Economics Ch1 Flashcards
X and Y are complementary products. If the price of product Y increases, the immediate impact on product X is that its?
Quantity demanded will decrease.
This answer is correct. If two goods are complements, an increase in the price of one tends to decrease the quantity demanded of the other. The package of goods becomes more expensive.
All of the following are complementary goods except Margarine and butter. Cameras and rolls of film. DVD players and DVDs. Razors and razor blades.
This answer is correct. Complementary goods are used together. Margarine and butter are substitute goods.
Which of the following instruments of monetary policy is the most important means by which the money supply is controlled?
This answer is correct. Open market operations through bond sales and purchases are flexible (government securities can be purchased or sold in large or small amounts), cause prompt changes in bank reserves, and are more subtle than reserve ratio changes.
reely fluctuating exchange rates perform which of the following functions?
They automatically correct a lack of equilibrium in the balance of payments.
They make imports cheaper and exports more expensive.
They impose constraints on the domestic economy.
They eliminate the need for foreign currency hedging.
This answer is correct. Freely fluctuating exchange rates automatically correct a lack of equilibrium in the balance of payments by revaluing currencies.
Which of the following is correct regarding the consumer price index (CPI) for measuring the estimated decrease in a company’s buying power?
The CPI is measured only once every 10 years.
The products a company buys should differ from what a consumer buys.
The CPI measures what consumers will pay for items.
The CPI is skewed by foreign currency translations.
This answer is correct because CPI is measured as the price that urban consumers paid for a fixed basket of goods and services in relation to the price of the same goods and services purchased in some base period. It is therefore inappropriate for measuring what companies buy. The producer price index (PPI) is the measure used by companies.
What is the effect when a foreign competitor’s currency becomes weaker compared to the U.S. dollar?
The foreign company will have an advantage in the U.S. market.
The foreign company will be disadvantaged in the U.S. market.
The fluctuation in the foreign currency’s exchange rate has no effect on the U.S. company’s sales or cost of goods sold.
It is better for the U.S. company when the value of the U.S. dollar strengthens.
This answer is correct because when a country’s currency weakens, its products become cheaper for purchasers in another country.
Which of the following changes would create pressure for the Japanese yen to appreciate relative to the U.S. dollar?
An increase in incomes in Japan.
A change in U.S. tastes in favor of Japanese goods.
A decrease in U.S. incomes.
A change in Japanese tastes in favor of U.S. goods.
A change in U.S. tastes in favor of Japanese goods
Balance of payments. Balance of payments is used to refer to a system of accounts that catalogs the flow of goods between the residents of two countries. If country X is a net exporter of goods and therefore has a surplus balance of trade, countries purchasing the goods must use country X’s currency. This increases the demand of the currency and therefore its relative value.
Which of the following activities involves collecting data about all segments of the firm’s general environment to understand the effects of economic changes on the firm’s industry? Monitoring. Assessing. Forecasting. Scanning.
Close
Since firms must make strategic decisions that involve long-term commitments (e.g., investments in technology, plant, etc.), management must not only deal with the current environment, it must forecast the future. Effective management must analyze and forecast the general environment to identify opportunities and threats to the firm. In doing so, the following techniques are used:
a. Scanning—A study of all segments in the general environment. The objective is to predict the effects of the general environment on the firm’s industry. Management can use this information to modify its strategies and operating plans. Scanning of the general environment is critical to firms in volatile industries. Sources of information for scanning include trade publications, newspapers, business publications, public polls, government publications, etc.
b. Monitoring—A study of environmental changes identified by scanning to spot important trends. As an example, the trend in aging of the population in this country would definitely be important to firms that provide services to retired individuals. Effective monitoring involves identifying the firm’s major stakeholders (e.g., customers, investors, employees, etc.).
c. Forecasting—Developing probable projections of what might happen and its timing. As an example, management might attempt to forecast changes in personal disposable income or the timing of introduction of a major technological development.
d. Assessing—Determining changes in the firm’s strategy that are necessary as a result of the information obtained from scanning, monitoring, and forecasting. It is the process of evaluating the implications of changes in the general environment on the firm.
Division A currently makes a widget. The following is information related to the production of the widgets:
Production capacity 100,000 units per year
Current sales level 100,000 units per year
Selling price to outside customers $20 per unit
Variable costs per unit $12 per unit
Total fixed costs $600,000
Division B wishes to purchase 15,000 widgets from Division A for $16 per unit. Division B currently purchases widgets from the outside for $18 per unit. If Division A accepted the $16 internal price and Division B purchases the widgets from Division A, the company as a whole will be:
A.
$30,000 better off each period.
B.
$90,000 better off each period.
Correct C.
$30,000 worse off each period.
D.
$60,000 worse off each period.
In order for Division A to sell widgets to Division B, Division A would have to lose 15,000 units of sale to outside customers; therefore, $4 of contribution margin per unit will be lost on the 15,000 units sold internally ($4 × 15,000 units = $60,000). Division B would save $2 per widget ($2 × 15,000 units = $30,000). As a company, the company would be worse off ($30,000 savings - $60,000 lost CM).
Zoo Supply Company borrowed $100,000 from a local bank to purchase equipment. The annual interest rate on the 5-year loan was 10%. Over the 5-year period, Zoo paid $50,000 of interest. This interest was calculated as ________ interest.
A.
compound
B.
prepaid
Correct C.
simple
D.
tax-exempt
Annual interest on $100,000 at 10% is $10,000. Five years of payments at $10,000 per year is $50,000, the total amount paid to the bank by Zoo. Since no interest was paid on the interest in succeeding years, the total interest must have come from interest on principal.
This method of computing interest is called simple interest as contrasted with the compound interest method where interest is charged on interest.
Which of the following types of risk can be reduced by diversification?
Incorrect A.
High interest rates
B.
Inflation
C.
Labor strikes
D.
Recessions
Company risk is risk that is specifically associated with a particular firm due to its mix of products, new products, competition, patents, lawsuits, etc. Since different industries and countries experience different risks of labor strikes, diversification between industries and countries can reduce company risk.
The other answer choices are incorrect because interest rate rises, recession, and inflation affect all industries and countries in today’s interrelated world economies. These risks apply regardless of the extent that a company diversifies it operations.
The following schedule presents cost data for a firm:
Total Units Produced Total Cost
-------------------- ----------
10 400
20 600
30 900
40 1,200
50 2,000
Diseconomies of scale start between:
A.
10 and 20 units.
B.
20 and 30 units.
Incorrect C.
30 and 40 units.
D.
40 and 50 units.
Diseconomies of scale begin where the average total cost starts going up.
Total Units Produced Total Cost Average Total Cost
——————– ———- ——————
10 400 40
20 600 30
30 900 30
40 1,200 30
50 2,000 40
A company obtained a short-term bank loan of $250,000 at an annual interest rate of 6%. As a condition of the loan, the company is required to maintain a compensating balance of $50,000 in its checking account. The company’s checking account earns interest at an annual rate of 2%. Ordinarily, the company maintains a balance of $25,000 in its checking account for transaction purposes. What is the effective interest rate of the loan?
A.
6.00%
B.
6.44%
C.
6.66%
Incorrect D.
7.11%
If a firm borrows $250,000 but is required to maintain $50,000 as a minimum compensating balance, then the firm only has use of $200,000, but is paying 6% interest on the entire $250,000. To determine the effective interest rate, the interest in dollars ($250,000 × 6%, or $15,000) should be divided by the amount of the loan available to the borrower, the effective loan amount, which is only $200,000. However, there are two issues that further complicate this problem. This company ordinarily maintains a $25,000 balance in its checking account. Therefore, the company will only be out $25,000 ($50,000 - $25,000). This means the effective loan amount is $225,000 ($250,000 - $25,000), not $250,000. Also, the company earns checking account interest which partially offsets the loan interest. The applicable amount on which to determine interest is only the part that pertains to this borrowing, the additional $25,000. The interest on this is $500 (2% × $25,000). The effective interest dollar amount for this borrowing is $14,500 ($15,000 - $500). The effective interest rate is now calculated as:
$14,500 ÷ $225,000 = .0644, or 6.44% effective interest rate
An individual had been working for a firm that supplies parts to the automotive industry. In which of the following circumstances would be said that the individual was structurally unemployed?
A.
“I was laid off because there is a recession in the auto industry.”
B.
“I was laid off due to the model changeover at the auto plant.”
Correct C.
“I was laid off because my firm installed robotic technology that allowed them to reduce production costs.”
D.
“I was laid off because my company closed my plant.”
Structural unemployment is defined as unemployment due to workers not having the skills demanded by employers, and workers who cannot easily move to the location where jobs are available. In this case, it would not be feasible for the worker to work as fast and as long as the robotic technology.
The following information is available for economic activity for Year 1:
In Billions
----------- Financial transactions $60 Second-hand sales 50 Consumption by households 40 Investment by businesses 30 Government purchases of goods and services 20 Net exports 10 What amount is the gross domestic product for Year 1?
A.
$210 billion
B.
$160 billion
Correct C.
$100 billion
D.
$90 billion
GDP (gross domestic product) includes personal consumption, business investment, government expenditures, and the net difference between exports and imports. These items total $100 billion.
Financial transactions are not included because they include such items as investments in securities and repayments of loans, which do not represent a real good or service produced by the economy. Second-hand sales are excluded from GDP because those items were originally produced at an earlier time and were included in GDP then.
When there is equilibrium in a monopolistically competitive industry, a firm:
Incorrect A.
will operate efficiently at minimum average total cost.
B.
will not engage in advertising to promote product differentiation.
C.
will operate inefficiently with price greater than marginal revenue.
D.
will be able to make economic profits in the long run.
Given free entry and exit in a monopolistically competitive industry, firms only earn normal profits in the long-run. However, since the firm faces a downward-sloping demand curve with MR
Economists and economic policy makers are interested in the multiplier effect because the multiplier explains why:
Correct A.
a small change in investment can have a much larger impact on gross domestic product.
B.
consumption is always a multiple of savings.
C.
the money supply increases when deposits in the banking system increase.
D.
the velocity of money is greater than one.
A multiplier is the ratio of the change in national income (and subsequently national product) to the initial change in autonomous expenditure that brings it about. The central assumption in the multiplier effect is that an increase in autonomous expenditure, in this case investment expenditure, will result in a greater increase in national income (and subsequently national product). Policy setters can stimulate or depress an economy by changing autonomous expenditures, be it investment, government spending or exports.
Gross domestic product can be measured using ________ approach.
A.
an expenditure or outlay
Correct B.
an income or expenditure
C.
an income or revenue
D.
a revenue or sales
Calculation of gross domestic product can take either an income or expenditure approach. Done correctly, the same result should occur.
The income approach sums items such as wages, rental income, dividends, and other similar items. In contrast, the expenditure approach sums personal consumption, investment, net exports, and governmental acquisitions.
A key rationale or cause for the changing pattern of investment in agriculture by sovereign wealth funds would be:
A.
to create markets for the output of their farmers in the countries where they are investing by attaching conditions to the loans that require those nations to make specific commodity purchases.
B.
to ensure food security in the event that crop shortages would cause export bans that might curtail their ability to import crops.
Incorrect C.
to ensure getting the products at lower prices in the event that crop shortages caused price spikes in commodity markets.
D.
to support the countries in which they are investing to produce cash crops that can be used for domestic consumption to provide for a better level of food security for the emerging market economy in which the investment took place as part of United Nations efforts to improve world food security.
B.
to ensure food security in the event that crop shortages would cause export bans that might curtail their ability to import crops.
A key driver of SWF (sovereign wealth fund) investment in agriculture is to ensure food security for their country in the event worldwide food shortages would curtail the availability of foodstuffs in traditional agricultural markets. Also, many emerging market economies are not well-suited for adequate agricultural production as they lack sufficient arable land and have an inadequate water supply. Thus, they outsource food production by purchasing and/or leasing land and growing the crops elsewhere in the world and having the output exported to the homeland.
Traditional investment in agriculture involved investment to support shifting production from staple crops to those that could be exported to world agricultural markets to earn a profit for the investing country.
All of the following actions are tools of monetary policy that the Federal Reserve Bank uses to control the supply of money (M1), except:
A.
selling government securities.
B.
changing the reserve ratio.
C.
raising or lowering the discount rate.
Correct D.
printing money when the level of M1 appears low.
Since the money supply consists of currency plus different types of deposits, money can be created in several different ways. The Federal Reserve Bank uses all of the following actions to control the supply of money:
Selling government securities
Changing the reserve ratio
Raising or lowering the discount rate
The actual printing of currency is controlled by the U.S. Treasury. This is not a tool of monetary policy.
M1 is the most narrowly defined component of the money supply. It consists of coins and currency in the hands of the public and the checkable deposits held in commercial banks and thrift institutions.
Each of the following is an effect from opening markets to foreign investment, except:
A.
an increase in the correlation of emerging stock markets with world markets.
B.
a change in the volatility of emerging stock market returns.
C.
a decrease in local firms’ cost of capital.
Correct D.
a decrease in investment growth rates.
Answer A is incorrect because opening a market to foreign investment will result in that market being subject to the same market forces that affect other markets, increasing the correlation of the market with other markets.
Answer B is incorrect because opening a market for foreign investment will change prices in the emerging stock market, resulting in a change to its volatility.
Answer C is incorrect because the additional investment from foreign investors will increase investment in the market, decreasing the cost of capital for local firms.
Answer D is correct, because the additional investment from foreign investors will increase investment in the market, thus increasing, not decreasing, the investment growth rate.
The “true” rate of interest is the same as the ________ rate.
A.
tax
B.
stated
C.
nominal
Correct D.
effective
The effective interest is computed considering the principal amount, stated or nominal rate and the compounding period(s). It is, therefore, the equivalent of the true rate of interest on a loan.
Debt-servicing problems of less developed countries that primarily sell raw materials to the United States would be eased by:
A.
a recession in the United States with declines in interest rates.
Correct B.
an expanding United States economy with stable money supply growth.
C.
an expansion of the lending authority of the World Bank.
D.
a significant increase in the level of U.S. tariffs.
An expanding United States economy with stable money supply growth would maintain a steady demand for raw materials of less developed countries. The moneys earned from the sale of raw materials will aid in servicing the debt of less developed nations.
When implicit costs are greater than zero and economic profits in an industry equal zero:
Incorrect A.
resources will be unproductive if they remain in the industry.
B.
there will be no production in the short run.
C.
resources will move to other industries
D.
accounting profits will be greater than zero.
A firm that earns a normal profit (zero economic profit) has revenue equal to total cost (explicit plus implicit costs). Economic profit is generally lower (never higher) than accounting profit due to the fact that implicit costs are included in the calculation of in economic profits.
Which of the following is not part of the control cycle approach to risk management?
A.
Doing a profit test to determine whether a product provides a positive contribution margin
Correct B.
Developing the hedges necessary to mitigate interest rate risk
C.
Determining, in both quantitative and qualitative terms, an understandable explanation of the differences between expected and actual results
D.
Using the feedback loops in the modeling of expected results to update the assumptions and determine what adjustments in reserves might be necessary
Key elements of the control cycle approach to risk management include the following:
Modeling the expected results using a set of initial assumptions
Doing a profit test to determine if the product provides a contribution margin
Measuring the actual results
Determining, both in quantitative and qualitative terms, an understandable explanation of the differences between expected and actual results
Determining what actions need to be taken with respect to the product, including possible adjustments to reserves
Using the findings to strengthen the model and update the assumptions as needed with feedback from the process
Information related to the economic activity for a country is given as follows with values stated in billions of dollars.
-- Gross domestic product (GDP) $4,000 -- Transfer payments 500 -- Corporate income taxes 50 -- Social Security contributions 200 -- Indirect business taxes 210 -- Personal income taxes 250 -- Undistributed corporate profits 25 -- Depreciation 500 -- Net income earned abroad for the country 0 National income is:
Incorrect A.
$3,500.
B.
$3,290.
C.
$3,515.
D.
$3,265.
National income (NI) is defined as net domestic product (NDP), plus net income earned abroad, minus indirect business taxes (e.g., sales taxes). NDP is gross domestic product ($4,000) minus depreciation ($500), or $3,500. Thus, national income is $3,290 ($3,500 NDP + $0 net income earned abroad - $210 indirect business taxes).
Net domestic product $3,500
Net income earned abroad 0
Indirect business taxes (210)
------
National income $3,290
======
$3,500 is the NDP. Recall that NDP = Gross domestic product (GDP) - depreciation.
$3,515 equals personal income (PI). Recall that PI = NI - corporate income taxes and undistributed profits - Social Security contributions + transfer payments (public and private). PI = NI ($3,290) - corporate income taxes ($50) - undistributed corporate profits ($25) - Social Security contributions ($200) + transfer payments ($500) = $3,515.
$3,265 equals disposable income (DI). Recall that DU = PI - personal income taxes. DI = PI ($3,515) - personal income taxes ($250) = $3,265.
Which of the following is not a primary use to which of funds invested by sovereign wealth funds (SWFs) would be put?
A.
Investing in land in another country to produce staple crops for export to their country in a way designed to circumvent the workings of world commodity markets
B.
Diversifying the use of foreign exchange reserves and attempting to improve food and energy security
Correct C.
Attempting to make investments that would allow their citizens to increase their savings rate to ensure that the citizens provide their own social safety net
D.
Acquiring technologies, brands, and resources designed to improve productivity and improve management techniques
A key agricultural goal would be to invest in staple crops with a protectionist impulse designed to circumvent world commodity markets. Many emerging market economies find investing in their own domestic agriculture to be problematic due to a scarcity of arable land and, more importantly, a shortage of water. They outsource food production, growing crops abroad and shipping them back to the home country.
Other investments by SWFs are designed to acquire technologies, brands, resources, and better access to international markets and to use technology to enhance productivity. A country like China is taking advantage of the low valuations of increasingly desperate foreign operations (particularly in strategically important sectors such as energy and raw materials) and is making investments in an attempt to achieve energy security and access to strategic materials at a known contract price.
Many SWFs are attempting to learn how U.S. companies operate and transfer those skills to improve the operation of their domestic firms.
hich of the following is not one of the key objectives of supply chain management?
A.
To reduce the supplier base while developing supplier relationships
B.
To standardize parts to reduce inventory levels
Correct C.
To ensure that internal transfer prices comply with IRS regulations
D.
To improve communications at levels of the organization to create an uninterrupted flow of materials and products
Key objectives of the supply chain do not to relate the manner in which a company calculates its transfer prices.
To address the problem of a recession, the Federal Reserve Bank most likely would take which of the following actions?
Correct A.
Lower the discount rate it charges to banks for loans.
B.
Sell U.S. government bonds in open-market transactions.
C.
Increase the federal funds rate charged by banks when they borrow from one another.
D.
Increase the level of funds a bank is legally required to hold in reserve.
A recession is a period in time during which the gross domestic product (GDP) decreases. The GDP is the value of all the reported goods and services produced by people and institutions operating in a country. This means that demand for goods has decreased, unemployment is usually higher (due to layoffs), and the economy is not in good shape. People are not usually borrowing money during a recession. In order to increase the borrowing of money and stimulate purchases (and thus increasing the demand for goods and strengthening the economy), the Federal Reserve Bank would want to make it more attractive to borrow money. In order to do this, the Fed would lower the discount, or interest, rate it charges to banks for loans. The banks would pass along this lower rate to individuals and businesses, giving them an incentive to borrow more and spend more.
Due to the decrease in demand for U.S. products, the value of a dollar as compared to other currencies would also decrease. Therefore, the Fed would not sell U.S. government bonds in open-market transactions. The amount received for the bonds would be affected by falling exchange rates.
The Federal Reserve Bank would not increase the rate charged by banks when they borrow from one another. An increase in an interest rate would discourage, not encourage, borrowing.
Decreasing, not increasing, the level of funds a bank is legally required to hold in reserve would stimulate the economy. Banks could lend more money with these reserves.
Which of the following would not be a successful business strategy resulting from rebalancing due to the shifting balance of power in the international economy?
A.
Promoting the same standards of quality throughout the world while maintaining the flexibility to tailor product attributes to the customs and traditions of local markets
B.
Enhancing the use of R&D, integrating innovation, and devising new products at lower costs while developing a long-term customer focus
C.
Attempting to identify clusters of similar customers across a broad base of international markets to allow building revenue and/or profit streams that would support ongoing capital investment
Correct D.
Engaging in specialized production for a significant number of local markets by constructing manufacturing facilities in several locations to ensure that products produced would meet local tastes and preferences
The high cost of information technology infrastructure and the need for highly skilled labor in the production process using many of the new technologies requires a market niche that caters to a large global market that requires the firm have the ability to provide mass customization and increased sensitivity to cultural diversity.
Success might take the form of developing clusters of similar customers across multiple domestic and/or international markets that would allow for building revenue and profit streams that would continue to support ongoing capital investment for continuing growth. Success might also come from building operations at local levels of an adequate scale in specific regions and territories by teaming up with very knowledgeable on-the-ground partners for product development, distribution, and market positioning.
In monopolistic competition, the goal of product differentiation and advertising is to:
Correct A.
make the firm’s demand curve less elastic so that consumers are less responsive to changes in price.
B.
make the firm’s demand curve more elastic so that consumers are more responsive to changes in price.
C.
make the firm more responsive to consumer wants and needs.
D.
cause the firm to operate more efficiently in response to an increase in consumer demand.
In monopolistic competition, each firm produces and sells a slightly different product. These differences may be due to brand names, packaging, location, credit terms, customer service, etc. It is through the use of advertising that customers become aware of the differences in the various products available. The goal of advertising is to make the firm’s demand curve less elastic.
Income and employment tend toward an equilibrium level where:
A.
inventory accumulation takes place.
B.
inventory depletion takes place.
Incorrect C.
aggregate supply equals aggregate demand and intended savings equals intended consumption.
D.
aggregate supply equals aggregate demand and intended savings equals intended investment.
Aggregate supply equaling aggregate demand is one criterion for market equilibrium. Another criterion is that consumers and businesses agree on what they will save and invest respectively. Although actual savings will always equal actual investment, this, however, does not guarantee an equilibrium level of income and employment.
If businesses note that their intended investment levels produce too high or too low of inventory levels, the market will not be in equilibrium, since too little or too much has to be purchased. Therefore, until these imbalances are cleared up, the economy will not be in equilibrium. (Note that actual investment does not usually equal intended investment.)
Suppose that a monopolist calculates that at the current level of sales and output, marginal costs is $3 and marginal revenue is $5. Under these conditions, profits could be increased by:
Correct A.
increasing output and decreasing price.
B.
decreasing output and increasing price.
C.
leaving output unchanged and decreasing price.
D.
decreasing output and leaving price unchanged.
The monopoly can increase profits by increasing output and decreasing price as long as MR > MC (marginal revenue is greater than marginal costs). The firm will maximize profits by continuing to the point where at the given output MC = MR.
A significant decline in the exchange rate of the U.S. dollar generally will have which of the following effects?
A.
It will hurt all U.S. business.
B.
It will benefit U.S. importers.
Correct C.
It will benefit U.S. exporters.
D.
It will make foreign goods cheaper for U.S. consumers.
Answer A is incorrect because some U.S. businesses will be helped and others will be hurt. U.S. importers will have to pay more U.S. dollars for goods priced in foreign currencies, increasing costs to the U.S. importers.
Answer B is incorrect because U.S. importers will have to pay more U.S. dollars for goods priced in foreign currencies, increasing costs to the U.S. importers.
Answer C is correct because a decline in the exchange rate of the U.S. dollar will make goods produced in the U.S. less expensive in foreign currencies, improving the competitiveness of U.S. exporters.
Answer D is incorrect because U.S. consumers will have to pay more dollars for goods priced in foreign currencies, making those goods more expensive for those consumers.
What is the Current Account?
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The current account is an important indicator about an economy’s health. It is defined as the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers.
The following transactions were noted for an economy whose currency is denominated in pesetas (Pta).
Amount in Pesetas
-----------------
Imports of goods 20,300
Exports of goods 15,760
Domestic purchases of assets in foreign
countries 6,300
Foreign purchases of assets in the country 1,400
Net investment income (3,700)
Gifts received from abroad (net transfers) 1,240 When calculating the current account balance for this economy:
A.
the current account has a surplus of Pta 7,000.
B.
the capital account has a surplus of Pta 4,000.
C.
the capital account has a deficit of Pta 7,700.
Correct D.
the current account has a deficit of Pta 7,000.
The balance of trade is calculated by subtracting merchandise imports from merchandise exports (15,760 Ptas. - 20,300 Ptas.) which shows a balance of trade deficit of 4,540 Ptas. The negative net investment income (3,700 Ptas.) is added to this balance, and it would be reduced by the positive inflow of transfers (1,240 Ptas.) leaving a current account deficit balance of 7,000 Ptas.
The two accounts dealing with the purchase of assets are part of the capital account and therefore are not relevant for this calculation. If there were any exports or imports or services, they would have been included in the calculation.
Sovereign wealth funds (SWFs) are:
A.
government investments funded by official currency reserves that are managed to make monetary policy more effective.
B.
government-controlled entities that seek to attract funds from foreign countries to fund foreign direct investment in the country.
Correct C.
government investments funded by foreign currency reserves that are managed separately from official currency reserves and invested for profit.
D.
entities that are an offshoot of state capitalism where the state manipulates its official currency reserves for political purposes.
Sovereign wealth funds (SWFs) are entities established by governments to make investments with foreign exchange reserves that are managed separately for official foreign exchange reserves managed by the country’s central bank within monetary policy goals. The underlying investments are made by SWFs with the goal of making a profit.
Many governments seek to attract foreign direct investment, and frequently, some governments seek to manipulate official currency reserves for political purposes.
There will be a national election in 15 months. Your planning team believes that the current administration in Washington will actively seek to follow the basic tenets of the political business cycle. Given that fact, as you develop your 2-year forecast, you are more likely to:
A.
increase your sales forecast for the near term and plan to access the debt markets earlier than you had otherwise anticipated.
Incorrect B.
make no changes to your plans since the actions of politicians prior to an election have no impact on the economy.
C.
reduce your sales forecast for the near term and postpone a planned bond issue until after the election.
D.
reduce inventories and loosen your credit policies.
According to the political business cycle theory, politicians want the economy to be “pointed in the right direction” as the election approaches with the unemployment rate and the inflation rate falling. Thus, there would be relatively expansionary fiscal policy prior to the election, followed by more restrictive fiscal policy soon after the election, often placing the blame for the reversal on the previous administration if there were a change.
A.
increase your sales forecast for the near term and plan to access the debt markets earlier than you had otherwise anticipated.
If the price for a product increases and the demand curve for a second product shifts to the left, then:
A.
the products are substitutes.
Correct B.
the products are complementary goods.
C.
the first product is an inferior good.
D.
the products are neutral goods.
Two goods that are used jointly as they are consumed are complementary goods. If the price of one increases causing a decrease in the quantity demanded of that product, then the demand for the other product will fall causing a shift in the demand curve.
Which of the following is not one of the effects of rapid technological change on nations in the global economy?
A.
There has been a dispersion of lean production methods with the combination of innovations within productive organizations.
Incorrect B.
Flexible computer-aided manufacturing systems that allow for the production of custom output have been combined with systems providing mass production at a low cost to meet the tastes of ever-smaller groups.
C.
There is a high degree of global labor arbitrage as unskilled workers move to the nations with the highest degree of technological change to take advantage of the job opportunities made possible by the new technology.
D.
If immigration restrictions limit the migration of skilled workers to the countries with advanced information technology, then technology begins to migrate to the location of skilled workers.
The pace and nature of recent technological changes has been one of the driving forces behind much of the success globalization efforts have achieved. There has been a “brain drain” with skilled workers migrating to countries with advanced IT, and where anti-immigration sentiment limits this migration, there is a tendency for the technology—particularly R&D—to migrate to the location of the skilled workers.
The U.S. balance of trade is decreased by:
A.
foreign investments in the United States.
B.
U.S. investments in foreign countries.
C.
U.S. exports.
Correct D.
U.S. imports.
The balance of trade comprises a subdivision of the balance of payments on current account. The balance of payments on current account includes all payments made because of current purchases of goods and services. The balance of trade is that part of the current account that denotes the difference between the dollar value of imports and exports in a given year. A favorable balance of trade occurs when exports exceed imports. Increases in U.S. imports will decrease the U.S. balance of trade.
In a competitive market for labor in which demand is stable, if workers try to increase their wage,
employment must fall.
government must set a maximum wage below the equilibrium wage.
firms in the industry must become smaller.
product supply must decrease.
This answer is correct. If wages rise in a stable market, demand for labor will decline and employment will fall.
A city ordinance that freezes rent prices may cause
The demand curve for rental space to fall.
The supply curve for rental space to rise.
Demand for rental space to exceed supply.
Supply of rental space to exceed demand.
Market Equilibrium
A product’s equilibrium price is determined by demand and supply; it is the price at which all the goods offered for sale will be sold (i.e., quantity demanded = quantity supplied). The equilibrium price is the price at which the demand and supply curve intersect as shown below.
Government intervention. Government actions may change market equilibrium through taxes, subsidies, and rationing. For example, a subsidy paid to farmers will reduce the cost of producing a particular farm product and, therefore, cause the equilibrium price to be lower than it would be without the subsidy. Import taxes, on the other hand, would increase the cost of an imported product causing the equilibrium price to be higher.
a. Price ceiling. A price ceiling is a specified maximum price that may be charged for a good. If the price ceiling is set for a good below the equilibrium price, it will cause good shortages because suppliers will devote their production facilities to producing other goods.
b. Price floor. A price floor is a minimum specified price that may be charged for a good. If the price floor is set for a good above the equilibrium price, it will cause overproduction and surpluses will develop.
In the short run, a severe hurricane creates an immediate strong increase in demand for roofers. Some roofers in other parts of the country are then attracted to the disaster area. Assume that in the long run the increase in demand still exceeds the increase in supply. Incorporating these facts in an analysis, the price for roofers in the short run increases, while in the long run the price will
Decrease below the original price.
Return to the original price.
Decrease, but remain above the original price.
Continue to increase.
This answer is correct. If the increase in demand continues to exceed the increase in supply, price will remain above the original price.
Close
Current account—shows the flow of goods and services and government grants for a period of time.
Current account—shows the flow of goods and services and government grants for a period of time.
(1) The balance of trade for a period is the difference between the total goods exported and the total goods imported.
(2) The balance on goods and services is the difference between the total value of goods and services exported and the total value of goods and services imported.
(3) When a nation exports more than it imports a trade surplus occurs.
(4) When a nation imports more than it exports a trade deficit occurs.
Disposable income is calculated as
Gross national product minus capital cost allowance.
Net national product minus indirect business taxes.
Personal income minus transfer payments.
Personal income minus personal taxes.
Disposable income is calculated as
Gross national product minus capital cost allowance.
Net national product minus indirect business taxes.
Personal income minus transfer payments.
Personal income minus personal taxes.
If both the supply and the demand for a good increase, the market price will
Rise only in the case of an inelastic supply function.
Fall only in the case of an inelastic supply function.
Not be predictable with only these facts.
Rise only in the case of an inelastic demand function
This answer is correct. Since the amounts of the supply and demand increase are not known, it is impossible to predict the effects.
Implementation of a government’s monetary policy in most major industrial countries is managed by The central bank. The national government. Commercial banks. Bond market traders.
This answer is correct. The central bank’s most important function is to regulate the money supply in accordance with policies established to promote the nation’s economic well-being. Monetary policy seeks to provide a supply of money, employment, and a relatively stable price level.
If the U.S. dollar declines in value relative to the currencies of many of its trading partners, the likely result is that
Foreign currencies will depreciate against the dollar.
The U.S. trade deficit will worsen.
U.S. exports will tend to increase.
U.S. imports will tend to increase.
This answer is correct. A weaker dollar decreases the prices of U.S. exports, which should increase the demand for these goods.
Which of the following statements is correct if there is an increase in the resources available within an economy?
More goods and services will be produced in the economy.
The economy will be capable of producing more goods and services.
The standard of living in the economy will rise.
The technological efficiency of the economy will improve.
This answer is correct because the economy will be capable of producing more goods and services with more resources.
The movement along the demand curve from one price-quantity combination to another is called a(n) Change in demand. Shift in the demand curve. Change in the quantity demanded. Increase in demand.
This answer is correct. Movement along the existing demand curve reflects an increase or decrease in the quantity demanded.
If a group of consumers decide to boycott a particular product, the expected result would be
An increase in the product price to make up lost revenue.
A decrease in the demand for the product.
An increase in product supply because of increased availability.
That demand for the product would become completely inelastic.
This answer is correct. If consumers boycott a product, demand for the product declines.
