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BEC + > Excel ECON: Micro/Macro > Flashcards

Excel ECON: Micro/Macro Flashcards

1
Q

In the (economic) linear equation D = b + m(a), define each variable.

A

The linear equation form is y = m(x) + b
b = the constant, and the value of y intercept
m = the slope of the line

The relationship between the variables can be described as positive or negative based upon the movement of the direction of the line. Each variable is either independent or dependent.

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2
Q

What are the characteristics of a free market economy?

A

Little to no governmental intervention, where perfect supply and demand exists (participants decide how, when, where g/s are produced).

  1. Interdependent relationship between individuals/firms.
  2. Biz firm production and manner of distro depends on preferences of those with resources to pay for g/s.
  3. How business firms produce depends on availability of economic resources, level of technology available and how resources are used.
  4. Firms will produce g/s only if the sales price is equal to or greater than the cost of the resources acquired.
  5. The $ value of flows provides a means of measuring the economy’s activity. e.g. when the flows are supplemented by the effects of government, financial institutions, and foreign exchange, it provides measuring basis for GDP of the economy.
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3
Q

Describe the slope of a demand curve and its graph plot.

A

The quantity demanded would be lower when the g/s is at higher prices, and the demand would increase as the price decreases. The slope of a demand curve would be negative as the line moves down the y-axis, and up the x-axis.

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4
Q

Explain movement along a supply or demand curve and discuss the difference between a shift of the curve (outward or inward).

A

For each supply or demand curve, any change in price will change the quantity supplied/demanded (the curve is a function of price and qty), which is displayed in movement along the curve.

A shift of the curve may occur if changes occur among other market variables: 
(Supply)
1. Technology 
2. No. of producers
3. Price of inputs

(Demand)

  1. No. of buyers
  2. Price of compliments (PB/J) or subs
  3. Customer tastes/preferences
  4. Consumer income
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5
Q

When the cost of input factors increases, what happens to the supply curve?

A

Increases in factors that affect Price will cause the supply curve to shift inward.

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6
Q

What is the effect on quantity demanded as a result of government mandated price ceilings and floors?

A

Price ceilings result in a demand shortage and floors result in a demand surplus. (Price floors - min wage - cause higher prices than would otherwise occur in a free market.)

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7
Q

If a supply and demand curve is ‘traditional’, what might cause a higher equilibrium price?

A

An increase in demand would cause a higher equilibrium price.

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8
Q

What is the formula used to determine elasticity?

A

Demand: % Change in Qty Demand / % Change in Price
Supply: % Change in Qty Supplied / % Change in Price

**If the result is less than 1 = inelastic, equal to 1 = unitary, greater than 1 = elastic

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9
Q

What is the formula that reflects Maximum Utility?

A

Maximum Utility is reached when the last dollar spent acquiring a g/s gives the same amount of Marginal Utility as the prior.

MU of pizza/price of pizza = MU of beer/price of beer

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10
Q

Which cost curve (avg. var cost, avg. fixed cost, marginal cost, avg. total cost) does not have a U shape?

A

Fixed costs do not change with changes in output over the relevant range of production. The more units produced, the lower the average fixed cost.

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11
Q

In the long run, there is one assumption for all inputs. What is that assumption?

A

All inputs to the production process can be varied in the long run.

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12
Q

If a product is demand elastic, what impact does a company’s cutting prices have on sales?

A

The quantity demanded will increase proportionately more than the price declines. This is due to the formula, and the relationship between % change in Demand and % change in price. An elastic product has a higher numerator than denominator in this formula.

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13
Q

What are the characteristics of a perfectly competitive market?

A
  1. Large no. of independent buyers and sellers, each of whom is too small to separately affect prices
  2. All firms sell a homogeneous product or service
  3. Resources are completely mobile
  4. Buyers and sellers have perfect information
  5. Government does not set prices
  • Also true in (short-run) PC market
  • -> price = marginal revenue
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14
Q

In the short run, a firm in perfect competition will cease producing when what happens?

A

When the market price is less than the firm’s average variable cost, the firm should cease to produce and exit the market. At this point, each unit that is produced does not cover the variable costs associated and losses increase with each unit produced.

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15
Q

What are the characteristics of monopolistic competition?

A
  1. Large number of sellers
  2. Close substitutes for the product or service
  3. Ease of entry into or exit from the market
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16
Q

In the short run, is any firm assured of making a profit in a particular market structure?

A

No. In the short run, a firm in any market structure (Perfect, Monopolistic, Oligopolistic, and Pure Monopoly Competitions) must be able to produce a G/S at a cost that is less than the price it can sell in the market.

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17
Q

In an oligopoly, are firms more or less inclined to create competition? Why or why not?

A

Since there are few sellers in an oligopoly, when one firm lowers its price to increase market share, a chain reaction is likely - constituting a price war. Firms in this kind of market structure are more likely to AVOID competition for fear of creating a price war.

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18
Q

What is a leakage (macro)?

A

Leakages result (in a macroeconomic free market flow model) when income is used for purposes other than domestic consumption.

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19
Q

What are the two methods of measuring GDP?

A

GDP is defined as the the final output of g/s produced for exchange during a period. The two measurement methods are income approach and expenditure approach.

Under the expenditure approach, GDP includes: Consumption by Ind/HH, Investment by biz, Gov Purchases, Net Exports.

Under the income approach: EE compensation, rental income, corp profit, net interest, taxes on production, depreciation (capital consumption).

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20
Q

What is Net GDP?

A

GDP adjusted for capital consumption: depreciation factor. GDP-Depreciation=Net GDP

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21
Q

What is Gross National Product?

A

Total output of g/s worldwide produced using US resources.

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22
Q

What is Net National Product?

A

GNP adjusted for capital consumption: depreciation factor. GNP-Depreciation=NNP

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23
Q

Define Potential GDP. What is Real GDP? How do imports/exports affect GDP?

A

Maximum output possible without causing inflation, assuming full use of available resources. Commonly estimated by adjusting actual GDP.

Real GDP is the market value of all final g/s produced, adjusted for changes in price level.

The net of exports-imports enters into the determination of a country’s GDP.

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24
Q

What happens if Real GDP exceeds or is below Potential GDP?

A

Real GDP > Potential = Positive Gap: Inefficient Economy
*Recession
Real GDP

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25
Q

What is the productive possibility curve?

A

Measures the maximum amount of various g/s an economy can produce at a given time with available technology and efficient use of all available resources.

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26
Q

What kinds of unemployment are included in the ‘natural rate of unemployment’?

A

Structural, Frictional, and Seasonal Unemployment are considered natural rates of unemployment.

Cyclical unemployment pertains to an inefficient/receding economy, and is not included in the natural rate of unemployment.

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27
Q

What are the macroeconomic results of government spending?

A

An increase in government spending increases demand for g/s in the economy.

However, 1) any increase in taxes to fund the spending will decrease aggregate demand as a result of more taxes and less disposable income. 2) Government spending also creates demands for types of g/s that are generally quite different from the mix in the economy.

28
Q

Define Marginal Propensity to Consume (and to save) and provide the formula(s).

A

MPC measures the change in consumption spending as a % change in disposable income.

MPC = Change in spending / Chg in disposable income

Alternatively, Marginal Propensity to Save measures change in saving as a % of disposable income, replacing the numerator in the above.

29
Q

Define Average Propensity to Consume and provide the formula.

A

APC measures the % of disposable income spent on consumable goods.

APC = Spending / Disposable income

Alternatively, the Average Propensity to Save measures savings as a % of disposable income, replacing the numerator above with savings.

30
Q

Define full employment.

A

The condition in which virtually every individual that is able and willing to work is employed.

31
Q

Describe the Keynesian Aggregate Supply Curve.

A

The curve is horizontal up to the (assumed) level of input of full employment and slopes upward, reflecting that output is not associated with price level until full employment is reached. There, increased output is associated with higher price levels.

This curve has a ‘kink’ in it.

32
Q

What is the effect on the Supply/Demand in U.S. when another currency increases in value, relative to the U.S. Dollar?

A

Increased Aggregate Demand is a result because the foreign goods become more expensive to the U.S. and vice versa. Therefore, fewer imported goods are purchased, and more domestically produced goods are demanded/purchased.

33
Q

What are some indicators of a forthcoming recessionary period?

A
  1. A downturn in consumer expectations
  2. Interest rate spread 10yr T Bonds
  3. Stock prices
  4. Average weekly claims for UE Ins.
34
Q

Describe the graph/components of a business cycle.

A
  1. Peak - Point in the cycle the marks the end of rising aggregate output and beginning of decline in output.
  2. Trough - Point in the cycle that marks the end of the decline in aggregate output and beginning of increase.
  3. Expansionary period - periods where aggregate output is rising.
  4. Recessionary period (contraction) - periods when aggregate output is decreasing.
35
Q

What is the process to adjust for inflation and determine a % change from one year to another?

A
  1. Determine % change in CPI (CPI1-CPI2)/CPI1
  2. Apply 1+above (ie, 1.389) to initial $ for estimated inflated amount.
  3. Determine diff in expected vs current $, and if necessary, the % diff.
36
Q

What is included in the M1 measure of money supply?

A

Paper currency, coins, and check-writing deposits are included in this measure as they are primary financial instruments used for transactions, but savings deposits are excluded.

37
Q

What is a strategy that the FED would most likely pursue under an expansionary policy?

A

In order to stimulate the economy and encourage consumption, the purchase of federal securities and lowering the discount rate (charged to loan to banks) are two actions the FED would likely take.

38
Q

What is the most effective policy package to dampen an economy at a peak in the business cycle and prevent inflation?

A

Reduce government spending, increase taxes, reduce money supply, and increase interest rates. WHY?

39
Q

What is an import quota and what group is this likely to benefit the most?

A

An import quota restricts the quantity of a certain commodity that can be brought into the country from foreign providers. The limit on foreign quantity enables domestic suppliers to sell more of the commodity at a higher price.

40
Q

What is the balance of payment accounts?

A

A summary of all transactions with other countries.

    • Current Acct (for net $ amt earned from export of g/s, amt spent on import, and gov. grants to foreign entities),
    • Capital Acct (net $ of inflows from investments and loans by foreign entities, amt of outflows from investments and loans made abroad)
    • Financial Acct (net $of US owned assets abroad and foreign owned assets held in US)
41
Q

Identify and define the different exchange rates.

A

Direct: The domestic price of one unit of foreign currency
IE - 1 EU = $1.10
Indirect: The foreign price for one domestic unit
$1 = .909 EU

42
Q

Describe a flexible or floating exchange rate system and explain the relationship between imports/exports when one economy is recessionary.

A

In this kind of system, the equilibrium rate of exchange is determined by market supply and demand for each currency.

When one economy is doing well and imports are up, the demand for foreign currency is also up. This causes the ‘healthy’ economy’s currency to decline w/respect to the ‘sick’ economy.

43
Q

What is the effect when a foreign competitor’s currency becomes weaker in comparison to the U.S. Dollar?

A

The key word in the question is ‘competitor’ - the question is not asking about purchases in the US economy but rather goods exported to the US.

With that in mind, we know the foreign exporter can produce a good for less in its country and sell it in the US for the same amount or even more and increase its market share. So, the answer pertains to the foreign currency increasing in value.

44
Q

What are the different types of hedging instruments?

A

A Foreign Currency Forward Exchange Contract is an obligation to buy or sell a specific amount of foreign currency at a specified future date at a specific rate.
*not an option, the obligation is firm

A FC Option Contract gives the holder the right to buy (call) or sell (put) a specific amount of a foreign currency during or at the end of a specific time period.
*An option is significantly more costly than the alternative

45
Q

What is a forward exchange contract?

A

This allows the contract holder to buy or sell a foreign currency at a rate set in advance.

46
Q

What type of exchange risk is caused by changes in currency exchange rates that alter the value of future transactions?

A

Economic Exchange Risk - it is the risk that currency exchange rate changes will reduce the financial viability of a future transaction.

47
Q

What is the International Monetary Fund?

A

International organization headquartered in DC.

Their objective is to maintain order in the international monetary system by providing funds to countries in financial crisis. It can assist countries facing currency, debt, or banking crises.

48
Q

What is foreign direct investment?

A

An investment in a non-monetary asset (eg, production facility) in a foreign location.

49
Q

What is market risk?

A

The risk that the value of an asset will decline as a result of a decline in general economic conditions.

50
Q

What is the currency of the Euromarket?

A

The currency in this market is the US Dollar. The Euromarket provides short term and intermediary loans but not long term loans.

51
Q

What is the US worldwide share of GDP (output)? What is its share of exports?

A

The US share is ~25%, and exports are ~10% of world.

52
Q

List the world’s largest exporters in order.

A

China, Germany, U.S., and Japan.

53
Q

What geographical area has seen the largest increase in share of worldwide output in the last thirty years?

A

Asia, particularly China, has increased worldwide output by more than 10%.

54
Q

What is the difference(s) between licensing and franchising?

A

Franchising is a special form of licensing in which the franchise sells intangible assets to the franchisee and mandates strict operating requirements of the franchisee. For example, a license may allow use of a logo (Disney, NFL) but doesn’t include rights to the franchise itself.

55
Q

What are the advantages and disadvantages of a wholly owned foreign subsidiary?

A

Advantages: home country control over patents and other proprietary info, ability to coordinate strategy w/other operations and adapt as needed.
Disadvantages: costly capital investment, greater unknowns of risk, cost and risk belong to home country.

56
Q

What are the components of the strategic planning process?

A
  1. Establishing the mission, values, and objectives
  2. Assessing the entity and its operational environment
  3. Establishing measurable goals that build entity’s strength
  4. Formulating strategies to achieve competitive advantage (3 industry generic strategies ID’d by M.Porter: focus, cost leadership, and differentiation)
  5. Implementing strategies to achieve objectives
  6. Evaluating and controlling strategic activities (feedback loop)
57
Q

Describe the different processes of analysis available for assessing the entity and its environment.

A
  1. Analyzing macro environment (domestic or foreign): PEST (political, economic, social, tech characteristics of a nation or region)
  2. Analyzing industry (operating attractiveness and long-run profitability): Five Forces-Michael Porter
  3. Analyzing internal factors and external relationships: SWOT
58
Q

Discuss the analysis factors of PEST.

A
  1. Political: stability, labor laws, environmental laws, tax policy, trade restrictions
  2. Econ: growth rate, interest rates, inflation, currency exchange rates
  3. Social: population growth, age distro, edu attainment and career attitudes, emphasis on health/safety
  4. Tech: r&d activities, state of automation capability, level of tech savvy, rate of tech changes
59
Q

What is PESTEL?

A

Adds 2 additional elements to the PEST model:

Environmental - weather/climate, water/air quality
Legal - discrimination, consumer, employment, anti-trust, health and safety laws
**STEER is another variation: Socio-cultural, Tech, Economic, Ecological, and Regulator factors

60
Q

What are the five forces factors used to determine the operating effectiveness of an industry?

A
  1. Threat of entry into the market by new competition
  2. Threat of sub g/s
  3. Bargaining power of buyers (cust) of the industry g/s
  4. Bargaining power of suppliers of the inputs used
  5. Intensity of rivalry
61
Q

What is the five forces ‘intensity of rivalry’ factor?

A

This factor affects marketing, advertising, and pricing strategies and depends on such factors as:

Structure of competition
Degree of product differentiation
Industry cost structure
Entities' strategic objectives 
Customer switching costs
Exit barriers
62
Q

What are the three generic strategies identified by Michael Porter?

A

Cost Leadership, Differentiation, and Market Focus

63
Q

Under which generic strategy, identified by Porter, would an entity’s marketing function be most critical?

A

Differentiation would require a great focus of an entity’s marketing function than any other strategy.

64
Q

What are the characteristics and risks of a Cost Leadership entity?

A

Characteristics: significant capital to invest, high levels of expertise, high levels of skill in prod design, efficient distribution channels.
Risks: Other entities begin same strategy and meet or beat costs, tech improvements allowing other firms to meet or beat costs, possibility that # firms may focus on industry segments and achieve lower costs.

65
Q

What are the characteristics and risks of a Differentiation entity?

A

Character: highly creative development personnel, leading edge research capabilities, strong and dedicated marketing/sales, reputation for innovation
Risks: Changes in cust preferences, imitations/knock-offs, threat of other firms pursuing differentiation

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