Principles 1 Flashcards
Public good have a ______ problem
Free rider
4 main factors that determine the supply of savings
- consumption smoothing
- level of impatience
- marketing and psychological effects
- the level of the int. rate
Often individuals tend to save more when saving is presented as a ______
default option
What are the 2 main roles of intermediaries?
- 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
Banks spread _____ of investments among many countless lenders
risk
Define default risk
the situation when the borrower might go bunkrupt and be unable to pay his interest
What is collateral?
somethings that by agreement becomes the property of the ledner if the borrower defaults
formula for rate of return
(face value - price / price )*100
Explain the arbitrage principle
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
Which factors can cause intermediaries to fail?
- insecure property rights
- control of int. rate
- politized lending and govt. owned banks
- bank failures and panic
- inflation
The difference between the value of a house and the unpaid amount of mortgage is referred to as :
equity
Formula for equity:
E = V-D (the value of an asset minus debt)
If someone has more leverage this means that their cash can be used to buy
bigger assets
In financial economics buying an asset is called
moving an asset
Having more liabilities than assets is referred to as being:
insolvent
Insolvency is usually followed by
bankruptcy
Selling assets very quickly is referred to as a :
fire sale
A run bank occurs when a large amount of _________ has to be paid off in a short amount of time
liabilities
According to Bagehot the way to combat an internal drain is to:
lend freely and signal that there is no reserve shortage
According to Bagehot a healthy bank builds it reserve in times of _________ and spends it freely in times of _______
propensity; panic
Crowding out is a problem that occurs in particular when
the economy is in an upturn and the govt. reduces public spending
According to Bagehot, banks should lend _____ when there is a crisis
freely
Why does free lending work to battle financial crises and panic?
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
The most immediate cause of the wealth of nations is that countries with high ___________ so that innovations and productivity can improve most efficiently
GDP per capita
The desire to have goods and services sooner rather than later is called
time preference
When a company opens up itself to the stock market for the very first time this is called an :
IPO
How do we call people who pay for a share of the costs of a public good but who do not enjoy the benefits
forced rider
Because forced riders exist public goods are not produced in the _____ quantity in the free market
optimal
Examples of common resources include:
fish , forests and agricultural land
List 3 solutions to the ‘tragedy of the commons’
command
control
tradable allowances
Example of a command and control solution :
Governments try to command and control solutions like limiting the number of fishing boats
A recession is a:
significant, widespread decline in real income and employment
In times of recession all kinds of resources are not fully ________.
employed
The AD curve shows all the combinations of :
inflation and real growth that are consitent with a specific rate of spending growth
growth rate of money supply + velocity growth =
inflation + real growth in GDP
If money supply grows by 6% per year and velocity is stable at 0% then inflation and real growth must be equal to :
6%
The LRAS curve is vertical at the :
Solow growth rate
The rate of growth as given by the real factors of production is called the :
Solow growth rate
Any shocks that shift the potential growth rate, also shift the _____growth rate
Solow
Real shocks either increase or diminish the level of
productivity in an economy
Examples of real shocks:
- oil price shocks or other important input shock
- wars
- terrorist attacks
- tax rate changes
- mass strikes
- new technologies
- bad weather
- earthquake
Negative shocks shift the LRAS curve to the :
left
The SRAS curve shows the positive relationship between the inflation rate and real growth during the period when prices and wages are ______
sticky
The costs of changing prices are called :
menu costs
In the short run an increase in AD will lead to an increase in the _____ rate and ____
inflation rate and growth rate
Prices and wages adjust way slower to a fall or an increase in AD>?
fall in AD
Wages are especially sticky in the ______ direction.
DOWNWARD
Components of AD :
C + G + I + (X-M)
Some factors shift the AD curve:
- Faster money growth rate
- Confidence
- Lower taxes
- Increased wealth
- Increased Export Growth
Fear among consumers can be regarded as a ______ shock
negative AD shock
In a low quality legal system property rights are not ______
guaranteed
What is the doubling time is a country’s growth rate is 2%
35 years woohooo
____, ____ and ______ are classified as intermediaries
Banks, bond markets, stock markets
Reasons for why people save:
- consumption smoothing
- level of impatience
- marketing and psychological effects
- level of int. rates
If there is a shortage of savings demanders will bid the :
interest rate up
When does a decreasing cost industry pop up?
when many firms of the same industry are established close together
when it comes to price discrimination , to maximize profits a firm should set higher prices in markets with _____ demand
inelastic
What can shift the demand curve right up for savings
Gov can offer a temporary investment tax credit to a company, so they borrow money to fund their new investments
CS + PS =
total gains from trade
Smuggling is a special example of ______
arbitrage
Bundling is most effective in a _______ cost industry
high fixed cost and low marginal cost
In the bond market, instead of borrowing from a bank, firms borrow money directly from
investors
Profits of firms in a perfectly comp. industry _____ when firms exit the market
increase
Above-normal profits are eliminated by
entry
Below-normal profits are eliminated by
exit
In some cases all the money borrowed through a bond is owed on 1 specific day. How is it called?
date of maturity
In the bond market, annual interest rate paid on a bond is called:
coupon payment
When the marginal costs of one firm in the same industry equal the marginal costs of another firm in the same insutry, this occurs:
total cost minimization
Property 2 of the invisible hand is the :
balance of industries
The invisible hand works when prices _____ signal costs and benefits
accurately
______ growth is the growth rate of real GDP per capita
real
_____ value is the value of a bond at maturity
face
The division of labour is a consequence of the :
propensity to barter trade and exchange
Factors that shift supply:
- technological innovations
- taxes and subsidies
- expectations
- changes in opp. costs
- entry or exit of producers
What are treasury bonds?
Long-term fixed interest rate bonds exeeding 10 years, usually paying interest every 6 months
What increased with larger trade
- specialization
- division of knowledge
- productivity
The market value of all final G + S produced within a country in one year is called
GDP
Futures are used to:
Reduce the risk of price fluctuations
Factors that contribute to the wealth of nations:
- incentives and institutions
- property rights
- honest govt.
- political stability
- gdp per capita
- location as landlocked countries are statistically less wealthy
- a dependable legal system
What are futures?
Futures are standarized contracts to buy/sell specified quantities of a good/finantial instrument at a specific price in the future
A price is a signal wrapped up in an ______
incentive
A prediction market is designed so that prices can be interpreted as
Probabilities, signals and used to make predictions
When a price rises it signal to BUYERS to buy ____ of it and look for cheaper _____
less; substitutes
When interest rates go up, bond prices…
fall
Speculation is an attempt to ______ from future price changes
profit
What 3 circumstances does A. Smith attribute to division of labour increasing qt. of work
- increase of dexterity in every workman
- the saving of time lost in passing from 1 task to another
- invention of machines which allow for 1 man to do the work of many
Which 3 things occur when a free market is said to maximize gains from trade
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
The pursuit of profits in a perfectly comp. market minimizes ______ costs
total industry costs
This term describes the process of analyzing futures prices to make inferences about future events
signal watching
In a perfect competition the profit a firm makes is found by:
MR-MC
Give an examole of a shift in supply and demand in one market affecting another
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
List the 3 BENEFITS of trade
- Trade makes people better off when preferences differ
- Trade increases productivity through the division of labour
- Trade increases total output (production) through comparative advantage
This happens when the production process is divided into multiple, distinct tasks
division of labour (A. Smith)
A profit exists when MC is _____ than AC
lower
What does price discrimination encourage?
smuggling
Once a cluster is established in a decreasing cost industry what happens?
Constant or increasing costs become the NORM
Firms tend to be larger when:
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
Elasticity is a measure of how responsive QUANTITY DEMANDED is to a change in ______
price
The demand for a firm’s product in a perfectly comp. industry is _______ elastic
perfectly
A bond that involves a collateral usually has a ______ interest rate
lower
Firms want to keep on producing as long as MR _____ than MC
is greater than
Define Arbitrage
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.
As long as Profit > AC in the long run a firm will
enter the market
If in the long run Profit < AC a firm will ______
exit the market
Under PPD there will be zero ________
consumer surplus since the monopolist takes all the gains from trade
How can Arbitrage be prevented
Firms can sell their product with different colour on different markets to easily distinguish ‘em
Who competes with whom in the market?
Sellers with other sellers and buyers with other buyers
What does tying require
Unique right to produce a certain technological capability
Benefits of price discrimination
- Increases output
- Higher welfare (sometimes ;))
- can help cover fixed costs for R& D
Subcategories of transaction costs:
1) Costs of discovering relevant prices
2) cost of negotiating contracts
3) sales tax and other interferences
Why are super large firms not always a good idea?
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
Unexploited gains occur when Qd is ___ than equilibrium
lower
List the shifters of demand
-income
-population
-prices of substitudes
-prices of complements
-tastes
-tastes
Wasted resources occur when Qs is ______ than equilibrium
higher
Define absolute advantage
When you can produce the same output with fewer inputs
According to A.Smith human cooperation in not based on belevolence bbut on
mutual self-interest
Tying works if :
the selling firm is the only firm allowed to sell the more expensive product
What is the division of labour limited by?
The extent of the market
The short run is the period _____ entry or exit has occured
before
Electricity is a ______ cost
variable
What is the ‘real price’ and ‘nominal price’?
‘Real price’ - price adjusted for inflation
‘Nominal price’ - price not adjusted for inflation
Profit maximizing level of output is at :
MC=MR
When choosing which country should produce a good this should be analyzed
comparative advantage
Leverage ratio is a ratio between _______ and ______
what a person borrows and what he has in his pocket
Borrowing is necessary for ______ investments
large
How does our book define ‘the long-run’
The period after all exit/entry has occured
This refers to the the advantages of large-scale production that reduce average cost as quantity increases.
economies of scale
Corrupt countries have lower _______
GDP per capita
Formula for profit
PQ-TC or (P-AC)Q
At PPD each customer is charged his _____
maximum willigness to pay
Example of PPD
University in its finantial aid programme might charge all students different prices based on their family’s income that they had to submit.
Property 1 of Invisible Hand :
Minimization of total industry costs of production
Constant cost industry example :
Domain selling companies like GoDaddy xddd
Firm should shut down immediately in the short run, if its not able to cover either _______ or _____ costs
variable or fixed costs
What sould a firm do if P<AVC
Firm should exit immediately
If the firm is able to cover _____ but not _____ costs it should exit in the long run ( ASAP)
variable but not fixed costs
What is an economic force that works with the Invisible hand property (balance of industries)
Entrepreuners seeking profits and avoiding losses
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?
5.26%
If the rate of return on a bond is lower than the interest rate then the investor should ____ buy the bond
should not buy the bond
Buying an existing company’s stocks is considered a transfer of _________
ownership rights
Firms acquiring currency obligations to avoid exchange rate risk is an example of :
futures contract
Does a dependable legal system lead to an increase in physical capital?
Yes
Is a country’s wealth a result of it exploting its absolute advantages?
No
What limitations for the division of labour does Adam Smith explain?
- the extent of the market
- work alienation such as becoming bored of a task
- technical limitations such as the extent of technology
When is govt. spending most effective?
when there are lower rayes of private spending
What happens in the SHORT RUN when speculators buy up oil reserves?
They reduce overall supply, in turn leading to a rise in value then( driving up the prices)
Why is speculation important?
Cause when real shocks like wars occur, speculators increase supply in times of crisis. Consequently, prices fall.
Overall society is better thanks to speculation because it _______ prices.
stabilizes
Futures markets are not only for SPECULATION but also for reducing _______
RISK
Change in demand equates to a ________
shift of the demand curve
Change in quantity demanded equates to a ________
movement along the demand curve
Prices tell the _______ which areas of production consumers what expanded and which abandoned.
entrepreuners
In a successful economy there will be many _______
unsuccessful firms
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.
lower opp. cost
How does trade affects wages?
It raises wages
List the lags that affect the effectiveness of fiscal policy
- Recognition lag
- Legislature lag
- Implementation lag
- Effectiveness lag
- Evaluation lag
This term refers to the is the
additional increase in AD caused when expansionary fiscal policy increases income and thus consumer spending
multiplier effect
What are the 4 major limits to fiscal policy?
- crowding out
- a drop in a bucket
- a matter of timing
- real shocks
Crowding out is the ______ in private spendign when government increases ______
decrease, spending
How is raising taxes a cause for crowding out?
Because when taxes are raised private individuals have less funds for investments
What is money illusion?
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
The costs of changing prices are referred to as :
menu costs
Prices rise like ______ and fall like _______
rockets ; feathers
Factors that increase AD ( shift AD curve to the right) :
- A faster money growth rate
- Increased Consumer Confidence
- Increased wealth
- Lower taxes
- Greater growth of govt. spending
- Increased Export Growth
- Decreased Import growth (PAMIETAJ)
Factors that decrease AD ( shift AD curve to the left)
- A slower money growth rate
- Consumer Fear
- Reduced Wealth
- Higher taxes
- Lower growth of govt. spending
- Decreased export growth
- Increased import growth
What is the standard investment tax credit ?
5 %
A federal tax incentive for business investment is called
investment tax credit
higher exports increase
AD
Changes in velocity of money tend to be
temporary
Real shocks are rapid changes in economic conditions that increase or diminish the _______ of capital and labour
productivity
Command and control policies are a solution to the _______
tragedy of the commons
Short run shutdown decision occurs when
Profit <MC or TR<TC
Firm should shut down immediately in the short run, if its not able to cover either ______ or ______ costs
variable or fixed
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
variable but not fixed
Example of a decreasing cost industry :
Silicon Valley
Tax increases and decreases work only on:
Supply curve (shifting it)
How according to Hayek is the information spread out throughout the economy?
Information is spread out unevenly throughout society, and markets are best way to aggregate that information
What is “licensing”?
The psychological phenomenon that an individual who carbon offset one type of consumption tends to pollute more with another
What are marketing costs? What do they include?
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
What 3 “Big Ideas” can be connected to A.Smith’s theory on division of labour
1) Incentives matter
2) Power of trade
3) Thinking on the margin
Who advocated the claim that: “the essence of strategy formulation is coping with competition”
Michael Porter
In a market with perfect competition, the profit a firm makes is found by:
market price and average cost so P-AC
Managing money supply is part of what kind of policy?
Monetary policy
What is the difference between monetary and fiscal policy?
Monetary policy is everything that central banks does, while fiscal policy is everything that gov does
Slower growth rate in Money supply will…
Decrease AD as people have less money to spend due to slower grwoth compared to hypothetical “normal growth”
Lower money supply causes…
Lower AD and therefore deflation
Increasing money supply causes….
Higher AD and therefore inflation
What is a ‘Bagehot Dictum’
To avert panic, central banks should lend early and freely (ie without limit), to commercial banks and at high interest rates.
What is fixed cost? What does it influence?
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
An icrease in one asset will either be offest by
a decrease in another asset
an increse in a liability
What is bookkeeping?
The recording of economic transactions on a daily (often real-time) basis
The left side of the T-account is called the :
debit side
the difference between equity on december 31 2022 and equity on december 31 2021 is regarded as the :
net income for 2021
revenues and expenses are CHANGES IN _____ not in ______
equity; cash
The consumers always spend the same amount of money on this good when the elasticity is
unitary meaning that it has a value of -1.
For durable goods the demand is more ________ in the short run than in the long run
inelastic
ATC are minimal when they are equal to
MC
If a firm has increasing returns to scale this means that its costs are :
declining in the long run (decling average costs)
Salience is the cognitive bias that _____-
predisposes shoppers to focus on items that are more prominent in valuie
Rules of thumb are essentially
mental shortcuts
Fairness is a bias in economics which concerns _______
making decision based off of moral rules
What is a bubble?
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)
An information cascade occurs when:
when one’s action depends on the actions of others which were also based on others
when firm a and firm b choose a cooperative outcome they choose the outcome that ______
maximizes total gains
In a vertically integrated model value creation entails:
- content creation
- multimedia packaging services
- network infrastructure equipment
- telecom services
In a vertically integrated model , value capturing entails:
- revenue gets redistributed more or less equally among all firms
