time with available technology and full utilization of current economic resources.
production-possibility frontier
Define “personal income”.
Personal income measures the amount (portion) of national income, before personal income taxes, received by individuals.
The positive difference: potential GDP - real GDP
is the positive GDP gap, which is a measure of ??
the (positive) GDP gap is a measure of inefficiency in the economy.
Nominal gross domestic product is a measure of the market value of all final goods and services produced FOR __??___ in the domestic economy during a year.
FOR EXCHANGE
When actual national income is typically less than potential national income as a result of decreased demand, the economy is considered to be in a ___ ___ of the business cycle.
recessionary phase of a business cycle
What is the result of a recessionary phase of the business cycle?
a decrease in payments for goods and services is the result of a recessionary phase of the business cycle
A rapid decline in the purchasing power of money would indicate ??
inflation
Inflation, indicated by a rapid decline in the purchasing power of money, is caused by ??
increases in demand (or increases in the cost of inputs)
A product that is in the finished goods inventory at the end of one year should be included in total in the ___for that year.
GDP
Define “official full employment”.
Officially, full employment exists where there is no cyclical unemployment. When there is official full employment, there could still be frictional, structural and/or seasonal unemployment.
Define “frictional unemployment”.
Unemployment in which members of the labor force are not employed because they are in transition between jobs or have imperfect information about job opportunities.
Define “structural unemployment”.
Unemployment in which members of the labor force are not employed because their prior types of jobs have been greatly reduced or eliminated, and/or because they lack the skills needed for available jobs.
Define “cyclical unemployment”.
Unemployment in which members of the labor force are not employed because a downturn in the business cycle has reduced the current need for workers.
Define “seasonal unemployment”.
Unemployment in which members of the labor force are not employed because their work opportunities regularly and predictably vary by the season of the year.
Identify characteristics that exclude individuals from the labor (or work) force.
The following are not included in the labor force:
- Those less than 16 years old;
- The retired;
- Those not actively seeking work;
- Those who are institutionalized;
- Military members on active duty.
U.S. macroeconomic employment/unemployment statistics are based largely on the size of the ______??
labor force
Members of the labor force who are not employed because of a contraction of the economy are considered ___ unemployed.
cyclically
___ unemployment includes members of the labor force who are unemployed because the types of jobs they performed have been eliminated.
structural
Official U.S. employment/unemployment statistics are developed by the ?
Bureau of Labor Statistics (BLS), unit of the DOL
The natural rate of unemployment in the U.S. economy results from all categories of unemployment except ___ unemployment.
cyclical
Which of the types of unemployment typically results from technological advances?
structural
What changes in unemployment is most likely to be associated with a period of economic contraction?
Increase in the cyclical unemployment rate.
There can be official full employment when there is which of the following kinds of unemployment?
I. Structural unemployment.
II. Frictional unemployment.
III. Seasonal unemployment.
I, II, and III.
There could be official full employment when there is structural, frictional, and/or seasonal unemployment. Only cyclical unemployment is considered in the official measure of full employment.
Only ___ unemployment is considered in the official measure of full employment.
cyclical
Jason, 14 years old, has been working delivering newspapers for the past two years. Because he just entered high school, he has had to give up his newspaper delivery job. Although he has been seeking a new job, he has not been able to find one.
Is Jason included of any specific type of unemployment measurement? Why or why not?
Jason is not considered frictionally unemployed. While frictional unemployment results when a worker is in transition between jobs (or has imperfect information about job opportunities), because Jason is only 14 years old, he is not considered a member of the workforce and, therefore, is not counted as unemployed. To be considered as part of the workforce, an individual must be at least 16 years old. **Jason is not considered frictionally, structurally, or cyclically unemployed. **
As a result of the recession in 2009 and the related decline in tourism, several thousand hospitality industry workers in Florida became unemployed. These workers were ___ unemployed.
cyclically unemployed.
Workers who are unemployed because of a recession are considered cyclically unemployed. They are unemployed because a downturn in the business cycle (including a recession) has reduced the current need for workers.
What are the factors that influence investment spending?
- Interest rate;
- Demographics;
- Consumer confidence;
- Consumer income and wealth;
- Current vacancy rates;
- Level of capacity utilization;
- Technological advances;
- Current and expected sales levels.
Define “discretionary fiscal policy”.
Intentional changes by the government in its tax receipts and/or spending to increase or decrease aggregate demand. (e.g., to close a recessionary gap - increase demand;-to close an inflationary gap - reduce demand.)
What are the factors that determine the level of imports?
- Relative levels of income and wealth;
- Relative values of currencies;
- Relative price levels;
- Import and export restrictions and tariffs;
- Relative inflationary rates.
Define “average propensity to consume” and “average propensity to save”.
- APC = Percent of disposable income spent on consumption goods;
- APS = Percent of disposable income saved;
- APC + APS = 1 (i.e., Disposable Income).
List the significant factors that cause a negatively-sloped demand curve.
- Interest rate factor;
- Wealth-level factor;
- Foreign purchasing power factor.
Define “marginal propensity to consume” and “marginal propensity to save”.
- MPC = Change in consumption as a result of a change in disposable income (or percent of an additional dollar of disposable income that will be spent).
- MPS = Change in savings as a result of a change in disposable income (or percent of an additional dollar of disposable income that will be saved).
- MPC + MPS = 1 (i.e., the change in disposable income).
Define the “consumption function”.
The relationship between consumption spending and disposable income.
What is the effect of interest rate on investment spending?
- Higher interest rates _ lower levels of investment;
- Lower interest rates _ higher levels of investment.
Give at least three examples of investment spending.
- Residential construction;
- Nonresidential construction;
- Business durable equipment;
- Business inventory.
Define “aggregate demand”.
Total spending of individuals, businesses, governmental entities, and net foreign spending on goods and services at different prices at the macroeconomic (economy) level.
___ spending is the largest share of total spending in the U.S.
consumer
An increase in ___ spending (by itself) increases aggregate demand in the economy.
government
Income taxes reduce the amount of __ income and ___ spending.
disposable ; consumer
Discretionary fiscal policy is implemented by changes in ??
taxation and/or government spending.
___ ___ policy is implemented by changes in taxation and/or government spending.
Discretionary fiscal policy
An increase in taxation will ___ aggregate consumer spending.
decrease
___ ___ measures total spending on all goods and services at different price levels.
Aggregate demand
As the interest rate increases, aggregate spending tends to ___.
decrease
Generally, the most significant factor in the level of investment spending is the___ ___
interest rate.
The amount of consumer spending is determined primarily by the level of ___ ___ ___
personal disposable income.
Investment spending is ___ associated with the interest rate.
negatively
___ ___ _____measures the percent of disposable income spent on consumption.
Average propensity to consume
As the domestic price level increases, spending on foreign goods tends to ___
increase.
What factors will cause a change in the level of a supply curve?
- Resource availability;
- Resource cost;
- Technological advances.
- But NOT the Price of the item supplied, which causes a movement along a given Supply Curve.
What is the slope of a Classical aggregate supply curve?
It is completely vertical; supply remains unchanged at various price levels.
What is the slope of a Conventional aggregate supply curve?
It is a continuously positive slope, with steeper slope beginning at the level of full employment; supply increases with price, but requires proportionately higher prices at full employment.
What is the slope of a Keynesian aggregate supply curve?
It is horizontal up to the level of output at full employment, then slopes upward to the right; supply increases with no change in price until the economy is at full employment.
Define “aggregate supply”.
Total output of goods and services at different price levels at the macroeconomic (economy) level.
The shape of the aggregate ___curve is less certain than the shape of the aggregate ___ curve.
supply ; demand
An aggregate ___ curve measures total output of the economy that will occur at different price levels.
supply
What effect is most likely to accompany an unexpected reduction in aggregate supply, assuming a conventional supply curve?
A reduction in aggregate supply will shift the supply curve to the left, resulting in a lower quantity of output at a higher price.
Which theoretical aggregate supply curve has a “kink” at the level of output at which there is full employment?
A Keynesian supply curve is horizontal up to the assumed level of output at full employment, at which point it “kinks,” or slopes, sharply upward, which reflects the point at which output is associated with higher prices.
What factors determine the effect of a change in aggregate supply (alone) on aggregate equilibrium?
Two factors:
- Which Aggregate Supply Curve is assumed;
- Direction of change in the Aggregate Supply Curve.
What determines aggregate equilibrium for an economy?
The level of output and price at which aggregate demand and aggregate supply are equal.
What is the effect on aggregate equilibrium of an increase in aggregate demand (only) when a Classical supply curve is assumed?
Since the Classical supply curve is completely vertical, an increase in Aggregate Demand (alone) will increase price with no change in the quantity supplied.
What is the effect on aggregate equilibrium of an increase in aggregate demand (only) when a Keynesian supply curve is assumed?
Since the Keynesian supply curve is horizontal up to the point of full employment, as Aggregate Demand increases, there will be an increase in supply (quantity) with no change in price until the level of full employment is reached, at which point both quantity and price increase.
What is the effect on aggregate equilibrium of a decrease in aggregate demand (only) when a Conventional supply curve is assumed?
Since the Conventional supply curve has a continuous positive slope, as Aggregate Demand decreases, both supply (quantity) and price will decrease.
With a ___ aggregate supply curve, an increase in aggregate demand alone will result in an increase of both output and price.
conventional
If the ___ supply curve is assumed, an increase in aggregate demand alone results only in higher price levels.
classical
If the ___ supply curve is assumed, an increase in aggregate supply alone results in more output at a lower price.
classical
If the ___ Supply Curve is assumed, an increase in aggregate demand alone results only in more output until output at full employment, at which point output and price level each increase.
Keynesian
If the ___ Supply Curve is assumed, an increase in supply alone will not affect either output or price level unless aggregate demand intersects supply where it is positively sloped.
Keynesian
If the ___ supply curve is assumed, an increase in aggregate demand alone will increase both the output and the price level.
conventional
If the ___ supply curve is assumed, an increase in supply alone will increase output, but reduce the price level.
conventional
Assume increased capital investment results in higher levels of output of goods, but demand remains unchanged. What will be the likely effect on aggregate equilibrium quantity and price if a conventional supply curve is assumed?
A higher level of output reflects a shift in the supply curve to the right. This would result in an increase in quantity of output and a decrease in price.
An increase in the value of the Chinese currency (the RMB) relative to the U.S. dollar would most likely cause what effects on aggregate supply/demand??
An increase in the value of the Chinese RMB relative to the U.S. dollar would most likely increase aggregate demand in the U.S. An increase in the value of the Chinese RMB relative to the U.S. dollar would make Chinese goods more expensive in the U.S. and U.S. goods less expensive in China.
As a consequence, fewer goods would be bought from China by U.S. consumers and more goods would be bought from the U.S. by Chinese consumers. Furthermore, U.S. consumers might also buy (substitute) more U.S. goods for the now more expensive Chinese goods.
A rise in a country’s exports would most likely cause which one of the following shifts?
A rise in the exports of a country most likely would shift the aggregate demand curve outward, i.e., there would be an increase in aggregate demand.
The aggregate demand and aggregate supply curves intersect at a price and quantity that are …?? in relationship to potential GDP.
Either at, above, or below potential GDP.
___ ___ is the maximum amount of various goods and services an economy can produce at a given time with available technology and full utilization of economic resources.
Potential GDP
The point at which the aggregate demand and aggregate supply curves intersect is ____ – the real output (and price level) for an economy. The real output may be at, above, or below potential GDP (output).
equilibrium
Assume increased capital investment results in higher levels of output of goods, but demand remains unchanged. What will be the likely effect on aggregate equilibrium quantity and price if a Keynesian supply curve is assumed and the level of aggregate demand is at greater than full employment?
A higher level of output reflects a shift in the supply curve to the right. If a Keynesian supply curve is assumed and demand is at full employment, this would result in an increase in quantity of output and a decrease in price.
A point in the economic cycle that marks the end of rising aggregate output and the beginning of a decline in output.
peak
A point in the economic cycle that marks the end of a decline in aggregate output and the beginning of an increase in output.
Trough
Periods during which aggregate output is increasing during the business cycle
Economic expansion or expansionary period
Periods during which aggregate output is decreasing during the business cycle
Economic contraction or recessionary period
A major cause of the business cycle is thought to be changes in ___ ___ ___ ___ ____and ___ ___ ___ ______.
business spending on capital investments ;
consumer spending on durable goods.
___ ___ are used to predict changes in the business cycle.
Leading indicators
___ ___ is reflected in the business cycle as the period between a trough and a peak.
Economic expansion
If the price for a good is fixed by government fiat below market equilibrium price, less ___ will be provided, such that ___ will exceed ___.
supply; demand; supply
Are the variables quantity and price dependent or independent variables in the following statement -
“the quantity supplied is a function of price”
?
quantity = dependent
price = independent
Recessionary periods are periods of economic ___
contraction
Changes in the business cycle are measured in terms of changes in ___ ___ ___ ___
real gross domestic product
During a recessionary period, aggregate demand ___.
decreases.
Inflation is measured by the rate of increase in the ___ ___
price level
___ ___ can be used to eliminate the effect of changes in the price level on economic activity.
Price indexes
The ___ ___ ___ (___) relates the price of a basket of goods and services to the price of a comparable basket in a prior reference (base) period.
Consumer Price Index (CPI)
Increase in the price of inputs that are passed on to the final customer will result in ___
inflation.
___ is likely to result when aggregate spending (demand) exceeds productive capacity at full employment.
Inflation
Inflation tends to cause an ___ in interest rates.
increase
The ___ ___ is the most comprehensive measure of changes in the price level.
GDP Deflator
Define “price indexes (or indices)”.
Factor that converts prices of each period to what those prices would be in terms of prices of a specific prior (or subsequent) reference period.
Define “inflation” and “deflation”.
Inflation = the rate of increase in the price level.
Deflation = the rate of decrease in the price level.
In the US, inflation and deflation are most commonly measured by?
In the U.S., most commonly measured by the CPI-U.
What causes demand-induced (or demand-pull) inflation?
Results when aggregate spending for goods and services exceeds the productive capacity of the economy at full employment.
Identify three common price indices.
Consumer Price Index (CPI);
Wholesale Price Index (WPI);
Gross Domestic Product (GDP) Deflator.
What causes supply-induced (or cost-push or supply-push) inflation?
Results from increases in the cost of inputs to the production process which are passed on to the final buyer in the form of higher prices.
What are the consequences of inflation?
- Lower current wealth and lower future real income;
- Higher interest rates;
- Uncertainty of economic measures.
The primary purpose of the Consumer Price Index (CPI) is to ?
The primary purpose of the consumer price index (CPI) is to measure and compare relative price changes over time. It does so by relating prices paid for a basket of goods and services during a period to the prices of those goods and services in a prior base period.
What functions does money serve?
- A medium of exchange;
- A measure of value;
- A store of value.
Identify the major components of the United States banking system.
A central banking system, the Federal Reserve System, consisting of:
- Board of Governors: Policy-making body;
- Federal Open Market Committee: Implements monetary policy through open-market operations to affect the money supply (M1);
- Federal Reserve Banks: Twelve district banks, each responsible for a specific geographical area of the U.S.
Define “monetary policy”.
Management of the money supply so as to achieve national economic objectives (e.g., economic growth and price level stability).
Identify and define the various measures of money used by the Federal Reserve.
- M1: Paper and coin currency held outside banks and check-writing deposits.
- M2: Includes M1 items plus savings deposits, money-market deposit accounts, certificates of deposit (less than $100,000), individual-owned money-market mutual funds, and certain other deposits.
- M3: Includes M2 items plus certificates of deposit ($100,000 and greater), institutional-owned money-market mutual funds, and certain other deposits.
What are the methods used by the Federal Reserve to regulate the money supply?
- Reserve-requirement changes (percent of loan amounts that must be held by bank);
- Open-Market Operations (buying and selling U.S. Treasury debt obligations);
- Discount Rate (rate of interest banks pay when borrowing from Federal Reserve Banks).
Interest rates are determined by ?
supply & demand
The Federal Reserve open-market operations involve buying and selling U.S. ___ debt.
Treasury
By engaging in ___ ___ ___, the Federal Reserve can increase or decrease a bank’s ability to use check-writing deposits.
open-market operations
___ is the least inclusive definition of money.
M1
The ___ ___ ___ imposes a reserve requirement on banks’ ability to issue check-writing deposits.
Federal Reserve System
Monetary policy has been used ___ than fiscal policy to achieve economic objectives.
more
Changing the money supply would be a form of ___ policy.
monetary
Exports increase domestic demand, which raises ___, ___, and ___, thus benefiting both entities engaged in export activities and national economic measures.
output, revenues and employment
What are the four broad national attributes (factors) identified by Michael Porter as promoting or impeding the creation of competitive advantage by a country?
Porter’s four factors are:
- Factor endowments - the factors of production;
- Demand conditions - nature of domestic demand;
- Relating and supporting industries - the international competitiveness of related industries;
- Firm strategy, structure and rivalry - how companies are created, organized, managed and compete.
Identify three major reasons for international economic activity.
- To develop new markets for the sale of goods and services;
- To obtain commodities not otherwise available domestically;
- To obtain goods and services at lower costs than available domestically.
Define “absolute advantage”.
Absolute advantage is the ability of a country, business, individual or other entity to produce a particular good or service more efficiently (with fewer resources) than another entity.
Define “comparative advantage”.
Comparative advantage is the ability of a country, business, individual or other entity to produce a particular good or service at a lower opportunity cost than the opportunity cost of producing the good or service by another entity.
Identify some of the reasons for comparative advantage between countries.
Differences in availability of economic resources, including:
- Natural resources;
- Labor;
- Technology.
Comparative advantage is determined based on relative ___ ___
opportunity cost.
A nation or entity should product all of the goods or services for which it has a ___ advantage.
comparative
What is a country’s balance of payments account?
A summary accounting of all of a country’s transactions with other countries.
Identify and describe the balance of payment accounts.
- Current Account: Net $ amounts earned from export of goods and services, amounts spent on import of goods and services, and government grants to foreign entities;
- Capital Account: Net $ amount of inflows from investments and loans by foreign entities, amount of outflows from investments and loans U.S. entities made abroad, and the resulting net balance;
- Financial Account : Net $ amount of U.S.-owned assets abroad and foreign-owned assets in the U.S.
What are some of the socio-political issues associated with international trade?
- Domestic unemployment linked to use of foreign labor
- Loss of manufacturing capabilities;
- Reduction of industries essential to national defense;
- Lack of domestic protection for start-up industries.
Define a “balance of payments deficit”.
A country has a balance of payments deficit when its imports and investment outflows exceed its exports and investment inflows.
Distinguish the difference between import quotas and import tariffs.
- Import quotas are restrictions on the quantity of goods that can be imported into a country;
- Import tariffs are taxes imposed on imported goods as a means of reducing the quantity of goods imported into a country.
The ___ account measures the balance of payments for international trade and government grants.
current
The ___ account measures the balance of payments for international investments and loans.
capital
A deficit in the U.S. balance of payments will result in ___ the value of the dollar relative to other currencies.
reducing
A ___ account measures the amount of US-owned assets & foreign-owned assets, government assets & private assets, and both monetary & non-monetary items.
financial
___ ___ ___is the difference between the monetary value of imports and exports, which is a part of a country’s current accounting in its balance-of-payments accounts.
Balance of trade
When the monetary value of exports exceeds imports, the balance of trade equals a ____
surplus
When the monetary value of imports exceeds exports, the balance of trade equals a ___
deficit
When the sum of earnings and inflows exceeds the sum of spending and outflows, a balance of payment ___ exists.
surplus
Define “direct (currency) exchange rate”.
Currency exchange rate expressed as the domestic price of one unit of a foreign currency (e.g., U.S. dollar cost of one Euro).
Define “indirect (currency) exchange rate”.
Currency exchange rate expressed as the foreign currency price of one unit of the domestic currency (e.g., Euro cost of one U.S. dollar).
Define “currency exchange rate”.
The price of one unit of a country’s currency expressed in units of another country’s currency; the rate at which two currencies will be exchanged.
A foreign currency ___ ___ ___establishes a legal obligation to exchange currencies.
forward exchange contract
If the currency of Country A appreciates relative to the currency of Country B, goods produced in Country___ will be less costly to buyers in Country ___.
B; A
If the currency of Country A appreciates relative to the currency of Country B, goods produced in Country B will be less costly to buyers in Country A.
The risk on an investment in a foreign operation derives from using ___ ___ ___ to convert financial statement accounts from the foreign currency to the domestic currency.
changing exchange rates
If the currency of Country A appreciates relative to the currency of Country B, it will take more units of Country __ currency to buy a unit of Country ___ currency.
B ; A
If the currency of Country A appreciates relative to the currency of Country B, it will take more units of Country B currency to buy a unit of Country A currency.
___ ___ ___ are agreements to exchange commodities in the future at an exchange rate set at the present.
Forward exchange contracts
Define “foreign currency risk hedging”.
A risk management strategy that seeks to offset losses resulting from changes in exchange rates between currencies by using contracts, swaps and other instruments which will result in changes counter to (opposite of) changes in the currency exchange rate.
Identify the three specific kinds of risk associated with changes in currency exchange rates.
Kinds of risk associated with changes in currency exchange rates:
- Transaction risk;
- Translation risk;
- Economic risk.
Define “transaction risk” as it relates to currency exchange rates.
The possible unfavorable impact of changes in currency exchange rates on transactions denominated in a foreign currency. Exchange rates may change so that transactions to be settled in a foreign currency result in receiving fewer dollars or paying more dollars to settle.
Define “translation risk” as it relates to currency exchange rates.
The possible unfavorable impact of changes in currency exchange rates on the financial statements of an entity when those statements are converted from one currency to another currency. Exchange rates may change so that domestic (dollar) values of financial statement items are adversely impacted.
Distinguish between a foreign currency exchange contract and a foreign currency option contract.
Under a foreign currency exchange contract, the obligation to buy or sell a foreign currency is firm; the exchange must occur. Under a foreign currency option contract, the party holding the option has the right (option) to buy (call) or sell (put), but does not have to exercise that option; the exchange will occur according to a decision made by the option holder.
Define “foreign currency forward exchange contract”.
Agreement to buy or sell a specified amount of a foreign currency at a specified future date at a specified (forward) rate.
Define “economic risk” as it relates to currency exchange rates.
The possible unfavorable impact of change in currency exchange rates on a firm’s future international earning power. Exchange rates may change so that future revenue, costs and prices are adversely impacted.
Define “currency exchange rate risk”.
The risk of loss or other unfavorable outcome that results from changes in exchange rates between currencies.
In addition to minimizing total income taxes, what other savings may be accomplished by the setting of transfer prices?
In addition to income taxes, the setting of transfer prices may affect:
Withholding taxes, that may apply to the transfer of cash as dividends, interest or royalties;
Import duties, which are applied to goods based on transfer prices;
Profit repatriation restrictions, which limit the amounts of profits that can be transferred out of a country.
For U.S. income tax purposes, in setting transfer prices, the resulting income should be allocated based on what factors?
Functions performed by separate affiliates;
Risks assumed by separate affiliates.
Define “transfer price”.
Amount (price) at which goods or services are transferred between affiliated entities.
What significant outcomes does the setting of transfer prices impact?
Profit recognized by separate units;
Allocation of taxes between units;
Measures of separate unit performance.
Identify and describe three major bases for setting transfer prices.
Cost: The transfer price is a function of the cost to the selling unit;
Market Price: The transfer price is based on the price of the good or service in the market (if available);
Negotiated Price: The transfer price is based on a negotiated agreement between buying and selling affiliates.
Transfer prices can be set based on ___ on the ___ ___.
cost to the selling unit.
A firm engaged in international transfer of goods and services can use transfer pricing to manipulate its ___ ___.
operating results.
Transfer pricing has implications for ___ ___ of unit management.
performance evaluation
Define “globalization” from a business perspective.
The movement toward a more integrated and interdependent world economy, evidenced by the increased mobility of goods, services, labor, technology and capital throughout the world.
Identify the primary purposes of the General Agreement on Tariffs and Trade (GATT).
- Liberalizing and encouraging trade by eliminating trade barriers;
- Harmonizing certain business-related laws;
- Reducing transportation and other costs of doing international business.
Describe the primary objective of the International Monetary Fund (IMF)
The primary objective of the IMF is to maintain order in the international monetary system, primarily by providing funds to economies in financial crisis, including:
- Currency crisis - dramatic decreases in the value of a country’s currency;
- Banking crisis - dramatic levels of withdrawals from a country’s banks (a “run on banks”);
- Financial debt crisis - country unable to satisfy its foreign debt obligations.
Describe the primary objective of the World Bank.
The primary objective of the World Bank is to promote general economic development world-wide, focusing on lending to developing countries for infrastructure, agricultural, educational and similar projects.
Globalization of business is often considered in three categories: ?
Globalization of business is often considered in three categories:
- Globalization of trade;
- Globalization of production;
- Globalization of capital markets.
Several macro-factors have contributed to the emergence of global economic activity. The most important of these factors fall into the following 3 categories: ??
Several macro-factors have contributed to the emergence of global economic activity. The most important of these factors fall into the following categories:
A. Global institutions;
B. Reduction in trade and investment barriers;
C. Technological advances.
The ___ ___ Agreement established an international system of fixed exchange rates between currencies (which has since been replaced mostly by floating exchange rates), also established a framework for increased international commerce and finance, and founded two international institutions intended to oversee the processes of international economic activity.
Bretton Woods Agreement
What is “currency crisis”?
when speculation in the exchange value of a currency causes a dramatic depression in its value
What is “banking crisis”?
when a loss in confidence in the banking system of a country leads to a run on banks
What is “Financial debt crisis”?
when a country cannot meet its foreign debt obligations
What is “economic risk”?
the possibility that management of an economy will cause dramatic adverse changes in a country’s business environment, including such factors as inflation and adverse currency exchange rates
What is “political risk”?
the possibility that political forces will cause significant adverse change in a country’s business environment that will have a negative affect on profits and other entity goals
The legal system has a direct impact on the nature of business practices,
including for example, the 4 areas of: ??
i. Property rights - the recognition and enforcement of right to own and use personal property.
ii. Contract law - the specification of what is acceptable and how enforcement occurs.
iii. Intellectual property - the recognition and enforcement of intellectual property rights, including patents, trademarks, etc.
iv. Product safety and liability laws - the extent to which such laws exist and how they are enforced.
The___, ___, and ___ ____ of a country help determine the attractiveness of the country as a market or investment location.
political, economic and legal environments
In recent years, there has been a move within and between countries to ___ world-wide restrictions on direct foreign investment.
remove
The ___ ___ makes loans to developing countries.
World Bank
GNP is different from GDP in what 2 ways?
Swaps foreign production.
- US Firms overseas are included-
- Foreign firms domestically are not included
