Economics - other Flashcards
(36 cards)
Effective Interest
= 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
Sovereign wealth funds (SWFs) are:
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.
When implicit costs are greater than zero and economic profits in an industry equal zero:
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.
An expansionary [List A] policy will have [List B] effect on net exports:
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.
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?
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.
If the U.S. dollar declines in value relative to the currencies of many of its trading partners, the likely result is that
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.
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
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.
All of the following are components of the formula used to calculate gross domestic product except:
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.
How does inflation distort reported income?
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.
If a product required a great deal of electricity to produce, and crude oil prices increased, which of the following costs most likely increased?
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.
Which of the following statements is correct if there is an increase in the resources available within an economy?
The economy will be capable of producing more goods and services.
Which of the following management techniques would likely be most important to a firm in a purely competitive market?
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.
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?
A forward contract to sell euros in 30 days would lock in the current exchange rate.
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?
Scanning
Freely fluctuating exchange rates perform which of the following functions?
Freely fluctuating exchange rates automatically correct a lack of equilibrium in the balance of payments by revaluing currencies.
The real risk-free rate
Is the basic component of interest.
For a given level of tax collections, prices, and interest rates, a decrease in government purchases will result in a(n)
Decrease in aggregate demand. Aggregate demand includes government purchases. A decrease in government purchases will decrease aggregate demand.
A period of rising inflation
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.
Transfer pricing
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.
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
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).
If a group of consumers decide to boycott a particular product, the expected result would be
If consumers boycott a product, demand for the product declines. Supply would likely drop because price would decline.
Economies of scale.
As firms grow they often experience economies of scale that increase their returns.
Marginal cost is
the difference between the total cost of producing 9 units and the total cost of producing 8 units.
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
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).
