Section I.B.2

Question 1

What are the major areas of economic thought?

Answer 1

• Keynesian economics (Most tested)
• Austrian School economics
• Monetarism

Question 2

What is Marginal utility?

Answer 2

Marginal utility: concept that value increases for each unit of consumption up to a point at which value begins decreasing for each additional unit consumed an important concept to grasp

Question 3

What is the Austrian School of Economic thought?

Answer 3

• This school is similar to neoclassical but considers the role of the money supply and government actions.
• Government intervention may cause a boom and bust cycle.
• Friedrich (F.A.) Hayek a pioneer of Austrian economic theory.

Question 4

John Maynard Keynes?

Answer 4

Question 5

Who is Milton Friedman?

Answer 5

Question 6

What is Monetarism?

Answer 6

Monetarists contend that inflation is a function of how much money a government prints.

*Advocate for a steady increase in the money supply and a limited role of government.

*Those following the monetarist school of thought object to the Keynesian approach because Keynesian theory

– does not consider the role of the money supply.
– is not logical in light of utility maximizing market
participants.
–ignores the long term cost of government intervention.
–does not consider the unpredictability of the timing of fiscal policy changes on the economy.

Question 7

What is Elasticity?

Answer 7

Question 8

How is Elasticity of Demand calculated?

Answer 8

Question 9

What is Micro vs Macro Economic Theory?

Answer 9

Microeconomic theory
* the study of the actions of individual consumers and businesses as it pertains to buying, selling and the prices paid for goods and services

• the utility function is a core component of micro
  economic theory

Macroeconomic theory
* the study of national and global economies and their interactions with each other

• gross domestic product, interest rates, trade surplus or deficit, currency exchange and other key data are analyzed

Question 10

Key variables for Domestic Macro-economy?

Answer 10

• Gross Domestic Product (GDP)
• Unemployment rates
• Inflation
• Interest rates
• Budget deficit
• Consumer sentiment

Question 11

Fiscal policy vs Monetary policy?

Answer 11

• Fiscal policy the government’s spending and taxing actions
• Monetary policy manipulation of the
  money supply

Question 12

What is Supply-Side policies?

Answer 12

• Goal: To create an environment in which workers and owners of capital have the maximum incentive and ability to produce and develop goods.
• Focus is on how tax policy can be used to improve incentives to work and invest.

Question 13

What is Monetary Policy?

Answer 13

Monetary Policy includes actions by a country’s central bank intended to accomplish its core objectives to maximize employment, promote stable growth and acceptable levels of
inflation.

Central banks enact monetary policy by controlling the money supply through open market operations, setting the discount rate and reserve requirements.

Question 14

What is Fiscal Policy?

Answer 14

Fiscal Policy is often used to describe a government’s ability to manage or
control government spending and revenue generating (tax) policy.

The impact of a government’s fiscal policy can be seen in a number of
ways including personal consumption (spending) and saving, debt levels,
business investment, exchange rates, etc.

Expansionary fiscal policy (e.g., tax reduction, government spending on
infrastructure and capital projects, etc.) is often used to encourage growth
and risk taking.

Contractionary fiscal policy (e.g., tax increases, government budget cuts,
etc.) is often used to slow down growth to avoid excess inflation or
bubbles.

Question 15

What is the Role of Central Banks?

Answer 15

• governmental entity responsible for overseeing a country’s monetary system
• goals may include controlling inflation, stabilizing the local currency, and maintaining full employment
• activities may include issuing currency, regulating credit, bank oversight, serve banking needs of the government, act as lender of last resort, and manage
  exchange reserves

Question 16

What are Yield Spreads?

Answer 16

the difference in yield percentage between two debt instruments or categories of debt

Question 17

Typically, when do yield spread widen?

Answer 17

widen during periods of uncertainty and fear.

Question 18

What is the Yield Curve?

Answer 18

graphical illustration of the relationship between yields and maturities;
* a “normal” yield curve is upward sloping due to higher yields for longer maturities
* information on expected future short term rates can be implied from the yield curve
* expectations of a rise in short term rates and an increase in the liquidity premium are examples of situations likely leading to an increase in the yield curve
* a flat or inverted yield curve may indicate a recession is forthcoming (there is historical evidence to support this theory, but recession is not a certain outcome)

Question 19

What are the stages of a Business/Economic Cycle?

Answer 19

• Expansion, peak, contraction and trough

Question 20

What are the four cycles of business and inflation?

Answer 20

Question 21

What is the impact of leverage on profitability?

Answer 21

Question 22

What is Inflation?

Answer 22

A condition in which prices are rising and purchasing power is falling over time.

How to fight it?
- Raise interest rates
- Reduce money supply

Question 23

What is Producer Price Index (PPI)?

Answer 23

measure of average change in price in goods and services received by domestic producers;

three areas of production included: -commodity based
-industry based
-stage of processing based

Question 24

What is Consumer Price Index (CPI)?

Answer 24

a broad measure of inflation; measures prices by taking a weighted average of a basket of consumer goods and services including food, medical care, transportation, energy, etc.

Question 25

What is Deflation?

Answer 25

A condition in which prices are falling.

Typically happens with a contraction in money supply and/or credit.

“Deflation occurs when the price levels in an economy decline, where people prefer to hoard cash instead of spending it on goods that will be cheaper in the future.”

How to fight?
- loose or expansionary monetary and fiscal policy tools are used.
- lower interest rates
- increase govt spending
- cutting taxes

Question 26

What is Reflation?

Answer 26

A condition in which prices begin rising again. “Reflate prices”

Typically happens after economic contraction and/or a decline in the financial markets.

Reflation is a policy that is enacted after a period of economic slowdown or contraction.

The goal is to expand output, stimulate spending and curb the effects of deflation.

Policies include tax cuts, infrastructure spending, increasing the money supply, and lowering interest rates.

Question 27

What is Stagflation?

Answer 27

When prices (inflation) are rising, economic growth is slowing or decreasing, and unemployment is high.

How to fight it?
- control inflation first by tightening money supply

Question 28

What is Disinflation?

Answer 28

A decrease in the rate of rising prices (inflation). It describes a slowing in the rate of growth.

Question 29

What are the Macroeconomic Measurements?

Answer 29

• leading GDP indicators
• coincident GDP indicators
• lagging GDP indicators
• price level indicators

Question 30

What are the Economic Indicators?

Answer 30

Question 31

What is Comparative and Absolute Advantage?

Answer 31

Comparative advantage is the ability or capacity one has in producing goods or services for a lower opportunity cost compared to one’s competitor.

Absolute advantage is the ability or capacity one has in producing more goods or services (e.g., more effectively) compared to one’s competitor.

Question 32

What is the role of the International Monetary Fund (IMF)?

Answer 32

• Promote sustainable growth and prosperity for member countries
• Ensure stability of the exchange rate system
• Ensure stability of international payments system

Services:
- Offers analysis and recommendations to members
- Lend money to member countries in need

Question 33

Role of the World Bank?

Answer 33

international organization established to provide financing, advice and research to developing nations in order to aid their economic development and stabilization.

Question 34

Role of the World Trade Organization (WTO)?

Answer 34

To provide the legal and institutional foundation for the multinational trading system.

• It addresses barriers to trade and subsidies that inhibit trade.
  *The WTO implements and administers individual agreements, which encourages trade by providing a platform for negotiations and settling of disputes.

Question 35

What is the standard exchange rate format?

Answer 35

Question 36

How are currencies quoted/calculated?

Answer 36

Question 37

What is Currency Appreciation (or Depreciation)?

Answer 37

Question 38

What is a mark-to-market system?

Answer 38

Question 39

What is Purchasing Power Parity?

Answer 39

Exchange rates are balanced (in equilibrium) when the purchasing power is equal between two countries.

PPP is often used to calculate the relative value of country currencies.

PPP is one way to assess a country’s standard of living.

Question 40

What is Carry Trade?

Answer 40

One example of a carry trade is to borrow at a lower interest rate in one country or asset and invest or lend in a country or asset at a higher rate.

Question 41

What are Special Drawing Rights (SDRs)?

Answer 41

Defined:
An international reserve asset created by the International Monetary Fund (IMF), typically used to support member countries

Application:
SDRs are not actually a currency but instead represent a claim on actual currencies of other IMF members