Economics Flashcards
(188 cards)
1
Q
What does the Neoclassical school believe?
A
Changes in aggregate demand/supply are caused by technological changes. Business cycles are caused by deviations from long-run equilibrium
2
Q
What does the Keynesian school believe?
A
Business cycles are caused by business expectations (overly optimistic and overly pessimistic). They believe both monetary and fiscal policy should be used to control aggregate demand
3
Q
What do New Keynesians believe in?
A
Prices of production inputs other than labor are also downward sticky
4
Q
What do Monetarists believe?
A
Business cycles are caused by inappropriate decisions by monetary authorities. Steady and predictable increases in the money supply will keep aggregate demand stable and growing.
5
Q
What does the Austrian school believe in?
A
Business cycles are caused by government interventions in the economy.
6
Q
What does the New Classical school believe in?
A
They believe in Real Business Cycle theory, which emphasizes changes in technology and external shocks instead of monetary factors
7
Q
What is the equation to calculate marginal revenue for a monopoly?
A
MR = P(1 - 1/E)
8
Q
What is the equation for GDP using the expenditures approach?
A
GDP = C + I + G + (X - M)
9
Q
What is the equation for GDP using the income approach (give both equations)?
A
GDP = national income + capital consumption allowance GDP = C + S + T
10
Q
What is the equation for national income?
A
National income = employee compensation + corporate/government profits before taxes + interest income + unincorporated business net income (owners’ income) + rent + indirect business taxes - subsidies
11
Q
What is stagflation?
A
When output decreases and prices rise. Usually caused by a leftwards shift of the SRAS curve
12
Q
What is a common value auction?
A
When the item’s value is the same to any bidder, but the bidders don’t know the value beforehand e.g. oil lease auctions
13
Q
What is a private value auction?
A
The item’s value is different to each bidder e.g. art collection auction
14
Q
What is an ascending price auction (English auction)?
A
Highest bidder wins
15
Q
What is a sealed bid auction?
A
Bidders place one bid. The highest bid wins
16
Q
What is a second price sealed bid auction (Vickery auction)?
A
Highest bidder wins but pays the price of the 2nd highest bid
17
Q
What is a descending price auction (Dutch auction)?
A
Offer price starts high and is reduced until a buyer is willing to pay for it
18
Q
What is a modified Dutch auction?
A
A Dutch auction in which all winning bidders pay the same price
19
Q
What is producer surplus?
A
Total revenue - total variable costs
20
Q
What is statutory incidence?
A
Refers to who is legally responsible for paying the tax
21
Q
If demand is less elastic, which party (consumers or suppliers) bear more of the tax burden?
A
Consumers
22
Q
What is price elasticity?
A
%change demanded / %change price
23
Q
At what elasticity point is total revenue maximized?
A
Unitary elasticity
24
Q
What 2 major factors affect demand elasticity?
A
- Portion of income spent on good - the larger the portion of income spent, the more elastic
- Time - elasticity increases as time goes on
25
What is a normal good?
A good for which income elasticity is positive (demand goes up as income increases)
26
What is an inferior good?
A good for which income elasticity is negative (demand decreases as income increases)
27
What does it mean if two goods are substitutes?
Demand for one good increases as the price of the other good increases
28
What does it mean if two goods are complements?
Demand for one good decreases as the price of the other good increases
29
What does utility theory try to explain?
Consumer behavior based on preferences for different combinations of goods in terms of their relative level of satisfaction
30
What is consumer choice theory?
A theory that relates consumers' wants and to the good/services that they buy
31
What is a utility function?
U(Q_A, Q_B, Q_C...Q_N)
32
What is the condition of non-satiation?
Holding all other quantities constant, increasing one good always increases utility
33
What is a budget constraint (expressed as a budget line)?
A line that shows all combinations of goods X and Y that the consumer can exhaust with his income
34
What is the opportunity set in a budget constraint?
All combinations of goods X and Y that a consumer can afford (shaded area under a budget line)
35
What is an indifference curve?
A plot that represents equal points of utility for goods X and Y
36
What is the marginal rate of substitution (MRS)?
the rate at which the consumer would be willing to exchange units of X for units of Y (also equal to the slope of the indifference curve at any point)
37
What is a consumer's equilibrium bundle of goods?
The point where the highest attainable indifference curve is tangent to the budget line
38
What is the substitution effect?
When the price of good X decreases, the consumer buys more of X and less of Y (moving along the same indifference curve, resulting in a new budget line)
39
What is the income effect?
It moves the budget line up to a new indifference curve. It may be in the same or opposite direction as the substitution effect
40
What is a Giffen good?
An inferior good in which the negative income effect is stronger than the substitution effect - consumption of good decreases. It would have an upwards sloping demand curve
41
What is a Veblen good?
A good in which a higher price would increase demand for the good. Not supported by consumer choice theory
42
What is economic profit?
Economic profit = accounting profit - implicit opportunity costs
43
What is a normal profit?
An accounting profit that results in zero economic profit AKA implicit opportunity costs and explicit costs are covered by revenue
44
What is economic rent?
Payment to a factor of production above its value in its next highest-valued use (opportunity cost)
45
What is Average Revenue?
Total Revenue/Quantity Sold
46
What type of demand curves do firms in imperfect competition face?
Downwards sloping
47
What type of demand curves do firms in perfect competition face?
Horizontal AKA perfectly elastic. Also equivalent to the market price, AR, and MR
48
What is Marginal Revenue?
The change in Total Revenue from selling one more unit of a good/service
49
What are examples of a firm's factors of production?
Land, labor, physical capital, and materials
50
What is a production function?
Q = f(K,L) where Q is quantity outputted, K is physical capital, and L is labor
51
What are Total Variable Costs?
Inputs whose cost varies with output i.e. wages, raw materials
52
What are Total Fixed Costs?
Inputs whose costs cannot be avoided; include normal profit
53
What is Total Cost?
Total Cost = TVC + TFC (include explicit and implicit costs)
54
What is Marignal Cost?
Change in Total Cost / Change in Quantity outputted
55
On a graph with output as the x-axis and cost on the y-axis, what does the Average Fixed Cost curve look like?
Downwards sloping, because costs are constant but are spread out over more products as output increases
56
On a graph with output as the x-axis and cost on the y-axis, what is the vertical distance between Average Variable Cost and Average Total Cost
The vertical distance is equal to Average Fixed Cost
57
On a graph with output as the x-axis and cost on the y-axis, what does the Marginal Cost curve look like?
It decreases initially and then slopes upwards (a J-shape). This is because marginal productivity initially increases as labor specializes, but at some point there is a diminishing return of labor
58
On a graph with output as the x-axis and cost on the y-axis, where does the Marginal Cost curve fall with respect to the Average Variable Cost curve and the Average Total Cost curve?
The MC curve intersects the AVC and ATC curves at their minimums
59
On a graph with output as the x-axis and cost on the y-axis, what do the Average Variable Cost and Average Total Cost curves look like?
They are U-shaped. AVC decreases initially but increases once diminishing returns of labor set in.
60
What does the minimum point on the Average Total Cost curve represent?
It represents the unit at which cost per unit is the lowest AKA the firm is maximizing profit per unit but not necessarily maximizing profits overall
61
What does the Marginal Cost curve above the Average Variable Cost curve represent?
The firm's short-run supply curve in a perfectly competitive market
62
In perfect competition, at what point should a firm shut down in the short-run and long-run?
If the price of its products are below AVC AKA Average Revenue is less than Average Variable Costs
63
In perfect competition, at what point should a firm shut down in the long-run but operate in the short-run?
If the Average Revenue is greater than AVC but less than ATC
64
In imperfect competition, at what point should a firm shut down in the long-run but operate in the short-run?
If Total Revenue is greater than Total Variable Cost but less than Total Cost
65
At what quantity are economic profits maximized for a firm? There are 2 ways to measure this
1. At the quantity where Marginal Revenue = Marginal Cost
| 2. At the quantity where Total Revenue - Total Cost is at a maximum
66
What is the minimum efficient scale?
The point of price and output where the Long Run Average Total Cost curve (LRATC) is at minimum
67
What is an increasing-cost industry and what does its long-run supply curve look like?
An industry where input prices increase as more firms enter due to increased demand, pushing up the market price of the firms' product and their input prices. The long-run supply curve is upwards sloping
68
What is a decreasing-cost industry and what does its long-run supply curve look like?
Input prices decrease as firms enter the industry. The long-run supply curve is downwards sloping
69
What is a constant-cost industry and what does its long-run supply curve look like?
Input prices remain the same as firms enter the industry. The long-run supply curve is flat
70
What is the total product of labor?
Output for a specific amount of labor
71
What is the average product of labor?
Total product of labor / number of workers
72
What is the marginal product of labor?
Addition to total product of labor by adding one more worker
73
For a firm with N inputs, what does cost minimization require?
MP_1 / P_1 = MP_2 / P_2 ... = MP_N / P_N
74
What is Marginal Revenue Product?
Monetary value of the marginal product of an input. It is the firm's increase in total revenue from selling the additional output from employing one more unit of labor. Equal to MP * MR of the additional output
75
What is the profit-maximizing quantity of an input i?
The quantity for which Marginal Revenue Product_i = P_i
76
For a firm with N inputs, what does cost minimization and profit-maximization require?
MRP_1 / P_1 = MRP_2 / P_2 ... = MRP_N / P_N = 1
77
What are characteristics of firms in perfect competition?
Products are identical, barriers to entry are low, demand curves are perfectly elastic
78
What are characteristics of firms in monopolistic competition?
Products are differentiated through quality, features, and marketing. Demand curves are downwards sloping but elastic.
79
What are characteristics of firms in an oligopoly?
Few firms, barriers to entry are high due to marketing or economies of scale.
80
What are characteristics of a monopoly?
Product has no close substitutes, high barriers to entry,
81
What is a natural monopoly?
A situation where average cost declines over the relevant range of consumer demand AKA having more competition would result in higher prices for consumers
82
What happens in long-run equilibrium to a firm earning economic profits in a perfectly competitive environment?
New firms enter market, increasing market supply and decreasing market price such that P = ATC. Each firm produces the quantity such that P = MR = MC = ATC
83
What is the short-run market supply curve in a perfectly competitive market?
The horizontal sum (add up the quantities from all firms at each price) of the MC curves for all firms in a given industry
84
What does the demand curve look like for firms in monopolistic competition? Where is it relative to the MR, MC, and ATC curves in the short-run?
The demand curve is downwards sloping and lies above the downwards sloping MR curve. The firm produces where MR = MC, and at this quantity the demand curve can exceed ATC, which is economic profit.
85
What is the kinded demand curve model? Where is profit maximized along the kinked demand curve?
For an oligopoly, it assumes an increase in price of a firm won't affect competitors, but a decrease in price will be matched by competitors. Profit is maximized at the kink.
86
What is a shortcoming of the kinked demand curve?
What determines the market price (where the kink is) is undefined
87
What is the dominant firm model?
One dominant firm sets the market price for other competitive firms due to scale and lower cost structure.
88
What happens in long-run equilibrium when competitor firms decrease prices in the dominant firm model?
The dominant firm will decrease prices, driving out competitors and increasing its market share
89
What are 2 pricing strategies that a monopoly can use?
1. Single price
| 2. Price discrimination
90
What is the equation for calculating MR for a monopoly given P and E_P?
MR = P(1 - 1/E_P) where E_P is the absolute value of elasticity at price P
91
What are the 3 requirements for price discrimination to work for a monopoly?
1. Downwards sloping demand curve
2. At least 2 customer bases with different elasticities of demand
3. Customers cannot resell the product to each other
92
How does the reduction in consumer surplus from a monopoly compare between single price and price discrimination?
There is less consumer surplus reduction with a price discrimination since different elasticity customer groups are charged different prices
93
Name 2 forms of pricing regulation imposed on monopolies
1. Average Cost Pricing
| 2. Marginal Cost Pricing
94
What is Average Cost Pricing?
A regulation that forces the monopolist to decrease price to where its ATC curve intersects the market demand curve
95
What is Marginal Cost Pricing?
A regulation that forces the monopolist to decrease price to where its MC curve intersects the market demand curve. This requires a government subsidy since the firm now earns economic losses (P is less than ATC)
96
What is the N-firm concentration ratio? What is a limitation of it?
The sum or percentage market shares of the largest N firms in the market. A limitation is it is insensitive to mergers between two large firms
97
What is the Herfindahl-Hirschman Index (HHI)?
Calculated as the sum of the squares of the largest firms in the market. Better captures the effect of mergers
98
What is a limitation of both the N-firm concentration ratio and the HHI?
Neither concentration measure captures whether barriers to entry are low.
99
What is the GDP deflator?
GDP deflator = nominal GDP_t / (value of output_t at base year prices) * 100
100
Using the expenditure approach, what is the equation for GDP?
GDP = C + I + G + (X - M)
101
Using the income approach, what are the 2 different equations for GDP (or GDI)?
```
GDP = national income + capital consumption allowance + statistical discrepancy
GDP = C + S + T (S = business/household savings, T = net taxes)
```
102
What is capital consumption allowance (CCA)?
Measures the depreciation of physical capital from the production of goods/services
103
What are the 6 components that sum up to national income?
National income = employee compensation + corporate/government enterprise profits before taxes + interest income + unincorporated business net income (business owners' income) + rent + indirect business taxes - subsidies (taxes/subsidies included in final prices)
104
What is personal income?
Pretax income received by households, including transfer payments (unemployment or disability benefits)
105
What is the fundamental relationship derived from equating total expenditures to total income?
S = I + (G - T) + (X - M)
106
What is the Marginal Propensity to Consume (MPC)?
The proportion of income spent for each dollar of additional income. MPC + MPS = 1
107
What is the real interest rate approximated by?
Nominal interest rate - expected inflation
108
What does the IS curve look like?
A downwards sloping line with real income on the x-axis and real interest rate on the y-axis
109
Why is the IS curve plotted that way (what's the relationship that it describes)?
The curve represents combinations of Y and r where planned expenditures equals income. S(Y) = I(r) + (G - T) + (X - M). When r decreases, I increases. To keep this relationship balanced, Y must increase so that S increases.
110
What does the LM curve look like?
Upwards sloping line with real income on the x-axis and real interest rate on the y-axis
111
What's the relationship that the LM curve describes?
Combinations of Y and r for which money supply equals money demand. For a given real money supply (M/P is constant), higher r decreases money demand. This can be offset by higher Y which increases money demand.
112
Which way does the LM curve shift if P increases, and why?
If P increases, real money supply (M/P) decreases. For a given level of Y, r must be higher to curb money demand, so the curve shifts upwards (or to the left)
113
What are 3 reasons the Aggregate Demand (AD) curve is downwards sloping AKA why are higher prices associated with lower GDP?
1. Higher P reduces real wealth
2. Higher P increases real interest rates
3. Domestic goods become more expensive compared to foreign goods
114
Why is the VSRAS curve flat (perfectly elastic)?
Firms adjust output without changing price by adjusting labor hours and physical capital usage
115
Why is the SRAS curve upwards sloping?
In the short run some input prices are sticky, so firms increase output when they see higher price levels (which will increase profits due to sticky input prices)
116
Why is the LRSAS curve inelastic?
All input costs vary in the long run in proportion to price levels, so price has no effect on aggregate supply
117
What is the level of output called for which the LRSAS is drawn?
Potential GDP or full-employment GDP
118
Name the 8 factors that can increase AD
1. Increase in consumers' wealth (C increases)
2. Increased business expectations (I increases)
3. Increased consumer expectations of future income (C increases)
4. Higher capacity Utilization (I increases)
5. Expansionary monetary policy (C & I increase)
6. Expansionary fiscal policy (C increases for tax cut, G increases for gov spending)
7. Exchange rates (decrease in currency increase X - M)
8. Global economic growth (increases X - M)
119
Name the 5 factors that can increase SRAS
1. Increase in labor productivity (output per hours worked)
2. Input prices (i.e. decrease in nominal wages)
3. Increased business expectations
4. Lower taxes/higher subsidies
5. Exchange rates (higher currency value makes imported inputs less expensive)
120
Name the 4 factors that can increase LRAS
1. Increase in supply and quality of labor
2. Increase in supply of natural resources
3. Increase in physical capital
4. Technology
121
What is a recessionary gap?
When real GDP is below full employment GDP
122
What is an inflationary gap?
When real GDP is above full employment GDP
123
What is stagflation?
When real GDP is below full employment GDP, but prices are higher due to a leftwards shift of the SRAS curve because productive input prices have risen
124
What are the 5 sources of economic growth?
1. Labor Supply (growth of the labor force)
2. Human Capital (education/skill level of labor force)
3. Physical capital stock
4. Technology
5. Natural Resources
125
What is the equation for potential GDP?
potential GDP = aggregate hours worked * labor productivity
126
What is the Solow model (neoclassical model) for growth in potential GDP?
growth in potential GDP = growth in technology + (W_l) growth in labor force + (W_c)growth in capital
127
What is the sustainable rate of economic growth?
Rate of increase in a country's potential GDP
128
What is a production function?
Y = A x f(K,L) where A = total factor productivity, K is amount of capital available, and L is size of labor force
129
What is total factor productivity?
The amount of output growth not explainable by labor or physical capital. Closely related to technological advances
130
What is the production function stated on a per-worker basis?
Y/L = A x f(K/L)
131
In what phase of the business cycle does the inventory-to-sales ratio for most businesses begin to increase?
When an expansion is approaching its peak
132
What is frictional unemployment?
Unemployment resulting from time lag necessary to match workers with businesses
133
What is structural unemployment?
Unemployment resulting from long-run changes in the economy that close certain jobs and open others
134
What is cyclical unemployment?
Unemployment caused by level of economic activity
135
What is disinflation?
Inflation that is decreasing but still positive
136
What is core inflation?
Headline inflation that excludes food and energy
137
How does a Paasche index differ from a Laspeyres index?
A Paasche index adjusts for upwards bias by using current period consumption weights
138
What is a Fisher index in relation to a Paasche and Laspeyres index?
It is the geometric mean of the 2 indexes
139
What is cost-push inflation?
When AS decreases and AD is increased in response, pushing up prices
140
What is demand-pull inflation?
When AD increases, causing downwards pressure on AS, pushing up prices
141
What is the natural rate of unemployment (NARU)?
The lowest rate of unemployment that results in non-accelerating or stable inflation
142
What is the money multiplier equation?
Money multiplier = 1 / reserve requirement
143
What is the Fisher effect?
Nominal interest rate = real interest rate + expected inflation
144
What are the 6 key roles of central banks?
1. Sole supplier of currency
2. Banker to government and other banks
3. Regulator/supervisor of payments system
4. Lender of last resort
5. Holder of gold/foreign exchange reserves
6. Conductor of monetary policy
145
What is the discount rate in the context of the Fed?
The rate at which banks can borrow reserves from the Fed
146
What are the 3 desirable qualities of a central bank?
1. Independence
2. Credibility
3. Transparency
147
What is the neutral interest rate?
neutral interest rate = real trend rate of economic growth + inflation target
148
What are the 3 objectives of fiscal policy?
1. Influencing economic activity and aggregate demand
2. Redistributing wealth/income
3. Allocating resources among different agents/sectors
149
What are the 4 desirable attributes of tax policy?
1. Simplicity to use and enforce
2. Efficiency; least interference with market forces
3. Fairness (horizontal and vertical equality)
4. Sufficiency (generates enough revenue for the gov)
150
What is the fiscal multiplier equation?
fiscal multiplier = 1/ (1 - MPC(1-t))
151
What is Ricardian equivalence?
When taxpayers reduce current spending in expectation of higher future taxes
152
What is the crowding out effect?
When increased government borrowing raises real interest rates, thus lowering private sector borrowing and investment
153
What 3 types of lag limit the usefulness of fiscal policy?
1. Recognition lag - policy makers are slow to realize when fiscal policy is needed
2. Action lag - Governments take time to implement fiscal policy
3. Impact lag - policies take time to impact the economy
154
What is Gross National Product?
Goods/services produced by a country's citizens
155
What is an absolute advantage?
When the cost for a country to produce a good is lower than for another country
156
What is a comparative advantage?
When a country can produce a good with lower opportunity cost than the other country
157
What are/is the factor(s) of production in the Ricardian model of trade?
Only one factor - labor
158
What is the source of differences in production costs in the Ricardian model of trade?
Differences in labor productivity due to differences in technology
159
What are/is the factor(s) of production in the Heckscher-Ohlin model of trade?
2 factors - labor and capital
160
What is the source of differences in production costs in the Heckscher-Ohlin model of trade?
Differences in the relative amounts of each factor the countries possess
161
What are 2 types of trade restrictions supported by economic theory?
1. Infant industry
| 2. National security
162
What are 2 types of trade restrictions that are not supported by economic theory?
1. Protecting domestic jobs
| 2. Protecting domestic industries
163
What are 5 types of trade restrictions?
1. Tarrifs
2. Quotas
3. Export subsidies
4. Minimum domestic content
5. Voluntary export restraint
164
What is a Free Trade Area?
1. All barriers to import and export of goods and services among the countries are removed.
165
What is a Customs Union?
1. All barriers to import and export of goods and services among the countries are removed.
2. All countries adopt a common set of trade restrictions with non-members
166
What is a Common Market?
1. All barriers to import and export of goods and services among the countries are removed.
2. All countries adopt a common set of trade restrictions with non-members.
3. All barriers to the movement of labor and capital goods among member countries are removed.
167
What is an Economic Union?
1. All barriers to import and export of goods and services among the countries are removed.
2. All countries adopt a common set of trade restrictions with non-members.
3. All barriers to the movement of labor and capital goods among member countries are removed.
4. Member countries establish common institutions and economic policy for the union.
168
What is a Monetary Union?
1. All barriers to import and export of goods and services among the countries are removed.
2. All countries adopt a common set of trade restrictions with non-members.
3. All barriers to the movement of labor and capital goods among member countries are removed.
4. Member countries establish common institutions and economic policy for the union.
5. Member countries adopt a single currency.
169
What are 4 reasons a country may place capital restrictions?
1. Reduce volatility of domestic asset prices
2. Maintain fixed exchange rates
3. Keep domestic interest rates low
4. Protect strategic industries
170
What are the 3 accounts that make up the Balance of Payments?
1. Current Account
2. Capital Account
3. Financial Account
171
A country with more imports than exports has a current account ____?
deficit
172
What is the relation between the trade deficit, saving, and domestic investment (expressed as an equation)?
X - M = private savings + government savings - investment
173
What are 3 goals of the IMF?
1. Exchange rate stability
2. Setting up international payment systems
3. Helping member countries with balance of payment problems
174
What are 2 goals of the World Bank?
1. Provide loans, credits, or grants to developing countries
| 2. Fight poverty
175
What is the main goal of the WTO?
Trade flows as smoothly, predictably and freely as possible using a multilateral trading system
176
What is a direct quote?
Price currency/base currency from the viewpoint of a price currency investor i.e. USD/EUR for a USD investor
177
What is the equation for the real exchange rate in terms of the nominal exchange rate?
real exchange rate = nominal exchange rate / (CPI_price/CPI_base)
178
Who is on the sell side in the FX markets?
Usually large multinational banks
179
What are 4 buyers on the buy side in FX markets?
1. Corporations
2. Investment accounts (real money accounts and leveraged accounts)
3. Governments or sovereign wealth funds
4. Retail market
180
What is the no-arbitrage relation (interest rate parity) between spot and forward exchange rates?
forward/spot = (1 + interest rate_price)/(1 + interest rate_base)
181
What is formal dollarization?
When a country uses the currency of another country
182
What is a currency board arrangement
An explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate
183
What is a conventional fixed peg arrangement?
When a country pegs its currency to within a margin of another currency or basket of currencies
184
What is a crawling peg?
A peg that adjusts periodically, typically to adjust for higher inflation
185
What is a system of pegged exchange rates within horizontal bands (or target zone)?
A peg in which the permitted fluctuations are wider
186
What is the Marshall-Lerner condition?
Depreciation of domestic currency will reduce a trade deficit if the following condition is true:
W_x*e_x + W_m*(e_m - 1) > 0
where W_x is proportion of total trade that is exports, e_x is the absolute value of price elasticity of demand for exports
187
What is the J-curve effect?
Since import/export contracts are fixed in the short-term, currency depreciation may initially worsen the trade deficit in the short-run. Later on it improves the trade balance
188
What is the equation that represents the absorption approach?
BT = Y - E
where BT is balance of trade,
Y is national income,
E is total expenditure
