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Econ _ principles > Principles 1 > Flashcards

Principles 1 Flashcards

1
Q

Public good have a ______ problem

A

Free rider

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2
Q

4 main factors that determine the supply of savings

A
  1. consumption smoothing
  2. level of impatience
  3. marketing and psychological effects
  4. the level of the int. rate
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3
Q

Often individuals tend to save more when saving is presented as a ______

A

default option

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4
Q

What are the 2 main roles of intermediaries?

A
  • They assist in bringing the equilibrium in the market for loanable funds.
    • They reduce costs of moving funds from savers to borrowers and help mobilize savings toward productive uses
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5
Q

Banks spread _____ of investments among many countless lenders

A

risk

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6
Q

Define default risk

A

the situation when the borrower might go bunkrupt and be unable to pay his interest

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7
Q

What is collateral?

A

somethings that by agreement becomes the property of the ledner if the borrower defaults

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8
Q

formula for rate of return

A

(face value - price / price )*100

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9
Q

Explain the arbitrage principle

A

the buying and selling of equally risky assets, ensures that vequally risky assets earn equal returns. If they had different prices no one would buy the one with higher price

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10
Q

Which factors can cause intermediaries to fail?

A
  • insecure property rights
  • control of int. rate
  • politized lending and govt. owned banks
  • bank failures and panic
  • inflation
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11
Q

The difference between the value of a house and the unpaid amount of mortgage is referred to as :

A

equity

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12
Q

Formula for equity:

A

E = V-D (the value of an asset minus debt)

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13
Q

If someone has more leverage this means that their cash can be used to buy

A

bigger assets

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14
Q

In financial economics buying an asset is called

A

moving an asset

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15
Q

Having more liabilities than assets is referred to as being:

A

insolvent

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16
Q

Insolvency is usually followed by

A

bankruptcy

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17
Q

Selling assets very quickly is referred to as a :

A

fire sale

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18
Q

A run bank occurs when a large amount of _________ has to be paid off in a short amount of time

A

liabilities

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19
Q

According to Bagehot the way to combat an internal drain is to:

A

lend freely and signal that there is no reserve shortage

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20
Q

According to Bagehot a healthy bank builds it reserve in times of _________ and spends it freely in times of _______

A

propensity; panic

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21
Q

Crowding out is a problem that occurs in particular when

A

the economy is in an upturn and the govt. reduces public spending

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22
Q

According to Bagehot, banks should lend _____ when there is a crisis

A

freely

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23
Q

Why does free lending work to battle financial crises and panic?

A

Because by lending freely banks signal to customers that there is still money to be given and taking money out of the bank is unnecessary

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24
Q

The most immediate cause of the wealth of nations is that countries with high ___________ so that innovations and productivity can improve most efficiently

A

GDP per capita

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25
Q

The desire to have goods and services sooner rather than later is called

A

time preference

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26
Q

When a company opens up itself to the stock market for the very first time this is called an :

A

IPO

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27
Q

How do we call people who pay for a share of the costs of a public good but who do not enjoy the benefits

A

forced rider

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28
Q

Because forced riders exist public goods are not produced in the _____ quantity in the free market

A

optimal

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29
Q

Examples of common resources include:

A

fish , forests and agricultural land

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30
Q

List 3 solutions to the ‘tragedy of the commons’

A

command
control
tradable allowances

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31
Q

Example of a command and control solution :

A

Governments try to command and control solutions like limiting the number of fishing boats

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32
Q

A recession is a:

A

significant, widespread decline in real income and employment

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33
Q

In times of recession all kinds of resources are not fully ________.

A

employed

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34
Q

The AD curve shows all the combinations of :

A

inflation and real growth that are consitent with a specific rate of spending growth

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35
Q

growth rate of money supply + velocity growth =

A

inflation + real growth in GDP

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36
Q

If money supply grows by 6% per year and velocity is stable at 0% then inflation and real growth must be equal to :

A

6%

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37
Q

The LRAS curve is vertical at the :

A

Solow growth rate

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38
Q

The rate of growth as given by the real factors of production is called the :

A

Solow growth rate

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39
Q

Any shocks that shift the potential growth rate, also shift the _____growth rate

A

Solow

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40
Q

Real shocks either increase or diminish the level of

A

productivity in an economy

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41
Q

Examples of real shocks:

A
  • oil price shocks or other important input shock
  • wars
  • terrorist attacks
  • tax rate changes
  • mass strikes
  • new technologies
  • bad weather
  • earthquake
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42
Q

Negative shocks shift the LRAS curve to the :

A

left

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43
Q

The SRAS curve shows the positive relationship between the inflation rate and real growth during the period when prices and wages are ______

A

sticky

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44
Q

The costs of changing prices are called :

A

menu costs

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45
Q

In the short run an increase in AD will lead to an increase in the _____ rate and ____

A

inflation rate and growth rate

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46
Q

Prices and wages adjust way slower to a fall or an increase in AD>?

A

fall in AD

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47
Q

Wages are especially sticky in the ______ direction.

A

DOWNWARD

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48
Q

Components of AD :

A

C + G + I + (X-M)

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49
Q

Some factors shift the AD curve:

A
  • Faster money growth rate
  • Confidence
  • Lower taxes
  • Increased wealth
  • Increased Export Growth
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50
Q

Fear among consumers can be regarded as a ______ shock

A

negative AD shock

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51
Q

In a low quality legal system property rights are not ______

A

guaranteed

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52
Q

What is the doubling time is a country’s growth rate is 2%

A

35 years woohooo

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53
Q

____, ____ and ______ are classified as intermediaries

A

Banks, bond markets, stock markets

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54
Q

Reasons for why people save:

A
  • consumption smoothing
  • level of impatience
  • marketing and psychological effects
  • level of int. rates
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55
Q

If there is a shortage of savings demanders will bid the :

A

interest rate up

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56
Q

When does a decreasing cost industry pop up?

A

when many firms of the same industry are established close together

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57
Q

when it comes to price discrimination , to maximize profits a firm should set higher prices in markets with _____ demand

A

inelastic

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58
Q

What can shift the demand curve right up for savings

A

Gov can offer a temporary investment tax credit to a company, so they borrow money to fund their new investments

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59
Q

CS + PS =

A

total gains from trade

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60
Q

Smuggling is a special example of ______

A

arbitrage

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61
Q

Bundling is most effective in a _______ cost industry

A

high fixed cost and low marginal cost

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62
Q

In the bond market, instead of borrowing from a bank, firms borrow money directly from

A

investors

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63
Q

Profits of firms in a perfectly comp. industry _____ when firms exit the market

A

increase

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64
Q

Above-normal profits are eliminated by

A

entry

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65
Q

Below-normal profits are eliminated by

A

exit

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66
Q

In some cases all the money borrowed through a bond is owed on 1 specific day. How is it called?

A

date of maturity

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67
Q

In the bond market, annual interest rate paid on a bond is called:

A

coupon payment

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68
Q

When the marginal costs of one firm in the same industry equal the marginal costs of another firm in the same insutry, this occurs:

A

total cost minimization

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69
Q

Property 2 of the invisible hand is the :

A

balance of industries

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70
Q

The invisible hand works when prices _____ signal costs and benefits

A

accurately

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71
Q

______ growth is the growth rate of real GDP per capita

A

real

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72
Q

_____ value is the value of a bond at maturity

A

face

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73
Q

The division of labour is a consequence of the :

A

propensity to barter trade and exchange

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74
Q

Factors that shift supply:

A
  • technological innovations
  • taxes and subsidies
  • expectations
  • changes in opp. costs
  • entry or exit of producers
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75
Q

What are treasury bonds?

A

Long-term fixed interest rate bonds exeeding 10 years, usually paying interest every 6 months

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76
Q

What increased with larger trade

A
  • specialization
  • division of knowledge
  • productivity
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77
Q

The market value of all final G + S produced within a country in one year is called

A

GDP

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78
Q

Futures are used to:

A

Reduce the risk of price fluctuations

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79
Q

Factors that contribute to the wealth of nations:

A
  • incentives and institutions
  • property rights
  • honest govt.
  • political stability
  • gdp per capita
  • location as landlocked countries are statistically less wealthy
  • a dependable legal system
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80
Q

What are futures?

A

Futures are standarized contracts to buy/sell specified quantities of a good/finantial instrument at a specific price in the future

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81
Q

A price is a signal wrapped up in an ______

A

incentive

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82
Q

A prediction market is designed so that prices can be interpreted as

A

Probabilities, signals and used to make predictions

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83
Q

When a price rises it signal to BUYERS to buy ____ of it and look for cheaper _____

A

less; substitutes

84
Q

When interest rates go up, bond prices…

A

fall

85
Q

Speculation is an attempt to ______ from future price changes

A

profit

86
Q

What 3 circumstances does A. Smith attribute to division of labour increasing qt. of work

A
  1. increase of dexterity in every workman
  2. the saving of time lost in passing from 1 task to another
  3. invention of machines which allow for 1 man to do the work of many
87
Q

Which 3 things occur when a free market is said to maximize gains from trade

A

1) the supply of goods is bought by buyers with higest willingness to pay
2) The supply of goods is sold by the sellers with the lowest costs
3) There are no unexploited gains and no wasted suppies

88
Q

The pursuit of profits in a perfectly comp. market minimizes ______ costs

A

total industry costs

89
Q

This term describes the process of analyzing futures prices to make inferences about future events

A

signal watching

90
Q

In a perfect competition the profit a firm makes is found by:

A

MR-MC

91
Q

Give an examole of a shift in supply and demand in one market affecting another

A

When oil prices in 70s started rising the rose industry in america suffered from high costs of heating so they moved from growing roses in US to Kenya

92
Q

List the 3 BENEFITS of trade

A
  1. Trade makes people better off when preferences differ
  2. Trade increases productivity through the division of labour
  3. Trade increases total output (production) through comparative advantage
93
Q

This happens when the production process is divided into multiple, distinct tasks

A

division of labour (A. Smith)

94
Q

A profit exists when MC is _____ than AC

A

lower

95
Q

What does price discrimination encourage?

A

smuggling

96
Q

Once a cluster is established in a decreasing cost industry what happens?

A

Constant or increasing costs become the NORM

97
Q

Firms tend to be larger when:

A

1) organization costs are low
2) When entreprenuer is less likely to make mistakes
3) When by becoming a larger firm the price of FOPs is lower

98
Q

Elasticity is a measure of how responsive QUANTITY DEMANDED is to a change in ______

A

price

99
Q

The demand for a firm’s product in a perfectly comp. industry is _______ elastic

A

perfectly

100
Q

A bond that involves a collateral usually has a ______ interest rate

A

lower

101
Q

Firms want to keep on producing as long as MR _____ than MC

A

is greater than

102
Q

Define Arbitrage

A

It legally takes advantage if orice differences on various markets by buying goods where they are cheap and selling them on markets with high prices.

103
Q

As long as Profit > AC in the long run a firm will

A

enter the market

104
Q

If in the long run Profit < AC a firm will ______

A

exit the market

105
Q

Under PPD there will be zero ________

A

consumer surplus since the monopolist takes all the gains from trade

106
Q

How can Arbitrage be prevented

A

Firms can sell their product with different colour on different markets to easily distinguish ‘em

107
Q

Who competes with whom in the market?

A

Sellers with other sellers and buyers with other buyers

108
Q

What does tying require

A

Unique right to produce a certain technological capability

109
Q

Benefits of price discrimination

A
  • Increases output
  • Higher welfare (sometimes ;))
  • can help cover fixed costs for R& D
110
Q

Subcategories of transaction costs:

A

1) Costs of discovering relevant prices
2) cost of negotiating contracts
3) sales tax and other interferences

111
Q

Why are super large firms not always a good idea?

A

because after a certain point there are diminishing marginal benefits and bureacracy costs begin to overwhelm the entrepreuner PLUS the entrepreuner is more likely to make mistakes

112
Q

Unexploited gains occur when Qd is ___ than equilibrium

A

lower

113
Q

List the shifters of demand

A

-income
-population
-prices of substitudes
-prices of complements
-tastes
-tastes

114
Q

Wasted resources occur when Qs is ______ than equilibrium

A

higher

115
Q

Define absolute advantage

A

When you can produce the same output with fewer inputs

116
Q

According to A.Smith human cooperation in not based on belevolence bbut on

A

mutual self-interest

117
Q

Tying works if :

A

the selling firm is the only firm allowed to sell the more expensive product

118
Q

What is the division of labour limited by?

A

The extent of the market

119
Q

The short run is the period _____ entry or exit has occured

A

before

120
Q

Electricity is a ______ cost

A

variable

121
Q

What is the ‘real price’ and ‘nominal price’?

A

‘Real price’ - price adjusted for inflation

‘Nominal price’ - price not adjusted for inflation

122
Q

Profit maximizing level of output is at :

A

MC=MR

123
Q

When choosing which country should produce a good this should be analyzed

A

comparative advantage

124
Q

Leverage ratio is a ratio between _______ and ______

A

what a person borrows and what he has in his pocket

125
Q

Borrowing is necessary for ______ investments

A

large

126
Q

How does our book define ‘the long-run’

A

The period after all exit/entry has occured

127
Q

This refers to the the advantages of large-scale production that reduce average cost as quantity increases.

A

economies of scale

128
Q

Corrupt countries have lower _______

A

GDP per capita

129
Q

Formula for profit

A

PQ-TC or (P-AC)Q

130
Q

At PPD each customer is charged his _____

A

maximum willigness to pay

131
Q

Example of PPD

A

University in its finantial aid programme might charge all students different prices based on their family’s income that they had to submit.

132
Q

Property 1 of Invisible Hand :

A

Minimization of total industry costs of production

133
Q

Constant cost industry example :

A

Domain selling companies like GoDaddy xddd

134
Q

Firm should shut down immediately in the short run, if its not able to cover either _______ or _____ costs

A

variable or fixed costs

135
Q

What sould a firm do if P<AVC

A

Firm should exit immediately

136
Q

If the firm is able to cover _____ but not _____ costs it should exit in the long run ( ASAP)

A

variable but not fixed costs

137
Q

What is an economic force that works with the Invisible hand property (balance of industries)

A

Entrepreuners seeking profits and avoiding losses

138
Q

What is the rate of return if Dominika could acquire a zero coupon bond for 950 euros which has a face value of 1000 at the day of maturity?

A

5.26%

139
Q

If the rate of return on a bond is lower than the interest rate then the investor should ____ buy the bond

A

should not buy the bond

140
Q

Buying an existing company’s stocks is considered a transfer of _________

A

ownership rights

141
Q

Firms acquiring currency obligations to avoid exchange rate risk is an example of :

A

futures contract

142
Q

Does a dependable legal system lead to an increase in physical capital?

A

Yes

143
Q

Is a country’s wealth a result of it exploting its absolute advantages?

A

No

144
Q

What limitations for the division of labour does Adam Smith explain?

A
  1. the extent of the market
  2. work alienation such as becoming bored of a task
  3. technical limitations such as the extent of technology
145
Q

When is govt. spending most effective?

A

when there are lower rayes of private spending

146
Q

What happens in the SHORT RUN when speculators buy up oil reserves?

A

They reduce overall supply, in turn leading to a rise in value then( driving up the prices)

147
Q

Why is speculation important?

A

Cause when real shocks like wars occur, speculators increase supply in times of crisis. Consequently, prices fall.

148
Q

Overall society is better thanks to speculation because it _______ prices.

A

stabilizes

149
Q

Futures markets are not only for SPECULATION but also for reducing _______

A

RISK

150
Q

Change in demand equates to a ________

A

shift of the demand curve

151
Q

Change in quantity demanded equates to a ________

A

movement along the demand curve

152
Q

Prices tell the _______ which areas of production consumers what expanded and which abandoned.

A

entrepreuners

153
Q

In a successful economy there will be many _______

A

unsuccessful firms

154
Q

The theory of comparative advantage states that if countries specialise in producing goods where they have a __________________– then there will be an increase in economic welfare.

A

lower opp. cost

155
Q

How does trade affects wages?

A

It raises wages

156
Q

List the lags that affect the effectiveness of fiscal policy

A
  • Recognition lag
  • Legislature lag
  • Implementation lag
  • Effectiveness lag
  • Evaluation lag
157
Q

This term refers to the is the
additional increase in AD caused when expansionary fiscal policy increases income and thus consumer spending

A

multiplier effect

158
Q

What are the 4 major limits to fiscal policy?

A
  1. crowding out
  2. a drop in a bucket
  3. a matter of timing
  4. real shocks
159
Q

Crowding out is the ______ in private spendign when government increases ______

A

decrease, spending

160
Q

How is raising taxes a cause for crowding out?

A

Because when taxes are raised private individuals have less funds for investments

161
Q

What is money illusion?

A

This happens when someone believes the money earn is worth more than it actually is because they focus on nominal prices and not REAL prices

162
Q

The costs of changing prices are referred to as :

A

menu costs

163
Q

Prices rise like ______ and fall like _______

A

rockets ; feathers

164
Q

Factors that increase AD ( shift AD curve to the right) :

A
  • A faster money growth rate
  • Increased Consumer Confidence
  • Increased wealth
  • Lower taxes
  • Greater growth of govt. spending
  • Increased Export Growth
  • Decreased Import growth (PAMIETAJ)
165
Q

Factors that decrease AD ( shift AD curve to the left)

A
  • A slower money growth rate
  • Consumer Fear
  • Reduced Wealth
  • Higher taxes
  • Lower growth of govt. spending
  • Decreased export growth
  • Increased import growth
166
Q

What is the standard investment tax credit ?

A

5 %

167
Q

A federal tax incentive for business investment is called

A

investment tax credit

168
Q

higher exports increase

A

AD

169
Q

Changes in velocity of money tend to be

A

temporary

170
Q

Real shocks are rapid changes in economic conditions that increase or diminish the _______ of capital and labour

A

productivity

171
Q

Command and control policies are a solution to the _______

A

tragedy of the commons

172
Q

Short run shutdown decision occurs when

A

Profit <MC or TR<TC

173
Q

Firm should shut down immediately in the short run, if its not able to cover either ______ or ______ costs

A

variable or fixed

174
Q

In the short run, if a firm is able to cover ______ costs but not _____ costs, the firm should exit the market as soon as possible

A

variable but not fixed

175
Q

Example of a decreasing cost industry :

A

Silicon Valley

176
Q

Tax increases and decreases work only on:

A

Supply curve (shifting it)

177
Q

How according to Hayek is the information spread out throughout the economy?

A

Information is spread out unevenly throughout society, and markets are best way to aggregate that information

178
Q

What is “licensing”?

A

The psychological phenomenon that an individual who carbon offset one type of consumption tends to pollute more with another

179
Q

What are marketing costs? What do they include?

A

Marketing costs are all the costs other than those connected to manufactuing the product (like wages, electricty, machinery). Examples of marketing costs are: Drafting a contract, setting up meetings and opportunity costs of driving to that meetings

180
Q

What 3 “Big Ideas” can be connected to A.Smith’s theory on division of labour

A

1) Incentives matter
2) Power of trade
3) Thinking on the margin

181
Q

Who advocated the claim that: “the essence of strategy formulation is coping with competition”

A

Michael Porter

182
Q

In a market with perfect competition, the profit a firm makes is found by:

A

market price and average cost so P-AC

183
Q

Managing money supply is part of what kind of policy?

A

Monetary policy

184
Q

What is the difference between monetary and fiscal policy?

A

Monetary policy is everything that central banks does, while fiscal policy is everything that gov does

185
Q

Slower growth rate in Money supply will…

A

Decrease AD as people have less money to spend due to slower grwoth compared to hypothetical “normal growth”

186
Q

Lower money supply causes…

A

Lower AD and therefore deflation

187
Q

Increasing money supply causes….

A

Higher AD and therefore inflation

188
Q

What is a ‘Bagehot Dictum’

A

To avert panic, central banks should lend early and freely (ie without limit), to commercial banks and at high interest rates.

189
Q

What is fixed cost? What does it influence?

A

Fixed costs are constant costs of running a business that don not change with output. Moreover, fixed cost does not affect supply of goods that are produced

190
Q

An icrease in one asset will either be offest by

A

a decrease in another asset
an increse in a liability

191
Q

What is bookkeeping?

A

The recording of economic transactions on a daily (often real-time) basis

192
Q

The left side of the T-account is called the :

A

debit side

193
Q

the difference between equity on december 31 2022 and equity on december 31 2021 is regarded as the :

A

net income for 2021

194
Q

revenues and expenses are CHANGES IN _____ not in ______

A

equity; cash

195
Q

The consumers always spend the same amount of money on this good when the elasticity is

A

unitary meaning that it has a value of -1.

196
Q

For durable goods the demand is more ________ in the short run than in the long run

A

inelastic

197
Q

ATC are minimal when they are equal to

A

MC

198
Q

If a firm has increasing returns to scale this means that its costs are :

A

declining in the long run (decling average costs)

199
Q

Salience is the cognitive bias that _____-

A

predisposes shoppers to focus on items that are more prominent in valuie

200
Q

Rules of thumb are essentially

A

mental shortcuts

201
Q

Fairness is a bias in economics which concerns _______

A

making decision based off of moral rules

202
Q

What is a bubble?

A

An increase in the price of a good based not on the market mechanism but primarily on the belief that the price will keep going up (housing bubble in the states)

203
Q

An information cascade occurs when:

A

when one’s action depends on the actions of others which were also based on others

204
Q

when firm a and firm b choose a cooperative outcome they choose the outcome that ______

A

maximizes total gains

205
Q

In a vertically integrated model value creation entails:

A
  • content creation
  • multimedia packaging services
  • network infrastructure equipment
  • telecom services
206
Q

In a vertically integrated model , value capturing entails:

A
  • revenue gets redistributed more or less equally among all firms

Econ _ principles (11 decks)

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