Economics - other

Question 1

Effective Interest

Answer 1

= interest paid / usable funds
100,000 loan at 10% and must maintain 10,000 bal.
=(10% x 100,000) / (100,000-10,000-10,000)

usable funds = loan amount - discounted interest - compensating bal

Question 2

Sovereign wealth funds (SWFs) are:

Answer 2

government investments funded by foreign currency reserves that are managed separately from official currency reserves and invested for profit.

Many governments seek to attract foreign direct investment, and frequently, some governments seek to manipulate official currency reserves for political purposes.

Question 3

When implicit costs are greater than zero and economic profits in an industry equal zero:

Answer 3

accounting profits will be greater than zero.

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.

Question 4

An expansionary [List A] policy will have [List B] effect on net exports:

Answer 4

A)Fiscal B) A negative
An increase in governmental spending causes an increase in domestic interest rates and international capital inflows. These capital inflows cause the domestic currency to appreciate, which has a negative effect on net exports.

Question 5

Tower Inc. sells a product that is a close substitute for a product offered by Westco. Historically, management of Tower has observed a coefficient of cross-elasticity of 1.5 between the two products. If management of Tower anticipates a 5% increase in price by Westco, how would this action by Westco’s management be expected to affect the demand for Tower’s product?

Answer 5

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.

Question 6

If the U.S. dollar declines in value relative to the currencies of many of its trading partners, the likely result is that

Answer 6

U.S. exports will tend to increase

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

Question 7

A company has a foreign-currency-dominated trade payable, due in 60 days. In order to eliminate the foreign exchange risk associated with the payable, the company could

Answer 7

Buy foreign currency forward today

The company can arrange today for the exchange rate at which it will purchase the foreign currency in 60 days’ time by buying the currency in the forward market. This will eliminate the exchange risk associated with the trade payable.

Question 8

All of the following are components of the formula used to calculate gross domestic product except:

Answer 8

Household income is correct because GDP may be calculated by adding personal consumption expenditures, plus gross private domestic fixed investment, plus government expenditures, adjusting for net exports and changes in business inventories. Household income is not included in the formula.

Question 9

How does inflation distort reported income?

Answer 9

Depreciation is not reflective of current fixed-asset replacement costs. This answer is correct because fixed assets are valued at historical cost and, therefore, depreciation does not reflect the current cost of the related assets.

Question 10

If a product required a great deal of electricity to produce, and crude oil prices increased, which of the following costs most likely increased?

Answer 10

Conversion costs. This answer is correct because the product requires a great deal of electricity to produce and some studies have shown a correlation between electricity prices and crude oil prices.

Question 11

Which of the following statements is correct if there is an increase in the resources available within an economy?

Answer 11

The economy will be capable of producing more goods and services.

Question 12

Which of the following management techniques would likely be most important to a firm in a purely competitive market?

Answer 12

Supply chain management. To be successful in a purely competitive market, the firm needs to focus on decreasing costs. Supply chain management can be effective at reducing costs.

Question 13

Platinum Co. has a receivable due in 30 days for 30,000 euros. The treasurer is concerned that the value of the euro relative to the dollar will drop before the payment is received. What should Platinum do to reduce the risk?

Answer 13

A forward contract to sell euros in 30 days would lock in the current exchange rate.

Question 14

Which of the following activities involves collecting data about all segments of the firm’s general environment to understand the effects of economic changes on the firm’s industry?

Answer 14

Scanning

Question 15

Freely fluctuating exchange rates perform which of the following functions?

Answer 15

Freely fluctuating exchange rates automatically correct a lack of equilibrium in the balance of payments by revaluing currencies.

Question 16

The real risk-free rate

Answer 16

Is the basic component of interest.

Question 17

For a given level of tax collections, prices, and interest rates, a decrease in government purchases will result in a(n)

Answer 17

Decrease in aggregate demand. Aggregate demand includes government purchases. A decrease in government purchases will decrease aggregate demand.

Question 18

A period of rising inflation

Answer 18

Increases the price level, which is negatively related to the purchasing power of money. This answer is correct. In periods of inflation, the purchasing power of the money declines as measured by the price level.

Question 19

Transfer pricing

Answer 19

Transfer pricing is the price at which services or products are bought and sold across international borders between related parties. As an example, if a U.S. parent company purchases products from its French subsidiary, a transfer price must be established for the products. Because the transfer price affects the parent and subsidiary’s net income, it affects the taxes that the firm pays in the United States and France. Multinational companies can minimize their overall tax burden by using transfer prices to minimize net income in jurisdictions with higher income tax rates, and maximizing net income in jurisdictions with lower income tax rates. However, many governments have established tax regulations that are designed to help ensure that transfer prices estimate market prices.

Question 20

A multinational company operates a production facility in country A and a distribution outlet in country B. The tax rates are 40% in country A and 50% in country B. The production facility sells the goods to the distribution outlet, both of which are wholly owned by the multinational company. The internal sale of goods occurs at a “transfer” price set by the multinational company. Assuming no nontax considerations and no interference from the tax authorities of the two countries, the company should

Answer 20

Maximize the transfer price. The country where the producer is located has the lower tax rate, so the overall tax burden is lowered by maximizing the transfer price. This will maximize reported taxable income in the lower tax country (by maximizing revenue) and minimize reported taxable income in the lower tax country (by maximizing expenses).

Question 21

If a group of consumers decide to boycott a particular product, the expected result would be

Answer 21

If consumers boycott a product, demand for the product declines. Supply would likely drop because price would decline.

Question 22

Economies of scale.

Answer 22

As firms grow they often experience economies of scale that increase their returns.

Question 23

Marginal cost is

Answer 23

the difference between the total cost of producing 9 units and the total cost of producing 8 units.

Question 24

This question is based on the following information.

Total units of product
Avg fixed cost Avg variable cost Avg total cost
6 $15.00 $25.00 $40.00
7 12.86 24.00 36.86
8 11.25 23.50 34.75
9 10.00 23.75 33.75

Answer 24

Marginal cost is the additional cost of producing one more unit. The amount may be obtained by subtracting the total cost of 9 units from the total cost of 8 units. $25.75 = ($33.75 × 9) – ($34.75 × 8).

Question 25

The effect of an expansionary policy on net exports.

Answer 25

An increase in governmental spending causes an increase in domestic interest rates and international capital inflows. These capital inflows cause the domestic currency to appreciate, which has a negative effect on net exports.

Question 26

law of diminishing marginal utility

Answer 26

A psychological generalization that the perceived value of, or satisfaction gained from, a good to a consumer declines with each additional unit acquired or consumed.

Even the most delicious food, for example, will appeal less and less to its consumer when he or she has had enough, and if consumption continues, sickness (disutility) will result. Consumers deal with this phenomenon by consuming a variety of goods rather than lots of one good.

Read more: http://www.businessdictionary.com/definition/law-of-diminishing-marginal-utility.html#ixzz3LVrPxJNz

Question 27

The law of diminishing marginal utility states that

Answer 27

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

Question 28

The purpose of hedging foreign exchange risk is to

Answer 28

insulate the firm from exposure to exchange rate fluctuations by locking in a purchase price for the foreign currency.

Question 29

aggregate supply

Answer 29

aggregate supply is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms are willing to sell at a given price level in an economy

Question 30

If a CPA’s client expected a high inflation rate in the future, the CPA would suggest to the client which of the following types of investments?

Answer 30

Precious metals

Question 31

option risk.

Answer 31

occurs when a firm gives the customer the right (but not the obligation) to change the stream from assets, liabilities, or off-balance sheet items. Allowing a customer to prepay a mortgage without a prepayment penalty gives the customer a call option, i.e., the right to pay the mortgage in full at any time during the mortgage term, thus changing the cash flow stream the firm receives from the mortgage.

Question 32

Re-pricing risk

Answer 32

occurs when a firm deliberately mismatches in an upsloping yield curve environment by holding assets with a longer duration than that of the liabilities used to fund them.

Question 33

If the institution did a test for basis risk, they would be dealing with:

Answer 33

changes in the relationship between key market interest rates.

Question 34

National income =

Answer 34

compensation of employees + rental income + interest income + proprietor’s income + corporate profits

or

net domestic product (NDP) + net income earned abroad - minus indirect business taxes

Question 35

Induced investment

Answer 35

is the investment made in an economy in response to changes in the level of national income

Question 36

Suppose that a monopolist calculates that at the current level of sales and output, marginal costs is $3 and marginal revenue is $5. Under these conditions, profits could be increased by

Answer 36

increasing output and decreasing price.
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.