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Flashcards in Econ Deck (46)
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1
Q

Components of GDP

A

GDP = C + I + G + (X – M).

The four components of gross domestic product are consumption spending, business investment, government spending, and net exports.

2
Q

When currencies are freely traded and forward currency contracts exist, the percentage difference between forward and spot exchange rates is approximately equal to the difference between the two countries’ WHAT?

A

Interest Rates

3
Q

Define the no-arbitrage forward exchange rate

A

forward rate / spot rate = (1 + int rate price currency / 1+ int rate base currency)

4
Q

Perfect Competition - Profit maximized at

A

Produce the quantity for which P = MR = MC = ATC

no firm earns economic profits and each firm is producing the quantity for which ATC is a minimum

5
Q

Perfect Competition - Long Run / Short Run Shutdown

A

If AR ≥ ATC, the firm should stay in the market in both the short and long run.

If AR ≥ AVC, but AR < ATC, the firm should stay in the market in the short run but will exit the market in the long run.

If AR < AVC, the firm should shut down in the short run and exit the market in the long run.

6
Q

Imperfect Competition - Long Run / Short Run Shutdown

A

TR = TC: break even.

TC > TR > TVC: firm should continue to operate in the short run but shut down in the long run.

TR < TVC: firm should shut down in the short run and the long run.

Because price does not equal marginal revenue for a firm in imperfect competition, analysis based on total costs and revenues is better suited for examining breakeven and shutdown points.

7
Q

Total Factor Productivity

A

Growth in potential GDP equals growth in technology plus the weighted average growth rate of labor and capital. Because of diminishing marginal productivity (return), the only way to sustain long-term growth in potential GDP is through technological change or growth in total factor productivity.

Technology is the primary driver in the growth in total factor productivity, a well-known model (the Solow model or neoclassical model)

8
Q

Real Exchange Rate

A

nominal FX rate * (CPI base currency / CPI price currency)

9
Q

Convert USD/EUR to EUR/USD

A

1.42 USD/EUR

divide 1 by the current rate = 1/1.42 USD/EUR

= 0.7042 EUR/USD

10
Q

Currency Cross Rate

A

The cross rate is the exchange rate between two currencies implied by their exchange rates with a common third currency.

CHF/USD = 1.7799, and NZD/USD = 2.2529. Calculate the CHF/NZD spot rate.

Since NZD is in the base of the rate you want, it has to be in the base of the rate you’re using to calc it.

so covert NZD/USD = 2.2529 = 1 / 2.2529 =
USD/NZD = .4439

CHF/USD 1.7799 * USD/NZD .4439 =
CHF/NZD .79

11
Q

Impact of change in INT Rates on exchange rates

A

The decrease in real interest rates causes the currency to depreciate in the foreign exchange market.

Depreciation of the currency increases foreign demand for domestic goods.

12
Q

Comparative Advantage

A

a nation will benefit from trade when it imports goods for which it is the high cost producer and exports goods for which it is the low-cost producer.

According to the law of comparative advantage, both trading partners are better off if they specialize in the production of goods for which they are the low-opportunity cost producer and trade for those goods for which they are the high-opportunity cost producer.

13
Q

Unemployment Rate

A

The unemployment rate of a country is the percentage of people in the labor force who are unemployed. It is calculated as: unemployment rate = (number of unemployed / labor force) × 100. The labor force includes those individuals who are employed or are actively seeking employment.

14
Q

neutral rate of interest

A

The neutral rate of interest is real trend rate of economic growth plus the inflation target

i.e. An analyst has determined the projected trend rate of real GDP growth is 2.5% and the central bank’s inflation target is 2.5%. If the central bank policy rate is 5.0%, monetary policy is most likely: Neutral

15
Q

Describe the elasticity of the long-run aggregate supply curve

A

The long-run aggregate supply curve is perfectly inelastic because in the long run, wages and other input prices adjust to changes in the overall price level. Long-run aggregate supply equals potential GDP.

16
Q

Kinked demand model

A

traditional model of oligopoly, the kinked demand curve model, is based on the assumption that an increase in a firm’s product price will not be followed by its competitors, but a decrease in price will. According to the kinked demand curve model, each firm believes that it faces a demand curve that is more elastic (flatter) above a given price (the kink in the demand curve) than it is below the given price.

17
Q

Money has three primary functions:

A

it provides a store of value because money received for work or goods can be saved for future consumption; it serves as a unit of account because prices of all goods and services are expressed in units of money; and it serves as a medium of exchange because money is accepted as a form a payment.

18
Q

Equation for Fiscal Balance and interpretation

A

(G – T) = (S – I) – (X – M)

we can interpret this equation as saying a fiscal deficit must be financed by a combination of domestic and foreign capital.

19
Q

The exchange rate for Japanese yen (JPY) per euro (EUR) changes from 98.00 to 103.00 JPY/EUR. How has the value of the EUR changed relative to the JPY in percentage terms?

A

Appreciated by by 5.1%. Because the exchange rates are quoted with the EUR as the base currency, the percentage change is simply 103.00 / 98.00 − 1 = 5.1%. The increase in the quoted JPY/EUR exchange rate means it now requires 5.1% more JPY to purchase one EUR. Thus, the EUR has appreciated by 5.1% against the JPY.

20
Q

Define Allocative Efficiency

A

Allocative efficiency occurs when the quantity produced maximizes the sum of consumer and producer surplus. That is, where marginal benefit equals marginal cost.

21
Q

Describe and Calc the money multipler

A

$ * (1 / reserve requirement)

The parenthetical is the money multiplier

deposit of $1 million in cash, the reserve requirement is 10%, the maximum increase in the money supply that could result is: 1/0.10 × $1 million = $10 million.

22
Q

Fundamental Relationship between Savings and the other components of GDP

A

S = I + (G - T) + (X - M)

Savings are either invested, used to finance government deficit or used to fund a trade surplus when both exist.

23
Q

Balance of Payments Consists of

A

Current Account - (X - M) - which usually measures goods and services

Capital Account - capital transfers, sales/purchases of physical assets, natural resources, intangible assets

Financial Account - records investment flows. domestic owned financial assets abroad.

24
Q

Current Account surplus/deficit

A

(X - M) = private savings + government savings - Investments

25
Q

Quantile Classes and Formula

A

Quartile - Quarters or 25% - divide distribution by quarters
Quintile - Fifths or 20% - divide distribution by fifths
Decile - Tenths or 10% - divide distribution by tenths
Percentile - 100%

(1 + # of observations) * (% / 100)

Note: this is going to give you the number of observations in the quintile range. (i.e. if you get 8, 8 observations are in the range)

note: for the %, if question asks for 3rd quintile the % is 60. 3/5
note: what to do with the decimal. (14)(60) / (100) = 8.4. The third quintile falls between 13.6% and 13.9%, the 8th and 9th numbers from the left. Since L is not a whole number, we interpolate as: 0.136 + (0.40)(0.139 − 0.136) = 0.1372, or 13.7%.

26
Q

Fiscal Multiplier

A

1 / (1 - MPC) * (1 - t)

i.e. increase in govt spend is $100 when mpc is 80%, tax rate is 25%
1/(1-.8)(1-.25) = 2.5. this means an increase in spending of $100 has the potential to increase agg demand by $250 –> 2.5*100

27
Q

Law of Diminishing Returns

A

The law of diminishing returns states that for a given production process, as more and more resources (such as labor) are added holding the quantities of other resources fixed, output increases at a decreasing rate. This occurs because, at some point, adding more workers results in inefficiencies.

28
Q

Growth in potential GDP =

A

Growth in potential GDP = growth in labor force + growth in labor productivity.

29
Q

Describe Levels of Price Discrimination

A

First degree, (perfect price discrimination) involves charging each customer their reservation price. The entire consumer surplus is eliminated.

Second degree, involves using the quantity purchased as the basis for the pricing of a particular good.

Third degree, involves segregating customers by demographic or other traits.

30
Q

Interpret the Demand Function

Qd of x = 4.3 - .7Px + .03I - .05Py

A

Qd of x = 4.3 - .7Px + .03I - .05Py

The negative sign on the coefficient forPyindicates thatXandYhave a negative cross-price elasticity of demand and are thus complements.

substitutes would be indicated by a positive sign on the coefficient forPy.

positive sign on the coefficient forIindicates thatXhas a positive income elasticity, thereforeXis a “normal”,

31
Q

Gross domestic product (GDP) can be defined in terms of either output or income:

A

Gross domestic product (GDP) can be defined in terms of either output or income:

  • it is the market value of all final goods and services produced within the economy in a given period of time (output definition) or, equivalently,
  • it is the aggregate income earned by all households, all companies, and the government within the economy in a given period of time (income definition).

GDP includes the final goods and NOT the resalable (intermediate) goods.

32
Q

Liquidity Trap

A

A liquidity trap arises when the demand for money is infinitely elastic because individuals elect to hold additional money balances rather than respond to stimulative rate cuts by spending. As a result, weakening consumption leads to deflation.

33
Q

Cost-push Inflation

A

Cost–push inflation arises due to increases in costs associated with production: wages and raw materials prices. Rising business costs, usually wages, compel businesses to raise prices generally

34
Q

Demand Pull Inflation

A

increasing demand raise prices generally, which then are reflected in a business’s costs as workers demand wage hikes to catch up with the rising cost of living.

Demand–pull inflation depends upon the relationship between actual and potential GDP and industrial capacity utilization. The higher the rate of capacity utilization or the closer actual GDP is to potential, the more likely an economy will suffer shortages, bottlenecks, and a general inability to satisfy demand, and hence, price increases.

35
Q

The inflation rate is measured

A

[(CPI this year − CPI last year)/CPI last year] × 100

36
Q

Elasticity Formulas - Own price, Income, cross price

A

Own Price Elasticity of Demand - % Change in Quantity / % Change in Price

Income Elasticity - % change in quantity / % change in income

Cross price elasticity - % change in quantity / % change in price of another good.

37
Q

Normal good, inferior good, giffen good

A

normal good - an increase in income causes consumers to buy more

inferior good - A good whose consumption decreases as income increases. –> no frills mac and cheese

giffen good - Goods that are consumed more as the price of the good rises because it is a very inferior good whose income effect overwhelms its substitution effect when price changes.

Veblen good - Goods that increase in desirability with increasing price.

38
Q

Wealth Effect

A

The proportion of disposable income that households save depends partly on the value of the financial and real assets that they have already accumulated. an increase in household wealth increases consumer spending and shifts the aggregate demand curve to the right. In contrast, a decline in wealth will reduce consumer spending and shift the AD curve to the left.

39
Q

dead weight loss

A

the deadweight loss is the amount of lost welfare from the imposition of the quota or tariff. From the viewpoint of the domestic country, the loss in consumer surplus is only partially offset by the gains in domestic producer surplus and the collection of tariff revenue.

40
Q

structural deficit

A

The structural deficit is the deficit that would exist if the economy was at full employment (or full potential output).

41
Q

cross price elasticity positive vs negative

A

If the cross-price elasticity of demand is positive, the goods are substitutes. if negative they are complements

42
Q

Using the expenditures approach GDP consists of

A

GDP = Consumer spending on goods and services + Business gross fixed investment + Change in inventories + Government spending on goods and services + Government gross fixed investment + Exports − Imports + Statistical discrepancy

43
Q

Money Neutrality

A

The concept of money neutrality implies that an increase in the money supply will leave real variables like output and employment unaffected. The real rate of interest will be unaffected by money supply changes but inflation and inflation expectations will be affected.

44
Q

frictional unemployment

A

Frictional unemployment is short term and transitory in nature; it includes people who are “between jobs,” as in this case, and those who are not working because they are taking time to search for a job that better matches their skills, interests, and other preferences.

45
Q

Basic Rule of elasticity regard greater than or less than 1

A

An item is elastic if the % change in quantity demanded is greater than the % change in price. change in q / change in P. when demand is elastic, the result of this formula is greater than one.

46
Q

sum of value added method for calcing GDP

A

The sum-of-value-added method involves summing the value added (or income created) at each step in the production and distribution process.