Economics Ch1 Flashcards

Question

Which of the following is not part of the control cycle approach to risk management? A. Doing a profit test to determine whether a product provides a positive contribution margin Correct B. Developing the hedges necessary to mitigate interest rate risk C. Determining, in both quantitative and qualitative terms, an understandable explanation of the differences between expected and actual results D. Using the feedback loops in the modeling of expected results to update the assumptions and determine what adjustments in reserves might be necessary

Answer 1

Key elements of the control cycle approach to risk management include the following: Modeling the expected results using a set of initial assumptions Doing a profit test to determine if the product provides a contribution margin Measuring the actual results Determining, both in quantitative and qualitative terms, an understandable explanation of the differences between expected and actual results Determining what actions need to be taken with respect to the product, including possible adjustments to reserves Using the findings to strengthen the model and update the assumptions as needed with feedback from the process

Answer 2

National income (NI) is defined as net domestic product (NDP), plus net income earned abroad, minus indirect business taxes (e.g., sales taxes). NDP is gross domestic product ($4,000) minus depreciation ($500), or $3,500. Thus, national income is $3,290 ($3,500 NDP + $0 net income earned abroad - $210 indirect business taxes). ``` Net domestic product $3,500 Net income earned abroad 0 Indirect business taxes (210) ------ National income $3,290 ====== ``` $3,500 is the NDP. Recall that NDP = Gross domestic product (GDP) - depreciation. $3,515 equals personal income (PI). Recall that PI = NI - corporate income taxes and undistributed profits - Social Security contributions + transfer payments (public and private). PI = NI ($3,290) - corporate income taxes ($50) - undistributed corporate profits ($25) - Social Security contributions ($200) + transfer payments ($500) = $3,515. $3,265 equals disposable income (DI). Recall that DU = PI - personal income taxes. DI = PI ($3,515) - personal income taxes ($250) = $3,265.

Answer 3

A key agricultural goal would be to invest in staple crops with a protectionist impulse designed to circumvent world commodity markets. Many emerging market economies find investing in their own domestic agriculture to be problematic due to a scarcity of arable land and, more importantly, a shortage of water. They outsource food production, growing crops abroad and shipping them back to the home country. Other investments by SWFs are designed to acquire technologies, brands, resources, and better access to international markets and to use technology to enhance productivity. A country like China is taking advantage of the low valuations of increasingly desperate foreign operations (particularly in strategically important sectors such as energy and raw materials) and is making investments in an attempt to achieve energy security and access to strategic materials at a known contract price. Many SWFs are attempting to learn how U.S. companies operate and transfer those skills to improve the operation of their domestic firms.

Answer 4

Key objectives of the supply chain do not to relate the manner in which a company calculates its transfer prices.

Answer 5

A recession is a period in time during which the gross domestic product (GDP) decreases. The GDP is the value of all the reported goods and services produced by people and institutions operating in a country. This means that demand for goods has decreased, unemployment is usually higher (due to layoffs), and the economy is not in good shape. People are not usually borrowing money during a recession. In order to increase the borrowing of money and stimulate purchases (and thus increasing the demand for goods and strengthening the economy), the Federal Reserve Bank would want to make it more attractive to borrow money. In order to do this, the Fed would lower the discount, or interest, rate it charges to banks for loans. The banks would pass along this lower rate to individuals and businesses, giving them an incentive to borrow more and spend more. Due to the decrease in demand for U.S. products, the value of a dollar as compared to other currencies would also decrease. Therefore, the Fed would not sell U.S. government bonds in open-market transactions. The amount received for the bonds would be affected by falling exchange rates. The Federal Reserve Bank would not increase the rate charged by banks when they borrow from one another. An increase in an interest rate would discourage, not encourage, borrowing. Decreasing, not increasing, the level of funds a bank is legally required to hold in reserve would stimulate the economy. Banks could lend more money with these reserves.

Answer 6

The high cost of information technology infrastructure and the need for highly skilled labor in the production process using many of the new technologies requires a market niche that caters to a large global market that requires the firm have the ability to provide mass customization and increased sensitivity to cultural diversity. Success might take the form of developing clusters of similar customers across multiple domestic and/or international markets that would allow for building revenue and profit streams that would continue to support ongoing capital investment for continuing growth. Success might also come from building operations at local levels of an adequate scale in specific regions and territories by teaming up with very knowledgeable on-the-ground partners for product development, distribution, and market positioning.

Answer 7

In monopolistic competition, each firm produces and sells a slightly different product. These differences may be due to brand names, packaging, location, credit terms, customer service, etc. It is through the use of advertising that customers become aware of the differences in the various products available. The goal of advertising is to make the firm's demand curve less elastic.

Answer 8

Aggregate supply equaling aggregate demand is one criterion for market equilibrium. Another criterion is that consumers and businesses agree on what they will save and invest respectively. Although actual savings will always equal actual investment, this, however, does not guarantee an equilibrium level of income and employment. If businesses note that their intended investment levels produce too high or too low of inventory levels, the market will not be in equilibrium, since too little or too much has to be purchased. Therefore, until these imbalances are cleared up, the economy will not be in equilibrium. (Note that actual investment does not usually equal intended investment.)

Answer 9

The monopoly can increase profits by increasing output and decreasing price as long as MR > MC (marginal revenue is greater than marginal costs). The firm will maximize profits by continuing to the point where at the given output MC = MR.

Answer 10

Answer A is incorrect because some U.S. businesses will be helped and others will be hurt. U.S. importers will have to pay more U.S. dollars for goods priced in foreign currencies, increasing costs to the U.S. importers. Answer B is incorrect because U.S. importers will have to pay more U.S. dollars for goods priced in foreign currencies, increasing costs to the U.S. importers. Answer C is correct because a decline in the exchange rate of the U.S. dollar will make goods produced in the U.S. less expensive in foreign currencies, improving the competitiveness of U.S. exporters. Answer D is incorrect because U.S. consumers will have to pay more dollars for goods priced in foreign currencies, making those goods more expensive for those consumers.

Answer 11

Image result for what is the current account The current account is an important indicator about an economy's health. It is defined as the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers.

Answer 12

The balance of trade is calculated by subtracting merchandise imports from merchandise exports (15,760 Ptas. - 20,300 Ptas.) which shows a balance of trade deficit of 4,540 Ptas. The negative net investment income (3,700 Ptas.) is added to this balance, and it would be reduced by the positive inflow of transfers (1,240 Ptas.) leaving a current account deficit balance of 7,000 Ptas. The two accounts dealing with the purchase of assets are part of the capital account and therefore are not relevant for this calculation. If there were any exports or imports or services, they would have been included in the calculation.

Answer 13

Sovereign wealth funds (SWFs) are entities established by governments to make investments with foreign exchange reserves that are managed separately for official foreign exchange reserves managed by the country's central bank within monetary policy goals. The underlying investments are made by SWFs with the goal of making a profit. Many governments seek to attract foreign direct investment, and frequently, some governments seek to manipulate official currency reserves for political purposes.

Answer 14

According to the political business cycle theory, politicians want the economy to be “pointed in the right direction” as the election approaches with the unemployment rate and the inflation rate falling. Thus, there would be relatively expansionary fiscal policy prior to the election, followed by more restrictive fiscal policy soon after the election, often placing the blame for the reversal on the previous administration if there were a change. A. increase your sales forecast for the near term and plan to access the debt markets earlier than you had otherwise anticipated.

Answer 15

Two goods that are used jointly as they are consumed are complementary goods. If the price of one increases causing a decrease in the quantity demanded of that product, then the demand for the other product will fall causing a shift in the demand curve.

Answer 16

The pace and nature of recent technological changes has been one of the driving forces behind much of the success globalization efforts have achieved. There has been a “brain drain” with skilled workers migrating to countries with advanced IT, and where anti-immigration sentiment limits this migration, there is a tendency for the technology—particularly R&D—to migrate to the location of the skilled workers.

Answer 17

The balance of trade comprises a subdivision of the balance of payments on current account. The balance of payments on current account includes all payments made because of current purchases of goods and services. The balance of trade is that part of the current account that denotes the difference between the dollar value of imports and exports in a given year. A favorable balance of trade occurs when exports exceed imports. Increases in U.S. imports will decrease the U.S. balance of trade.

Answer 18

This answer is correct. If wages rise in a stable market, demand for labor will decline and employment will fall.

Answer 19

Market Equilibrium A product’s equilibrium price is determined by demand and supply; it is the price at which all the goods offered for sale will be sold (i.e., quantity demanded = quantity supplied). The equilibrium price is the price at which the demand and supply curve intersect as shown below. Government intervention. Government actions may change market equilibrium through taxes, subsidies, and rationing. For example, a subsidy paid to farmers will reduce the cost of producing a particular farm product and, therefore, cause the equilibrium price to be lower than it would be without the subsidy. Import taxes, on the other hand, would increase the cost of an imported product causing the equilibrium price to be higher. a. Price ceiling. A price ceiling is a specified maximum price that may be charged for a good. If the price ceiling is set for a good below the equilibrium price, it will cause good shortages because suppliers will devote their production facilities to producing other goods. b. Price floor. A price floor is a minimum specified price that may be charged for a good. If the price floor is set for a good above the equilibrium price, it will cause overproduction and surpluses will develop.

Answer 20

This answer is correct. If the increase in demand continues to exceed the increase in supply, price will remain above the original price.

Answer 21

Current account—shows the flow of goods and services and government grants for a period of time. (1) The balance of trade for a period is the difference between the total goods exported and the total goods imported. (2) The balance on goods and services is the difference between the total value of goods and services exported and the total value of goods and services imported. (3) When a nation exports more than it imports a trade surplus occurs. (4) When a nation imports more than it exports a trade deficit occurs.

Answer 22

Disposable income is calculated as Gross national product minus capital cost allowance. Net national product minus indirect business taxes. Personal income minus transfer payments. Personal income minus personal taxes.

Answer 23

This answer is correct. Since the amounts of the supply and demand increase are not known, it is impossible to predict the effects.

Answer 24

This answer is correct. The central bank’s most important function is to regulate the money supply in accordance with policies established to promote the nation’s economic well-being. Monetary policy seeks to provide a supply of money, employment, and a relatively stable price level.

Answer 25

This answer is correct. A weaker dollar decreases the prices of U.S. exports, which should increase the demand for these goods.

Answer 26

This answer is correct because the economy will be capable of producing more goods and services with more resources.

Answer 27

This answer is correct. Movement along the existing demand curve reflects an increase or decrease in the quantity demanded.

Answer 28

This answer is correct. If consumers boycott a product, demand for the product declines.

Answer 29

This answer is correct. In the trough of a business cycle there is unused capacity and an unwillingness to make investments.

Answer 30

The principle of diminishing marginal utility states that marginal utility declines with each additional unit the consumer receives.

Answer 31

Forward discount relative to the currency of country B. a. Real interest rate—Interest rate in terms of goods. These rates are adjusted for inflation. b. Nominal interest rate—Interest rate in terms of the nation’s currency. These are the rates that are quoted by financial institutions and in the financial pages of newspapers. The difference between the real rate and the nominal rate is the inflation premium. It represents the expected inflation rate. The higher the expected inflation rate the larger the inflation premium. The interest rate charged to a particular business or individual will be higher than the nominal rate due to credit risk.

Answer 32

A coefficient of cross-elasticity of 1.5 would mean that a 5% increase in the price of the substitute would result in a 7.5% (5% × 1.5) increase in demand for Tower’s product.

Answer 33

The balance of trade comprises a subdivision of the balance of payments on current account. The balance of payments on current account includes all payments made because of current purchases of goods and services. The balance of trade is that part of the current account that denotes the difference between the dollar value of imports and exports in a given year. A favorable balance of trade occurs when exports exceed imports. Increases in U.S. imports will decrease the U.S. balance of trade.

Answer 34

The balance of trade is calculated by subtracting merchandise imports from merchandise exports (15,760 Ptas. - 20,300 Ptas.) which shows a balance of trade deficit of 4,540 Ptas. The negative net investment income (3,700 Ptas.) is added to this balance, and it would be reduced by the positive inflow of transfers (1,240 Ptas.) leaving a current account deficit balance of 7,000 Ptas. The two accounts dealing with the purchase of assets are part of the capital account and therefore are not relevant for this calculation. If there were any exports or imports or services, they would have been included in the calculation.

Answer 35

Socioeconomic effects are the social and economic experiences and realities that help mold one's personality, attitudes, and lifestyle. Declining birth rates reduce the dependency ratio, and the large labor force tends to keep wages low as economic activity expands. Most of the world's currently developed economies were in this phase of the demographic cycle when they began their economic expansion.

Answer 36

Economics involves forecasting probable future trends using indicators such as unemployment, orders for capital goods, and interest rates. While the business cycle usually responds a certain way to economic activity, forecasts regarding production of goods, the standard of living, and technology efficiency are not certain and cannot be definitively determined. As such, the only conclusion to the scenario represented in the question is that the economy will be capable of producing more goods and services if there is an increase in the resources available.

Answer 37

C. earnings from commodity-based exports and trade surpluses driven by the export of manufactured goods. The primary sources of funds for sovereign wealth funds are export earnings from commodity (energy)-based exports and the trade surplus generated by the export of manufactured goods. The trade surplus is often tied to the country having a weak currency that causes a country's goods and services to be priced lower in terms of a foreign currency. Additionally, increases in commodity prices have shifted the terms-of-trade in favor of nations exporting goods from extractive- and commodity-based industries.

Answer 38

A foreign exchange rate is the ratio between a unit of one currency and the amount of another currency for which that unit can be exchanged at a particular date. Assume that you are buying an item from Tunisia and paying 15 dinars for it. It would cost you $10 to buy the 15 dinars at a rate of 1.5 dinars per dollar. What would the item cost you in dollars if the rate went to 1.7 dinars per dollar? Now you would be able to buy the item with your $10 and have 2 dinars left over—that 2 dinars is a gain on a foreign currency exchange rate fluctuation. That export from Tunisia is less expensive to you in the United States. The answer choice "its currency has appreciated" is incorrect because the dinar has declined in value relative to the dollar, not appreciated. "Its imports of U.S. goods are more affordable" is incorrect because people in Tunisia who pay in dinars would need to spend more dinars to buy U.S. goods—their imports would be less affordable, not more affordable. "Its purchases of the U.S. dollar will cost less" is incorrect because people in Tunisia will pay more in dinars, not less, for purchases of U.S. goods.

Answer 39

Some of the key characteristics of emerging market economies include low debt-to-GDP ratios, a significant increase in trade among and between emerging market economies, low-cost labor, high savings rates, large currency reserves, and high investment in infrastructure. In addition, most emerging market economies are experiencing rapid growth in the number of middle-class consumers while many are improving supply-chain linkages in an attempt to capture more of value-added costs during the production process.

Answer 40

The recessionary phase is a period in which more resources become unemployed and actual output falls below potential output. There will be a decline in the number of hours in the average workweek since output falls. There will be an increase in unemployment claims; however, the natural rate of unemployment will remain unchanged. Cost will have a tendency to fall.

Answer 41

The marginal propensity to consume is the percentage of additional income that can be expected to be consumed. Disposable income increased ($48,000 - $40,000) or $8,000. Consumption increased ($44,000 - $38,000) or $6,000. This means that of the additional $8,000 of income, $6,000 will be consumed or 75% of the increase in income. Therefore the marginal propensity to consume equals .75.

Answer 42

Sovereign wealth funds (SWFs) are entities established by governments to make investments with foreign exchange reserves that are managed separately for official foreign exchange reserves managed by the country's central bank within monetary policy goals. The underlying investments are made by SWFs with the goal of making a profit. Many governments seek to attract foreign direct investment, and frequently, some governments seek to manipulate official currency reserves for political purposes.

Answer 43

A sovereign wealth fund (SWF) is a state-owned investment fund investing in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds. Sovereign wealth funds invest globally. Most SWFs are funded by revenues from commodity exports or from foreign-exchange reserves held by the central bank. By historic convention, the United States' Social Security Trust Fund, with $2.8 trillion of assets in 2014, is not considered a sovereign wealth fund. Some sovereign wealth funds may be held by a central bank, which accumulates the funds in the course of its management of a nation's banking system; this type of fund is usually of major economic and fiscal importance. Other sovereign wealth funds are simply the state savings that are invested by various entities for the purposes of investment return, and that may not have a significant role in fiscal management. The accumulated funds may have their origin in, or may represent, foreign currency deposits, gold, special drawing rights (SDRs) and International Monetary Fund (IMF) reserve positions held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of the sovereign nations that are typically held in domestic and different reserve currencies (such as the dollar, euro, pound, and yen). Such investment management entities may be set up as official investment companies, state pension funds, or sovereign oil funds, among others. There have been attempts to distinguish funds held by sovereign entities from foreign-exchange reserves held by central banks. Sovereign wealth funds can be characterized as maximizing long-term return, with foreign exchange reserves serving short-term "currency stabilization", and liquidity management. Many central banks in recent years possess reserves massively in excess of needs for liquidity or foreign exchange management. Moreover, it is widely believed most have diversified hugely into assets other than short-term, highly liquid monetary ones, though almost no data is publicly available to back up this assertion. Some central banks have even begun buying equities, or derivatives of differing ilk (even if fairly safe ones, like overnight interest rate swaps).[citation needed]

Answer 44

Inventory levels tend to be high as the economy begins the contraction phase of the business cycle and firms cut orders and use their unanticipated inventory to meet demand, attempting to bring inventory levels back to their desired level as contraction continues. Thus, inventory levels tend to be low at the end of the contraction phase due to deliberate management actions.

Answer 45

The “expenditure approach” to GDP determination includes personal consumption expenditures (C), gross private domestic investment (Ig), government purchases of goods and services (G), and exports minus imports or net exports (Xn). GDP = C + Ig + G + Xn Thus, the equation for GDP includes net exports. Business profits, compensation to employees, and capital consumption allowance (depreciation) are all variables used in the “Income Approach” to GDP determination

Answer 46

At a business cycle's trough, a large portion of the nation's productive capacity often goes unused due to the depressed level of demand in the economy. Moreover, firms and individuals are hesitant to make new investments because the expected return is far less than what it would be if the economy were in an expansion. However, the trough of a business cycle is not characterized by any specific sort of behavior with respect to costs and purchasing power.

Answer 47

A key driver of SWF (sovereign wealth fund) investment in agriculture is to ensure food security for their country in the event worldwide food shortages would curtail the availability of foodstuffs in traditional agricultural markets. Also, many emerging market economies are not well-suited for adequate agricultural production as they lack sufficient arable land and have an inadequate water supply. Thus, they outsource food production by purchasing and/or leasing land and growing the crops elsewhere in the world and having the output exported to the homeland. Traditional investment in agriculture involved investment to support shifting production from staple crops to those that could be exported to world agricultural markets to earn a profit for the investing country.

Answer 48

A recession is a period in time during which the gross domestic product (GDP) decreases. The GDP is the value of all the reported goods and services produced by people and institutions operating in a country. This means that demand for goods has decreased, unemployment is usually higher (due to layoffs), and the economy is not in good shape. People are not usually borrowing money during a recession. In order to increase the borrowing of money and stimulate purchases (and thus increasing the demand for goods and strengthening the economy), the Federal Reserve Bank would want to make it more attractive to borrow money. In order to do this, the Fed would lower the discount, or interest, rate it charges to banks for loans. The banks would pass along this lower rate to individuals and businesses, giving them an incentive to borrow more and spend more. Due to the decrease in demand for U.S. products, the value of a dollar as compared to other currencies would also decrease. Therefore, the Fed would not sell U.S. government bonds in open-market transactions. The amount received for the bonds would be affected by falling exchange rates. The Federal Reserve Bank would not increase the rate charged by banks when they borrow from one another. An increase in an interest rate would discourage, not encourage, borrowing. Decreasing, not increasing, the level of funds a bank is legally required to hold in reserve would stimulate the economy. Banks could lend more money with these reserves.

Answer 49

The increased demand for products and infrastructure development in the emerging economics has been a mixed blessing in the sense that companies that engage in providing nonrenewable resources have benefited. However, the users of these resources have seen significant increases in their cost of materials that has eroded company profit margins. Globalization has allowed for new technologies to be effectively utilized in areas where low-cost labor is available; allowed for foreign direct investment to bring new technology and labor market skills to underdeveloped areas; and caused capital to flow to areas where its marginal product is higher, resulting in increased world output.

Answer 50

Answer A is incorrect because opening a market to foreign investment will result in that market being subject to the same market forces that affect other markets, increasing the correlation of the market with other markets. Answer B is incorrect because opening a market for foreign investment will change prices in the emerging stock market, resulting in a change to its volatility. Answer C is incorrect because the additional investment from foreign investors will increase investment in the market, decreasing the cost of capital for local firms. Answer D is correct, because the additional investment from foreign investors will increase investment in the market, thus increasing, not decreasing, the investment growth rate.

Answer 51

In a world with a rapid pace of change and high levels of uncertainty, scenario planning has taken on increasing importance as it allows firms to effectively look at a series of different potential future possibilities as part of their planning process. Labor arbitrage is a key driver in which path globalization efforts will follow. However, the movement of production is not a static factor. Moving production facilities to one country to capture the benefits of low-cost labor has a tendency to drive up wages in that area, thus making then-lower labor costs in other countries more attractive. Early globalization efforts were driven by low production costs in emerging markets, and today a rising middle class in emerging economies is shifting the focus as many of these nations are now seeing rapid increases in their level of consumption.

Answer 52

The law of demand states that there is an inverse relationship between the price of a product and the quantity demanded if the product. The higher the price, the lower the quantity demanded. This would be movement along the demand curve.

Answer 53

Gross domestic product is the primary measure of the level of economic activity in the United States.

Answer 54

The elasticity of demand is a measure of the responsiveness of consumers to a change in a product's price. The law of demand states that there is an inverse relationship between the price and quantity of product demanded. In other words, the higher the price, the less of the product that is demanded by buyers. The following factors affect the elasticity of demand: The larger the number of substitute products that are available, the greater the elasticity of demand. The higher the price of the product relative to the consumer's income, the more elastic the demand for the product. In other words, a major appliance would have a greater elasticity of demand than a paperback book. The more that a particular product is placed in a “luxury” category by consumers (as opposed to being considered a necessity), the greater the elasticity of demand. The more time that consumers have to respond to price changes, the greater the elasticity of demand. For example, it is difficult for consumers to respond immediately to higher gasoline prices, but over a longer period of time, they can purchase more fuel-efficient vehicles or establish better public transportation systems.

Answer 55

Suppliers have more power when: the product they are supplying is differentiated from other products, substitute products are not available, few companies produce the same product, and the purchasing industry is not an important customer to the supplying industry.

Answer 56

Variations, or differences, between business cycles in the economy as a whole are due to many factors that result in fluctuations in business activity over time. These are measured by duration (from peak to peak) and intensity (the peaks and troughs in the cycle). The law of diminishing returns applies to an individual firm in the intensity of its use of fixed costs, not to the business cycle of the economy as a whole. Comparative advantage describes the internal factors within one company that give that firm strengths in comparison to other firms; it does not apply to the economy as a whole. Opportunity costs represent the lost income when a firm chooses to use a resource in one area instead of another; again, this does not apply to the economy as a whole.

Answer 57

Marginal utility is the additional utility (or satisfaction) that an individual receives from one additional unit of the product. The law of diminishing marginal utility states that the marginal utility gained from successive units decreases as the number or units purchased (or consumed) increases.

Answer 58

One example of the definition of supply chain management is, “The use of a network of autonomous or semi-autonomous business entities collectively responsible for procurement, manufacturing, and distribution activities associated with one or more families of related products.” In its simplest sense supply chain management is defined as getting the right product to the right place at the right time at minimum cost.

Answer 59

Disposable income is that income received by individuals which is available for consumption and saving (i.e., personal income minus personal income taxes). The example below demonstrates the calculation of disposable income: Gross domestic product (GDP) $4,000 - Depreciation (500) ------- = Net domestic product (NDP)(at mkt cost) $3,500 - Indirect business taxes (210) ------- = Net national income (NNI) (at factor cost) $3,290 - Corporate income taxes ( 50) - Undistributed corporate profits ( 25) - Social Security contributions (200) + Transfer payments 500 ------- = PERSONAL INCOME $3,515 - Personal income taxes (250) ------- = DISPOSABLE INCOME $3,265

Answer 60

Domestic or global mergers/acquisitions allow an organization to: lower risk by diversifying into additional industries, enter new markets, provide possible opportunities for quick profitability in new areas, provide opportunities to take advantage of economies of scope, potentially lower costs along the value chain of activities, and broaden the strength of resources and capabilities.

Answer 61

Answer A is incorrect because the concentration ratio measures the market share of the several largest firms in the industry. It doesn’t provide understanding of their behavior. Answer B is incorrect because inter-industry competition is competition between difference markets, not within a market such as a oligopolistic market. Answer C is correct because an oligopoly means few firms in the market, each relatively large. Game theory is a useful tool in choosing responses to actions of competitors in such a market. Answer D is incorrect because this index is a measure of the size of firms in relation to the market, not a way to understand behavior of firms in such a market.

Answer 62

Deflation is a sustained decline in general price levels. Expansion and recession are phases of the business cycle. During expansion, more resources become employed and actual output approaches potential output. During recession, resources become unemployed so that actual output falls below potential output. Neither of these terms describes the price of goods or the level of interest rates. Inflation is a sustained increase in the average level of prices.

Answer 63

In an oligopolistic firm there tends to be an interdependence between firms. This interdependence does not exist in a monopolistically competitive industry. Also, there are a small number of relatively large forms in an oligopolistic industry and a large number of small competitors in a monopolistically competitive industry. D. a monopolistically competitive firm has a large number of small competitors whereas an oligopolistic firm must deal with the issue of interdependence between the small number of large firms in the industry.

Answer 64

Demand is the quantity of goods or services that buyers will purchase at various prices. A demand curve is a graphical representation of related price and quantity demanded, so the demand curve represents the impact that price has on the quantity of the good purchased. “The impact of prices on the amount of product offered” and “the willingness of producers to offer a product at alternative prices” are incorrect because supply, not demand, represents the quantity of product offered for sale. “The impact that price has on the purchase amount of two related products” is incorrect because it is the definition of the cross-elasticity of demand between two products.

Answer 65

In monopolistic competition, each firm produces and sells a slightly different product. These differences may be due to brand names, packaging, location, credit terms, customer service, etc. It is through the use of advertising that customers become aware of the differences in the various products available. The goal of advertising is to make the firm's demand curve less elastic.

Answer 66

Companies will use strategic alliances to: open up or improve access to new markets, learn from other companies by sharing technology and various expertises, improve supply chain efficiency, get into critical countries in an effective and efficient manner, and gain access to necessary resources.

Answer 67

A recession is defined as a period when real output, as measured by real national income, is decreasing. Thus, during a recession, actual real national income falls short of potential real national income, because some resources are unemployed and the economy operations below capacity.

Answer 68

A successful niche market requires that the buyers need very specific product attributes. These attributes must differ from those offered on the general market product so much so that the general product does not meet the needs of the niche market. Another possibility would be for the niche market buyers to have different uses for the product, and with its package of attributes, the general product cannot meet the needs for the niche market.

Answer 69

GDP (gross domestic product) includes personal consumption, business investment, government expenditures, and the net difference between exports and imports. These items total $100 billion. Financial transactions are not included because they include such items as investments in securities and repayments of loans, which do not represent a real good or service produced by the economy. Second-hand sales are excluded from GDP because those items were originally produced at an earlier time and were included in GDP then.

Answer 70

Personal income is all income received by individuals whether earned or unearned and is computed before any deductions for personal income taxes. National income (NI) includes all income by American-used resources whether used/invested at home or abroad. Since all income earned is not received, we must adjust NI by deducting Social Security contributions, corporate income taxes and undistributed corporate taxes. Also, some income received is not earned and so we must add in transfer payments received by individuals, including such things as Social Security payments received, unemployment compensation, and welfare payments. Gross domestic product (GDP) $4,000 - Depreciation (500) ------- = Net domestic product (NDP)(at mkt cost) $3,500 - Indirect business taxes (210) ------- = Net national income (NNI) (at factor cost) $3,290 - Corporate income taxes ( 50) - Undistributed corporate profits ( 25) - Social Security contributions (200) + Transfer payments 500 ------- = PERSONAL INCOME $3,515 ======= Terms

Answer 71

A multiplier is the ratio of the change in national income (and subsequently national product) to the initial change in autonomous expenditure that brings it about. The central assumption in the multiplier effect is that an increase in autonomous expenditure, in this case investment expenditure, will result in a greater increase in national income (and subsequently national product). Policy setters can stimulate or depress an economy by changing autonomous expenditures, be it investment, government spending or exports.

Answer 72

The best cost provider attempts to provide a product with superior quality, features, durability, service, etc. at the lowest cost. In other words, they are trying to give the buyer more value for their money.

Answer 73

Low cost providers have the ability to reduce nonvalue-added cost both with the manufacturing environment as well as along the value chain. At least some of these cost savings generally are passed on to the customer so that the company can underprice the competition. The low-cost strategy works best in a market where products produced by all firms in the industry are essentially identical and buyers tend to be price sensitive.

Answer 74

One key element of customer service management is to provide customers with real-time information as to product availability and delivery and customer satisfaction could be measured by metrics such as fill-rates and on-time delivery.

Answer 75

A nation's economic growth is measured by gauging changes in the production of physical output per capita. Output indices such as the Federal Reserve Board's Index of Industrial Production are used in quantifying the amount of the change. Money supply, total wages, and general price levels are not good growth indicators because of their sensitivity to inflation and other factors.

Answer 76

Key Objectives of Supply Chain Management a. To improve communications at all levels of the supply chain to create an uninterrupted flow of materials and products. b. To reduce inventory levels while improving customer service levels. c. To reduce the supplier base while developing supplier relationships. d. To coordinate logistical activities to ensure that trade-offs between the various activities are understood to allow for the lowest possible logistical cost. e. To arrange credit terms and methodologies of exchanging funds across entities and within supply chains.

Answer 77

When the Federal Reserve buys federal securities, they expand the money supply. The effect on the economy is expansionary. Similarly, lowering the discount rate decreases interest rates paid by banks, which pass lower interest rates along to borrowers. People are more able to afford to borrow to invest, and the result is expansion of the economy.

Answer 78

During a recession there is insufficient aggregate demand. An expansionary fiscal policy would increase government spending or cut taxes, both of which would increase the level of aggregate demand. An expansionary monetary policy would attempt to decrease interest rates to stimulate business investment and the consumption of durable goods.

Answer 79

Movement along the supply curve occurs when the price for the product increases or decreases if all other factors remain constant. The supply curve shifts (a change in demand) when there are changes in other supply determinants such as technology, the prices of resources, the expectation of future prices, the number of sellers, and in taxes and other government restriction or subsidies.

Answer 80

Correct C. | Structural

Answer 81

The monopoly can increase profits by increasing output and decreasing price as long as MR > MC (marginal revenue is greater than marginal costs). The firm will maximize profits by continuing to the point where at the given output MC = MR.

Answer 82

The term “mutual interdependence” relates to the fact that the outcome of pricing decisions in an oligopoly is dependent upon the reactions of organization's rivals.

Answer 83

Structural unemployment is defined as unemployment due to workers not having the skills demanded by employers, and workers who cannot easily move to the location where jobs are available. In this case, it would not be feasible for the worker to work as fast and as long as the robotic technology.

Answer 84

A rightward shift in the demand curve means that buyers are willing and able to purchase more of a product at all prices. Factors that create a shift in the demand curve include income, prices of related goods, number of buyers, preferences, and expectation of future prices. Since housing is a normal good, an increase in average household income will cause an increase in the demand for housing.

Answer 85

The firm will maximize profits at the point where marginal cost equals marginal revenue. For a perfectly competitive firm MR = P, therefore, MR = $133. Thus the firm would produce 6 units. Economic profit is defined as total revenue minus total cost. TR = ($133 × 6) = $798; TC = ATC × output = ($120 × 6) = $720. Therefore economic profit equals $78

Answer 86

Diseconomies of scale begin where the average total cost starts going up. Total Units Produced Total Cost Average Total Cost -------------------- ---------- ------------------ 10 400 40 20 600 30 30 900 30 40 1,200 30 50 2,000 40

Answer 87

The Differentiation Strategy a. A differentiation strategy seeks to create a competitive advantage by developing a product that has unique attributes that are not offered by the competition. The firms that are the most successful using the differentiation strategy develop products that provide value to customers and cannot be easily duplicated by the competition. Generally product features that can be easily duplicated, improved upon, or replaced by a substitute do not provide sustainable differentiation. Unfortunately, any differentiation strategy that works well for a company will attract imitators. b. In order for a differentiation strategy to be successful, it must be tied to something that cannot be easily copied, such as core competencies, available resources, or other internal attributes that cannot be easily copied. c. A variation on the differentiation strategy is for a firm to make a product that requires replacement parts that are slightly different than standard parts available made by other companies. Once the product is sold, the consumer is “locked into” purchasing the specific replacement part produced by the original firm. Often these replacement parts have high mark-ups.

Answer 88

A prolonged period of unemployment can lead to a worker's loss of skills and self-esteem and increase in domestic violence and anti-social behavior.

Answer 89

The proportion of the disposable income that individuals spend on consumption is the propensity to consume. The marginal propensity to consume (MPC) is the proportion of additional income that an individual will spend. The marginal propensity to save (MPS) is 1 - MPC. The multiplier is the combined effect of the additional spending once it ripples through the economy (if the MPC is 0.8, then each person is assumed to spend 80% of additional income received and save the other 20%). The multiplier equals 1/MPS; in this question, 1/0.2 = 5. Increasing government expenditures by $20 billion, when multiplied by the multiplier of 5, equals the desired increase in GDP of $100 billion ($0.1 trillion).

Answer 90

A normal good is one for which demand increases as income increases.

Answer 91

The reserve level is affected by the Federal Reserve's open market operations. When the Federal Reserve sells a security to a household or firm, it receives the buyer's check drawn against its own deposits in a commercial bank. The Federal Reserve presents the check to the commercial bank for payment. On payment of the check, the commercial bank's reserves are reduced.

Answer 92

The accelerator principle says that small changes in consumer spending can cause big percentage changes in investment. It plays a role in many business-cycle theories and is still used today to explain some of the fluctuation in investment. In a very simple form, the accelerator principle assumes that the ratio of capital to output tends to remain constant. Suppose, for example, that normally it takes $1,000 worth of equipment to manufacture $1,000 worth of shoes each year. Suppose further that each year one-tenth of the equipment wears out. If there is no growth or decline, total investment each year will be $100, all for replacement. Now suppose that the sales of shoes jump by 5%, to $1,050 each year. The new desired amount of equipment will also rise by 5%, to $1,050. However, to obtain this new level, investment will have to increase by 50%, to $150. Thus, if firms desire a constant capital-to-output ratio, a small percentage change (either an increase or decrease) in final sales, can lead to a big percentage change in investment.

Answer 93

A shift in the supply curve to the right indicates that a larger quantity of the product is supplied at each price. Things that shift the supply curve are technology, prices of resources, expectation of future prices, number of sellers, taxes and other government restriction or subsidies.

Answer 94

Gross domestic product is not affected by changes in units or technology because it is a monetary measure. The only answer choice that reflects a need for monetary adjustment is price level.

Answer 95

Correct B. | Price level

Answer 96

A firm that earns a normal profit (zero economic profit) has revenue equal to total cost (explicit plus implicit costs). Economic profit is generally lower (never higher) than accounting profit due to the fact that implicit costs are included in the calculation of in economic profits.

Answer 97

Since the money supply consists of currency plus different types of deposits, money can be created in several different ways. The Federal Reserve Bank uses all of the following actions to control the supply of money: Selling government securities Changing the reserve ratio Raising or lowering the discount rate The actual printing of currency is controlled by the U.S. Treasury. This is not a tool of monetary policy. M1 is the most narrowly defined component of the money supply. It consists of coins and currency in the hands of the public and the checkable deposits held in commercial banks and thrift institutions.

Answer 98

GDP = Personal consumption expenditure + Gross private domestic investment + Government purchases + (Exports − Imports). GDP = 275 + 82 + 110 + (18 − 31) = 454

Answer 99

D. aggregate supply equals aggregate demand and intended savings equals intended investment. Aggregate supply equaling aggregate demand is one criterion for market equilibrium. Another criterion is that consumers and businesses agree on what they will save and invest respectively. Although actual savings will always equal actual investment, this, however, does not guarantee an equilibrium level of income and employment. If businesses note that their intended investment levels produce too high or too low of inventory levels, the market will not be in equilibrium, since too little or too much has to be purchased. Therefore, until these imbalances are cleared up, the economy will not be in equilibrium. (Note that actual investment does not usually equal intended investment.)

Answer 100

Is it A? I would think that because of the election approaching, one can expect expansionary monetary policy in order to get more votes. There should be more government spending and also an increase in sales.

Answer 101

ollusion is when competitors agree to restrict production so as to increase the price they receive for their product. A cartel is one form of collusion, where producers agree how much each member will produce and charge. OPEC (the Organization of the Petroleum Exporting Countries) is an example of a cartel. Dual pricing is a practice of setting different prices for a product dependent on the currency used to buy it. It often is used to set lower-than-normal prices to gain access to a particular foreign market. Predatory pricing means lowering prices to such an extent as to drive competitors out of business. A transfer price is the price charged by one unit within a larger business to another unit in that business.

Answer 102

Two goods that are used jointly as they are consumed are complementary goods. If the price of one increases causing a decrease in the quantity demanded of that product, then the demand for the other product will fall causing a shift in the demand curve.

Answer 103

The price elasticity of demand is the absolute value of the percentage change in quantity demanded divided by the percentage change in price. If the elasticity is less than 1.0, the elasticity is inelastic. Since a 3% decrease in quantity demanded results from a 5% price increase, the elasticity of demand is: 0.3 ÷ 0.5 = 0.6 This is a number less than 1.0, indicating inelastic demand. A 4% price increase that results in a 6% decrease in the quantity demanded, and a 3% price decrease that results in a 5% increase in the quantity demanded, represent elastic demand since the change in quantity is greater than the change in price. A change of 4% in quantity demanded due to a 4% price increase results in an elasticity of exactly 1.0, neither elastic nor inelastic.

Answer 104

Gross domestic product (GDP) is a measure of the market value of all final goods and services produced in an economy during a year using either domestic- or foreign-supplied resources. It excludes intermediate goods, which are goods that are purchased for resale or for further processing or manufacturing. It also excludes nonproductive transactions which have nothing to do with the production of final goods and services. Calculating GDP can be summarized as: GDP = C + Ig + G + Xn Where: ``` C = Personal consumption expenditures Ig = Gross private domestic investment G = Government purchases Xn = Net exports ```

Answer 105

In its role as central bank of the United States, the Federal Reserve System is responsible for the United States' monetary policy. Monetary policy involves controlling the quantity of money in the economy. The Treasury's role is to advise the President and Congress on fiscal policy matters; the Comptroller of the Currency's role involves the administrative details of regulating national banks; the Bureau of Printing and Engraving is in charge of the actual manufacture of currency.

Answer 106

Firms in a monopolistically competitive industry produce differentiated products, engage in non-price competition, and face a downward sloping demand curve. Firms in a perfectly competitive industry produce a standardized product, find non-price competition ineffective, and face a perfectly elastic demand curve. There are no significant barriers to entry in either market structure.

Economics Ch1 Flashcards

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