Econ

Question 1

Q: When should a firm continue operating in the short run under perfect competition?

Answer 1

A: A firm should continue operating if average revenue (AR) is greater than average variable cost (AVC), even if it incurs losses. If AR < AVC, the firm should shut down.

Question 2

Q: When should a firm shut down in the long run?

Answer 2

A: A firm should shut down in the long run if AR < ATC, meaning it cannot cover total costs. If AR = ATC, the firm breaks even, earning zero economic profit.

Question 3

Q: How do shutdown and breakeven points differ for price-searcher firms?

Answer 3

A: Price-searcher firms (downward-sloping demand curve) use total revenue (TR) and total cost (TC) for shutdown analysis:

TR = TC → Breakeven
TC > TR > TVC → Continue in the short run but shut down in the long run
TR < TVC → Shut down immediately

Question 4

Q: A firm has TR = $700,000, TVC = $800,000, and TFC = $400,000. Should it shut down?

Answer 4

A: Yes. Since TR < TVC, the firm cannot cover variable costs and should shut down to minimize losses.

Question 5

Q: What are economies of scale, and how do they affect costs?

Answer 5

A: Economies of scale occur when increasing production reduces long-run average total cost (LRATC), due to factors like labor specialization, mass production, and bulk purchasing.

Question 6

Q: What are diseconomies of scale, and why do they occur?

Answer 6

A: Diseconomies of scale occur when LRATC rises due to inefficiencies from large-scale operations, such as bureaucracy, workforce management issues, and reduced innovation.

Question 7

If a firm increases its plant size by 10% and its minimum average total cost increases by 10%, the firm is experiencing:

A)
constant returns to scale.

B)
diseconomies of scale.

C)
economies of scale.

Answer 7

Explanation
If minimum average total costs increase as plant size is increased, the firm is experiencing diseconomies of scale. (Module 12.1, LOS 12.a)

Question 8

Q: What are the key characteristics of perfect competition?

Answer 8

A: Many firms, identical products, very low barriers to entry, price competition only, no pricing power, perfectly elastic (horizontal) demand curve.

Question 9

Q: How does monopolistic competition differ from perfect competition?

Answer 9

A: Many firms with differentiated products, low barriers to entry, price and non-price competition (marketing, features), downward-sloping demand curve, some pricing power.

Question 10

Q: What are the defining characteristics of an oligopoly market?

Answer 10

A: Few firms, high barriers to entry, interdependent pricing, products may be similar or differentiated, significant pricing power, firms compete on price, marketing, and features.

Question 11

Q: What are the main features of a monopoly?

Answer 11

A: Single firm, very high barriers to entry, no good substitutes, significant pricing power, downward-sloping demand curve, competition mainly through advertising (if any).

Question 12

Q: How does the demand curve differ across market structures?

Answer 12

A: Perfect competition: horizontal (perfectly elastic); Monopolistic competition: relatively elastic downward slope; Oligopoly: varies between elastic and inelastic; Monopoly: steep downward slope.

Question 13

Q: What factors determine where a market falls on the spectrum from perfect competition to monopoly?

Answer 13

A: Number of firms, product differentiation, pricing power, barriers to entry/exit, and competition beyond price.

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Question 14

We can analyze where a market falls along the spectrum from perfect competition to pure monopoly by examining five factors:

Answer 14

Number of firms and their relative sizes

Degree to which firms differentiate their products

Bargaining power of firms with respect to pricing

Barriers to entry into or exit from the industry

Degree to which firms compete on factors other than price

Question 15

Compared to a perfectly competitive industry, in an industry characterized by monopolistic competition:

A)
both price and quantity are likely to be lower.

B)
price is likely to be higher, and quantity is likely to be lower.

C)
quantity is likely to be higher, and price is likely to be lower.

Answer 15

Explanation
Monopolistic competition is likely to result in a higher price and lower quantity of output compared to perfect competition. (Module 12.2, LOS 12.c)

Question 16

A firm will most likely maximize profits at the quantity of output for which:

A)
price equals marginal cost.

B)
price equals marginal revenue.

C)
marginal cost equals marginal revenue.

Answer 16

Explanation
The profit-maximizing output is the quantity at which marginal revenue equals marginal cost. In a price-searcher industry structure (i.e., any structure that is not perfect competition), price is greater than marginal revenue. (Module 12.2, LOS 12.c)

Question 17

Consider a firm in an oligopoly market that believes the demand curve for its product is more elastic above a certain price than below this price. This belief fits most appropriately to which of the following models?

A)
Cournot model.

B)
Dominant firm model.

C)
Kinked demand model.

Answer 17

Explanation
The kinked demand model assumes that each firm in a market believes that at some price, demand is more elastic for a price increase than for a price decrease. (Module 12.2, LOS 12.d)

Question 18

Which of the following is most likely an advantage of the Herfindahl-Hirschman Index (HHI) relative to the N-firm concentration ratio?

A)
The HHI is simpler to calculate.

B)
The HHI considers barriers to entry.

C)
The HHI is more sensitive to mergers.

Answer 18

Explanation
Although the N-firm concentration ratio is simple to calculate, it can be relatively insensitive to mergers between companies with large market shares. Neither the HHI nor the N-firm concentration ratio consider barriers to entry. (Module 12.3, LOS 12.e)

Question 19

A market characterized by low barriers to entry, good substitutes, limited pricing power, and marketing of product features is best characterized as:

A)
oligopoly.

B)
perfect competition.

C)
monopolistic competition.

Answer 19

Explanation
These characteristics are associated with a market structure of monopolistic competition. Firms in perfect competition do not compete on product features. Oligopolistic markets have high barriers to entry. (Module 12.3, LOS 12.e)

Question 20

Flashcard 1
Q: What are the four phases of the business cycle?

Answer 20

A: Expansion, Peak, Contraction (Recession), and Trough.

Question 21

Q: How do credit cycles interact with business cycles?

Answer 21

A: Credit cycles, which involve fluctuations in interest rates and loan availability, can amplify business cycles. Loose credit can create asset bubbles, while tight credit can deepen contractions.

Question 22

Q: How does consumer spending vary over the business cycle?

Answer 22

A: Spending on durable goods is highly cyclical, increasing in expansions and decreasing in contractions, while nondurable goods and essential services remain more stable.

Question 23

Q: What factors influence housing sector activity in the business cycle?

Answer 23

A: Mortgage rates, housing costs relative to income, speculative activity, and demographic trends.

Question 24

Q: How do imports and exports change with the business cycle?

Answer 24

A: Rising domestic GDP increases imports, while rising foreign GDP boosts exports. Currency appreciation reduces exports and increases imports, and vice versa.

Flashcard 6

Question 25

Q: What are the three types of economic indicators?

Answer 25

A: Leading indicators (predict turning points), coincident indicators (move with the cycle), and lagging indicators (confirm trends after they occur).

Question 26

In the early part of an economic expansion, inventory-sales ratios are most likely to: A) increase because sales are unexpectedly low. B) increase because businesses plan for expansion. C) decrease because of unexpected increases in sales.

Answer 26

Explanation Early in an expansion, inventory-sales ratios typically decrease below their normal levels as accelerating sales draw down inventories of produced goods. (Module 13.1, LOS 13.c)

Question 27

Which economic sector would most likely correlate strongly and positively with credit cycles? A) Exports. B) Food retail. C) Construction.

Answer 27

Explanation Credit cycles are associated with interest rates and the availability of credit, which is important in the financing of construction and the purchase of property. (Module 13.1, LOS 13.b)

Question 28

An economic indicator that has turning points that tend to occur after the turning points in the business cycle is classified as a: A) lagging indicator. B) leading indicator. C) trailing indicator.

Answer 28

Explanation Lagging indicators have turning points that occur after business cycle turning points. (Module 13.1, LOS 13.c)

Question 29

When they recognize the beginning of a recession, companies are most likely to adjust their stock of physical capital by: A) selling physical assets. B) deferring maintenance of equipment. C) canceling orders for new construction equipment.

Answer 29

Explanation Physical capital adjustments to downturns typically are made through aging of equipment plus postponing maintenance. (Module 13.1, LOS 13.c)

Question 30

Q: What is the difference between a budget deficit and a budget surplus?

Answer 30

A: A budget deficit occurs when government expenditures exceed tax revenues, while a budget surplus occurs when tax revenues exceed expenditures.

Question 31

Q: How do expansionary and contractionary fiscal policies affect GDP?

Answer 31

A: Expansionary fiscal policy (higher deficits or lower surpluses) increases GDP, while contractionary fiscal policy (lower deficits or higher surpluses) decreases GDP.

Question 32

Q: What are the key differences between Keynesian and monetarist views on fiscal policy?

Answer 32

A: Keynesians believe fiscal policy strongly affects economic growth when unemployment is high, while monetarists argue that fiscal stimulus has only temporary effects and prefer monetary policy for managing inflation.

Question 33

Q: What is the crowding-out effect in fiscal policy?

Answer 33

A: The crowding-out effect occurs when increased government borrowing raises interest rates, reducing private-sector borrowing and investment.

Question 34

Q: What are the two main categories of fiscal policy tools?

Answer 34

A: Spending tools and revenue tools.

Question 35

Q: What are the three types of government spending, and how do they differ?

Answer 35

A: Transfer payments: Redistribute wealth (e.g., unemployment benefits, Social Security). Current spending: Ongoing government purchases of goods and services. Capital spending: Investment in infrastructure to boost future productivity.

Question 36

Q: How do direct taxes differ from indirect taxes?

Answer 36

A: Direct taxes: Levied on income or wealth (e.g., income tax, corporate tax). Indirect taxes: Levied on goods/services (e.g., sales tax, VAT, excise tax).

Question 37

Q: What is Ricardian Equivalence?

Answer 37

A: The theory that taxpayers may save more today in anticipation of higher future taxes, offsetting the impact of government deficit spending on aggregate demand.

Question 38

Q: What are the three types of lags in implementing fiscal policy?

Answer 38

A: Recognition lag: Time to identify economic issues. Action lag: Time to pass and enact policy. Impact lag: Time for the policy to affect the economy.

Question 39

Q: What is fiat money, and how does it differ from money backed by gold?

Answer 39

A: Fiat money is currency that has no tangible backing (e.g., gold) but is deemed legal tender by law. Unlike gold-backed money, its value depends on public confidence and government regulation.

Question 40

Q: What are the six key roles of central banks?

Answer 40

A: 1) Sole supplier of currency 2) Banker to the government and banks 3) Regulator of the payments system 4) Lender of last resort 5) Holder of gold and foreign exchange reserves 6) Conductor of monetary policy

Question 41

Q: What are the primary objectives of a central bank?

Answer 41

A: The main goal is price stability by controlling inflation. Other objectives may include exchange rate stability, full employment, economic growth, and moderate long-term interest rates.

Question 42

Q: What are the three main tools of monetary policy?

Answer 42

A: 1) Policy rate (e.g., discount rate, repo rate) 2) Reserve requirements (banks' required reserves) 3) Open market operations (buying/selling securities to influence money supply)

Question 43

Q: How does a contractionary monetary policy affect the economy?

Answer 43

A: Raising the policy rate leads to higher borrowing costs, lower asset prices, reduced demand, a stronger currency, and ultimately, downward pressure on inflation.

Question 44

Q: What happens in an expansionary monetary policy?

Answer 44

A: The central bank buys securities, lowers interest rates, depreciates the currency, increases business investments and consumer spending, and boosts aggregate demand, GDP, and inflation.

Question 45

Q: What are the three essential qualities a central bank must have to succeed in inflation targeting?

Answer 45

A: Independence, credibility, and transparency.

Question 46

Q: What is the difference between operational and target independence for a central bank?

Answer 46

A: Operational independence allows the central bank to set policy rates, while target independence lets it define inflation measurement, set the target level, and determine the target horizon.

Question 47

Q: Why do some countries use exchange rate targeting instead of inflation targeting?

Answer 47

A: Exchange rate targeting stabilizes the currency against another (e.g., the U.S. dollar), but it forces the country to match the inflation rate and monetary policy of the targeted currency’s country.

Question 48

Q: What is a liquidity trap, and how does it limit monetary policy?

Answer 48

A: A liquidity trap occurs when individuals hold money instead of investing, making monetary policy ineffective because increasing money supply does not lower interest rates or boost spending.

Question 49

Q: What happens when monetary and fiscal policies are both expansionary?

Answer 49

A: Interest rates usually fall, boosting both private and public sector growth, leading to a highly expansionary economic environment.

Question 50

Monetary policy is likely to be least responsive to domestic economic conditions if policymakers employ: A) inflation targeting. B) interest rate targeting. C) exchange rate targeting.

Answer 50

Explanation Exchange rate targeting requires monetary policy to be consistent with the goal of a stable exchange rate with the targeted currency, regardless of domestic economic conditions. (Module 15.2, LOS 15.c)

Question 51

Monetary policy is most likely to fail to achieve its objectives when the economy is: A) growing rapidly. B) experiencing deflation. C) experiencing disinflation.

Answer 51

Explanation Monetary policy has a limited ability to act effectively against deflation because the policy rate cannot be reduced below zero, and demand for money may be highly elastic (liquidity trap). (Module 15.2, LOS 15.c)

Question 52

Roles and objectives of fiscal policy most likely include: A) controlling the money supply to limit inflation. B) adjusting tax rates to influence aggregate demand. C) using government spending to control interest rates.

Answer 52

Explanation Influencing the level of aggregate demand through taxation and government spending is an objective of fiscal policy. Controlling inflation and interest rates are typical objectives of monetary policy. (Module 14.1, LOS 14.b)

Question 53

When investing for a long time horizon, a portfolio manager should most likely devote resources to analyzing: A) event risks. B) thematic risks. C) exogenous risks.

Answer 53

Explanation Thematic risks are those that have effects over the long term. Event risks and exogenous risks are more likely to have high-velocity impacts on investment values, but they are less of a focus for investors with longer time horizons. (Module 16.1, LOS 16.d)

Question 54

Which international organization is primarily concerned with providing economic assistance to developing countries? A) World Bank. B) World Trade Organization. C) International Monetary Fund.

Answer 54

Explanation The World Bank provides technical and financial assistance to economically developing countries. The World Trade Organization is primarily concerned with settling disputes among countries concerning international trade. The International Monetary Fund promotes international trade and exchange rate stability and assists member countries that experience balance of payments trouble. (Module 16.1, LOS 16.c)

Question 55

Q: What is geopolitics?

Answer 55

A: Geopolitics refers to interactions among nations, including the actions of state actors (governments) and nonstate actors (corporations, NGOs, and individuals). It also involves studying how geography affects these interactions.

Question 56

Q: How does a country's cooperation in geopolitics vary?

Answer 56

A: Cooperation exists on a spectrum, with countries being more cooperative on some issues and less on others. Factors influencing cooperation include domestic politics, decision-makers, and political cycles.

Question 57

Q: What are the four archetypes of globalization and cooperation?

Answer 57

A: Autarky (noncooperation & nationalism) – national self-reliance. Hegemony (noncooperation & globalization) – global influence without cooperation. Bilateralism (cooperation & nationalism) – selective country-to-country agreements. Multilateralism (cooperation & globalization) – extensive global cooperation.

Question 58

What are the main functions of the IMF, World Bank, and WTO? A:

Answer 58

IMF: Promotes monetary cooperation, exchange stability, and assists countries in financial distress. World Bank: Provides financial aid and resources to reduce poverty and support development. WTO: Ensures smooth and fair global trade, resolving disputes between nations.

Question 59

Q: What are the three types of geopolitical risk?

Answer 59

A: Event risk – Known timing but uncertain outcomes (e.g., elections). Exogenous risk – Unanticipated events (e.g., wars, rebellions). Thematic risk – Long-term risks (e.g., migration, cyber threats).

Question 60

Q: How do geopolitical risks impact investments?

Answer 60

A: Geopolitical risks affect investment values by increasing required risk premiums. Investors analyze risks based on likelihood, impact, and velocity, using qualitative and quantitative scenario analysis to manage exposure

Question 61

Q: What is the principle of comparative advantage in trade?

Answer 61

A: Comparative advantage occurs when countries specialize in producing goods with lower relative costs and trade with others, increasing total output and wealth. It results from differences in technology and resource endowments.

Question 62

Q: What are the key benefits of free trade beyond comparative advantage?

Answer 62

A: Free trade enhances economies of scale, increases product variety, lowers costs through competition, improves quality, and reduces domestic monopolies' pricing power.

Question 63

Q: What are the common types of trade restrictions?

Answer 63

A: Trade restrictions include tariffs (taxes on imports), quotas (import limits), export subsidies (government payments to exporters), minimum domestic content rules, and voluntary export restraints (VERs).

Question 64

Q: How do tariffs and quotas impact domestic economies?

Answer 64

A: Tariffs and quotas raise domestic prices, reduce consumer surplus, increase producer surplus, and generate government revenue. Quotas may also create quota rents for foreign exporters.

Question 65

Q: What are the different levels of economic integration in trading blocs?

Answer 65

A: From least to most integrated: Free Trade Area (no trade barriers), Customs Union (common trade policy), Common Market (free movement of labor/capital), Economic Union (shared institutions/policies), and Monetary Union (shared currency).

Question 66

Q: What are some common arguments for and against trade restrictions?

Answer 66

A: Arguments for include protecting infant industries and national security. Arguments against include higher consumer prices, reduced efficiency, and job losses in competitive industries.

Question 67

Which of the following effects is most likely to occur in a country that increases its openness to international trade? A) Increased prices of consumer goods. Incorrect Answer B) Greater specialization in domestic output. C) Decreased employment in exporting industries.

Answer 67

Explanation Openness to international trade increases specialization as production shifts to those products in which domestic producers have a comparative advantage. Greater competition from imports will tend to decrease prices for consumer goods. Increasing international trade is likely to increase profitability and employment in exporting industries, but it may decrease profitability and employment in industries that compete with imported goods. (Module 17.1, LOS 17.a)

Question 68

An agreement with another country to limit the volume of goods and services sold to them is best described as a: A) quota. B) voluntary export restraint. C) minimum domestic content rule.

Answer 68

Explanation Voluntary export restraints are agreements to limit the volume of goods and services exported to another country. Minimum domestic content rules are limitations imposed by a government on its domestic firms. Import quotas are limitations on imports, not on exports. (Module 17.1, LOS 17.b)

Question 69

hich of the following groups would be most likely to suffer losses from the imposition of a tariff on steel imports? A) Domestic steel producers. B) Workers in the domestic auto industry. C) Workers in the domestic steel industry.

Answer 69

Explanation Imposing a tariff on steel imports benefits domestic steel producers and workers by increasing the domestic price of steel and benefits the national government by increasing tax (tariff) revenue. However, the increase in the domestic price of steel would increase costs in industries that use significant amounts of steel, such as the automobile industry. The resulting increase in the price of automobiles reduces the quantity of automobiles demanded, and it ultimately reduces employment in that industry. (Module 17.1, LOS 17.b)

Question 70

The most likely motivation for establishing a trading bloc is to: A) increase economic welfare in the member countries. B) increase tariff revenue for the member governments. C) protect domestic industries in the member economies.

Answer 70

Explanation The motivation for trading blocs is to increase economic welfare in the member countries by eliminating barriers to trade. Joining a trading bloc may have negative consequences for some domestic industries and may decrease tariff revenue for the government. (Module 17.1, LOS 17.c)

Question 71

In which type of regional trade agreement are economic policies conducted independently by the member countries, while labor and capital are free to move among member countries? A) Free trade area. B) Common market. C) Economic union.

Answer 71

Explanation These characteristics describe a common market. In a free trade area, member countries remove restrictions on goods and services and trade with one another but may still restrict movement of labor and capital among member countries. In an economic union, member countries also coordinate their economic policies and institutions. (Module 17.1, LOS 17.c)

Question 72

Q: What are the two exchange rate regimes for countries that do not issue their own currencies? .

Answer 72

A: 1. Formal dollarization – A country uses another country's currency and has no independent monetary policy. 2. Monetary union – Several countries adopt a common currency, like the Eurozone, where monetary policy is set collectively

Question 73

Q: What is a currency board arrangement?

Answer 73

A: A system where a country commits to exchanging its currency for a specified foreign currency at a fixed rate. The domestic currency is only issued when fully backed by foreign reserves, limiting independent monetary policy. Example: Hong Kong.

Question 74

Q: What is the difference between a conventional fixed peg and a pegged exchange rate with horizontal bands?

Answer 74

A: - Conventional fixed peg: A currency is pegged within ±1% of another currency or a currency basket. Horizontal bands: Allows for wider fluctuations (e.g., ±2%), providing more policy flexibility than a conventional peg.

Question 75

Q: What are the key features of a crawling peg and crawling bands?

Answer 75

A: - Crawling peg: Exchange rate is periodically adjusted, either passively (to match inflation) or actively (pre-announced adjustments). Crawling bands: The allowed exchange rate band widens over time, facilitating a transition to a floating exchange rate.

Question 76

Q: How do capital flows affect exchange rates and trade balances?

Answer 76

A: - Capital flows adjust faster than trade flows and primarily determine short- to intermediate-term exchange rates. Over time, trade flows influence long-term exchange rates as asset prices and investment decisions adjust. A trade deficit (imports > exports) must be offset by foreign capital inflows (capital account surplus).

Question 77

Q: What are common objectives of capital restrictions imposed by governments?

Answer 77

A: 1. Reduce asset price volatility by preventing sudden capital outflows. 2. Maintain fixed exchange rates by controlling foreign capital movement. 3. Keep domestic interest rates low by limiting capital outflows. 4. Protect strategic industries like defense and telecommunications from foreign ownership.

Question 78

The monetary authority of the Stoddard Islands will exchange its currency for U.S. dollars at a one-for-one ratio. As a result, the exchange rate of the Stoddard Islands currency with the U.S. dollar is 1.00, and many businesses in the Islands will accept U.S. dollars in transactions. This exchange rate regime is best described as: A) a fixed peg. B) dollarization. C) a currency board.

Answer 78

Explanation This exchange rate regime is a currency board arrangement. The country has not formally dollarized because it continues to issue a domestic currency. A conventional fixed peg allows for a small degree of fluctuation around the target exchange rate. (Module 18.2, LOS 18.b)

Question 79

The goal of a government that imposes restrictions on foreign capital flows is most likely to: A) stimulate domestic interest rates. B) decrease domestic asset price volatility. C) encourage competition with domestic industries.

Answer 79

Explanation Decreasing the volatility of domestic asset prices may be a goal of a government that imposes capital restrictions. Other typical goals include keeping domestic interest rates low and protecting certain domestic industries, such as the defense industry. (Module 18.2, LOS 18.c)