Chapter 1 Flashcards
(33 cards)
The use of tariffs and other trade restrictions to improve a country’s international competitiveness.
It influences imports and exports.
What is Commercial policy?
Regulating aggregate demand through government spending and taxation.
It can stimulate or dampen economic activity.
What does Fiscal policy involve?
Concerned with the regulation of the money supply and the availability of credit.
It is conducted by the Federal Reserve System.
Define Monetary policy.
Aims to promote full employment, price stability, and economic growth.
It consists of monetary, fiscal, and commercial policies.
What is Macroeconomic policy?
The interest rate that equates future payments from a debt instrument with its value today.
It measures the total return from a bond if held until maturity.
What does Yield to maturity (YTM) represent?
A debt instrument that promises interest payments and principal repayment upon maturity.
It is commonly used for financing by governments and corporations.
What is a Bond?
A share of equity in a publicly-owned corporation.
It signifies ownership and a claim on profits.
Define Common stock.
A tradable claim on the issuer’s future income or assets.
Examples include common stock and bonds.
What is a Financial instrument?
Stock, bond, and foreign-exchange markets that channel funds from surplus to deficit units.
They are essential for economic growth.
What are Financial markets?
The difference between total revenue and total operating (variable) cost.
It measures profitability from core business activities.
Define Operating profit ($pi_{o}$).
Expenditures related to a firm’s ongoing operations.
It is also referred to as total variable cost (TVC).
What does Total operating cost ($TC_{o}$) include?
The additional return required to make an investor indifferent between a risky and a risk-free investment.
It compensates for additional investment risk.
Define Risk premium.
Short-term U.S. Treasury securities.
They serve as a benchmark for assessing risk.
What are Risk-free investments?
The minimum rate of return necessary to keep shareholders from pulling their investment.
It is considered an implicit cost.
What is Normal profit?
The difference between total revenue and total economic cost.
It incorporates both explicit and implicit costs.
Define Economic profit (π).
The difference between total revenue and total explicit (accounting) cost.
It is the profit reported on financial statements.
What is Accounting profit ($pi_{A}$)?
Includes all relevant opportunity costs—both explicit and implicit.
It provides a complete picture of production costs.
Define Total economic cost (TC).
The value of resources used in production for which no direct payment is made.
These are crucial for calculating economic profit.
What is an Implicit cost?
Also called accounting costs, they include wages paid to workers and raw materials suppliers.
These costs are directly measurable.
What are Explicit costs?
discount rate.
It is derived from the interest rate.
Fill in the blank: The term _______ is used to determine the present value of some future amount.
The price paid for the use of borrowed funds.
It is essential in financial calculations.
What is Interest rate?
The difference between the present value of cash inflows and cash outflows.
Maximizing NPV is critical for investment decisions.
Define Net present value (NPV).
The firm is a profit-maximizing ‘black box’ that transforms inputs into outputs for sale.
This theory simplifies the firm’s market behavior.
What does Neoclassical theory of the firm posit?
An activity that transforms scarce factors of production into outputs of goods and services.
Firms play a vital role in economic activity.
What is a Firm?
