Micro & Macro Economics (18%) Flashcards

Question

Product Differentiation

Answer 1

* **Physical** characteristics (e.g., higher quality, additional features, etc.) * **Perceived** differences (e.g., advertising, brand name, etc.) * **Support service** differences (e.g., exchange policies, assistance, after-sale support, etc.)

Answer 2

Potential GDP

Answer 3

NNP = GNP - Depreciation

Answer 4

Measures the maximum amount of various goods and services an economy can produce at a given time with available technology and efficient use of all available resources.

Answer 5

GDP Gap = **Potential** GDP - **Real** GDP * **Negative GDP gap** indicates that the economy is operating above normal full capacity, which will put **upward pressure on prices**.

Answer 6

Average propensity to consume (APC): Measures the percent of disposable income spent on consumption goods. * CS / DI Average propensity to save (APS): Measures the percent of disposable income not spent, but rather saved. * S / DI Remember that APC + APS = 1, the measures are reciprocal of each other.

Answer 7

C. Monopolistic Competition Pure Competition is incorrect because in pure competition, products are standardized and firms have no control over prices.

Answer 8

* Average weekly hours, manufacturing * Average weekly initial claims for unemployment insurance * Manufacturer’s new orders, consumer goods and materials * Vendor performance, slower deliveries diffusion index * Manufacturer’s new orders, nondefense capital goods * Building permits, new private housing units * Stock prices, 500 common stocks * Money supply, M2 * Interest rate spread, 10-year Treasury bonds less federal funds * Index of consumer expectations

Answer 9

The balance of payments accounts include all international payments made by one nation to another, including capital movements. * Current * Capital * Financial

Answer 10

Balance of payments is used to refer to a system of accounts that catalogs the flow of goods between the residents of two countries. If country X is a net exporter of goods and therefore has a surplus balance of trade, countries purchasing the goods must use country X’s currency. This increases the demand of the currency and therefore its relative value.

Answer 11

* Forward Contract to buy or sell (hedging in a forex market) * Money Market Hedge * Currency Futures Market Hedge

Answer 12

* The **Federal Reserve System** seeks to achieve national economic objectives through its exercise of **monetary policy**, that is, through its control of the money supply. * The Fed **does not** establish or implement fiscal policy. * **Fiscal policy is established primarily by the U.S. Congress**, through its control of the level of government spending and the tax system (rate, etc.).

Answer 13

**Direct** = D = Domestic, domestic price of 1 unit of a foreign currency. 1 EUR costs $1.10. **Indirect** = Foreign price of 1 unit of domestic currency. $1 will buy .90 EUR.

Answer 14

* Political and Economical Environment = stronger they are the more demand for currency. * Relative Interest Rates = higher rates relative to comparable countries increases investment in country which creates increased demand. * Relative Inflationary Rates = lower rates retain PPow and increases demand * Level of public debt (higher = inflation), deters investment and decreases currency demand. * Status of Current Account Balance = higher deficit (Imports \> Exports) = increases demand for foreign currency relative to domestic currency.

Answer 15

Value of currency increases (stronger) relative to another currency. It takes less domestic currency to buy foreign currency or goods sold in foreign currency.

Answer 16

* Higher imports = higher demand for foreign currencies, which exceeds other country's demand for host country currency. * Host currency declines with respect to other currencies.

Answer 17

**They automatically correct a lack of equilibrium in the balance of payments.** For example, with a U.S. deficit in the balance of payments, the U.S. demand for foreign currencies will exceed the foreign currencies provided by foreign currency inflows. As a result, there will be an increase in demand for foreign currencies relative to the U.S. dollar, and freely fluctuating exchange rates will enable the value of the dollar relative to other currencies (i.e., the exchange rate) to fall and help move the balance of payments back into equilibrium.

Answer 18

* Matching - incur equal payables and receivables in the same currency to offset effects. * Leading/Lagging Payments Hedging - contra transaction used so that a loss on one would be offset by a gain on the other.

Answer 19

Possible unfavorable impact of changes in currency exchange rates on **financial statements** of foreign operation that are converted from a foreign currency to the domestic currency.

Answer 20

Δ's in FX Rates may make future revenues convert to fewer dollars or future expenses convert to more dollars.

Answer 21

A put is an option that gives its owner the **right to sell** a specific security at fixed conditions of price and time. A put option is a contract that gives the owner the right, but not the obligation, to sell a specified amount of an underlying asset (e.g., security) at a specified price within a specified time

Answer 22

The IMF maintains order in the international monetary system by providing funds to countries in financial crisis, including currency crisis, banking crisis, or debt crisis.

Answer 23

Foreign direct investment involves investments in **non-monetary assets** (e.g., property, plant, equipment, etc.) in a foreign location. ## Footnote **Buying Foreign Bonds is NOT FDI.**

Answer 24

Adding together the GDP of the world's countries.

Answer 25

do not result in creating value for the acquiring entity.

Answer 26

Both are correct

Answer 27

1. Establish mission, values and goals. 2. Assess environment 3. Establish Objectives 4. Formulate strategies 5. Implement strategies 6. Evaluate and control activities

Answer 28

1. Cost Leadership 2. Differentiation 3. Focus

Answer 29

Michael Porter's "Five Forces" - specifically analyzes the nature of competition in an industry or market.

Answer 30

Macro assessment of: **Political Economic Social Technological** elements of a **business environment.**

Answer 31

Develops a profile of internal strengths and weaknesses and external opportunities and threats. * Internal Environment (S/W) - relates to situations that enhance or hurt an entity's competitive advantage. * External Environment (O/T) - opportunities (benefit from unmet demand) and threats (risk of adverse consequence as result of external forces).

Answer 32

* Seek to minimize costs * Invest significantly in production and distribution assets * Efficient Distribution, Manufacturing and Product Design

Answer 33

**PEST** (external only analysis) analysis is a form of macro-environmental analysis and is primarily concerned with **where** an entity should operate. **SWOT** is a form of micro-environmental analysis and is primarily concerned with **how** an entity should operate.

Answer 34

**Increase the price of the item** **to domestic consumers**, resulting in the reallocation of expenditures to other products. This will lead to **lower domestic consumption** of the item.

Answer 35

**Scanning** - study of all segments of the general environment. High level look. **Monitoring** - study of environmental changes identified by scanning. **Forecasting** **Assessing** - determining changes in firm's strategy that are necessary as a result of information obtained from forecasting.

Answer 36

In monopolistic competition, firms sell a product or service that is only **slightly differentiated**; the product or service is similar to, but not identical with, other products or services. A firm takes the prices charged by its rivals **as given and ignores the impact of its own prices** on the prices of other firms In addition, monopolistic competition has the following characteristics: 1. A **large number of sellers**. 2. **Close substitutes** for the product or service. 3. **Ease of entry** into or exit from the market (few barriers to entry) 4. In the **long run**, a monopolistically competitive firm will make **zero economic profit**. Profit is maximized when MR = MC.

Answer 37

Satisfaction

Answer 38

**Expenditure** - this measures GDP using the value of final sales and is derived as the sum of the spending of: * Individuals - consumption expenditures for **durable and non-durable goods and for services**; * Businesses - investments in **residential and non-residential (e.g., plant and equipment) construction and new inventory**; * Governmental entities - in the form of goods and services purchased; * Foreign buyers - in the form of **net exports** (exports - imports) of U.S. produced goods and services.

Answer 39

**Income** - this measures GDP as the value of income and resource costs and is derived as the sum of: 1. Compensation to employees 2. Rental income 3. Proprietor's income 4. Corporate profits 5. Net interest 6. Taxes on production and inputs 7. Depreciation 8. Business transfer payments Less: Government enterprise surplus Plus: Statistical adjustment = GDP

Answer 40

Measures the total output of final goods and services produced for exchange in the domestic market during a period (usually a year) at **constant prices ( it adjusts for changing prices using a price index)**. ## Footnote **Real GDP = (Nominal GDP/GDP Deflator) × 100**

Answer 41

The GDP deflator is a comprehensive measure of price levels used to derive real GDP.

Answer 42

Real GDP/Population Real GDP per capita is a common measure of the **standard of living** in a country.

Answer 43

NDP Measures GDP less a deduction for "capital consumption" during the period—the equivalent of depreciation. Thus, NDP is GDP less the amount of capital that would be needed to replace capital consumed during the period.

Answer 44

Measures the total output of all goods and services produced worldwide using economic resources of **U.S. activities**. In 1992 GNP was **replaced by GDP** as the primary measure of the U.S. economy. GNP includes both the cost of replacing capital (the depreciation factor) and the cost of investment in new capital.

Answer 45

1. Measures the total payments for economic resources included in the production of all goods and services, including payments for wages, rent, interest, and profits, but not taxes included in the cost of final output. 2. Measures the amount (portion) of national income, **before personal income taxes**, received by individuals. 3. Measures the amount of income individuals have available for spending, **after taxes** are deducted from total personal income.

Answer 46

1. Unemployed (including all categories) / Size of Labor Force 2. Natural Rate of Unemployment = Frictional + Structural + Seasonal Unemployed/Size of Labor Force

Answer 47

There is **no cyclical unemployment**. Even with frictional and structural unemployment, officially full employment can exist. Said another way, if unemployment is due solely to frictional, structural and seasonal causes (i.e., the natural rate of unemployment), the economy is in a state of full employment.

Answer 48

* AgD is a **macro**economic demand measure * Curve is traditional downward sloping and shows quantity demanded at various prices AgD Components are **total spending** by: 1. **Individual consumers** (consumption spending), 2. **businesses on investment goods**, and 3. by **governmental entities**, and 4. **foreign entities on net exports**.

Answer 49

Direct relationship with AgD. * An increase in transfer payments will increase AgD * It is the spending of transfer payments **by recipients** that increases aggregate demand. * A decrease in transfer payments will decrease AgD

Answer 50

* Income Taxes - if up, AgD down * Consumer Confidence - if up, AgD up * Technological Advances - if up, AgD up * Corporate Taxes - if up, AgD down * **Interest Rates - if up, AgD down** * **higher rates equate to lower levels of investment.** * Government Spending - if up, AgD up * Exchange Rates / Net Exports - if a country's currency weakens, it's goods & services become less expensive relative to other countries and exports will rise, causing AgD to also increase. * Wealth Changes - if up, AgD up

Answer 51

Factors that cause a shift in aggregate demand have a ripple effect through the economy. For example, an increase in investment spending by business results in certain increases in personal disposable income, which further spurs demand. This cascading effect on demand is called "the multiplier effect." **Multiplier Effect = Initial Change in Spending × (1/(1 − MPC))** or **Multiplier Effect = Initial Change in Spending × (1/MPS)**

Answer 52

1. Frictional - due to imperfections in the labor market and relates to workers searching for jobs or waiting to take jobs in the near future. 2. Cyclical - caused by the **recession phase of the business cycle**, that is, by a deficiency of aggregate spending. 3. Structural - **changes over time in the structure of consumer demand**, which in turn alters the structure or composition of the demand for labor, is what is referred to as structural unemployment. 4. Full Employment - **sum of frictional and structural unemployment.** Full employment does not mean zero unemployment.

Answer 53

In the **Short-run**: * **it is possible for all structures to make a profit** but **NO FIRM is assured of profit**. It is not a guarantee in the short-run or the long-run. In the **Long-run**: * Long-run **profit is only possible** in the following market structures: * **Oligopoly** * **Perfect Monopoly** * Firms in a monopolistic competition and perfect competition structure will not make profit in the long-run.

Answer 54

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**.

Answer 55

When **domestic price levels increase** relative to foreign currencies, **foreign products become less expensive** causing an increase in imported goods and a decrease in exported goods. This decreases the aggregate demand of domestic products. * When foreign products become less expensive for U.S. buyers, this will increase imports and increase the trade deficit, decreasing aggregate demand for domestic products.

Answer 56

**Shift aggregate demand to the left** An increase in spending on imported goods would most likely shift the aggregate demand curve to the left--a **reduction in demand**. An increase in spending on imported goods would shift the demand curve to the left as demand for domestic goods is replaced by imports.

Answer 57

Chinese currency **strenghtens** against the dollar, this would likely result in **increased aggregate demand in the U.S.** An increase in the value of the Chinese RMB relative to the U.S. dollar would most likely increase aggregate demand in the U.S. An increase in the value of the Chinese RMB relative to the U.S. dollar would make Chinese goods more expensive in the U.S. and U.S. goods less expensive in China. As a consequence, fewer goods would be bought from China by U.S. consumers and more goods would be bought from the U.S. by Chinese consumers. Furthermore, U.S. consumers might also buy (substitute) more U.S. goods for the now more expensive Chinese goods.

Answer 58

* **AA**: If a country has an absolute advantage (e.g., low-cost labor, technology, etc.) in the production of a particular good, there is an **incentive for that country to produce more than its citizens need** to export the good to countries with higher production costs. * **CA**: a comparative advantage means that country has no alternate uses of its resources that would involve a higher return. In the long term, production of specific goods and services will migrate to countries that have a comparative advantage. * **Opportunity Costs**

Answer 59

* **Scanning**—a study of all segments in the general environment. The objective is to predict the effects of the general environment on the firm’s industry. Management can use this information to modify its strategies and operating plans. Scanning of the general environment is critical to firms in volatile industries. Sources of information for scanning include trade publications, newspapers, business publications, public polls, government publications, etc. * **Monitoring**—a study of environmental changes identified by scanning to spot important trends. As an example, the trend in aging of the population in this country would definitely be important to firms that provide services to retired individuals. Effective monitoring involves identifying the firm’s major stakeholders (e.g., customers, investors, employees, etc.). * **Forecasting**—Developing probable projections of what might happen and its timing. As an example, management might attempt to forecast changes in personal disposable income or the timing of introduction of a major technological development. * **Assessing**—Determining changes in the firm’s strategy that are necessary as a result of the information **obtained from scanning, monitoring, and forecasting.** It is the process of evaluating the implications of changes in the general environment on the firm.

Answer 60

In the long run all inputs are variable because additional plant capacity can be built. If in the long run a firm increases all production factors by a given proportion, there are the following three possible outcomes: * **Constant** returns to scale—Output increases in same proportion. * **Increasing** returns to scale—Output increases by a greater proportion. * **Decreasing** returns to scale—Output increases by a smaller proportion.

Answer 61

1. When net exports is positive (**exports greater than imports**), aggregate demand is **increased**. 2. When net exports are negative (**exports less than imports**), aggregate demand is **decreased**. A number of factors enter into determining a country's level of imports and exports with other countries, including: 1. Relative levels of income and wealth—the higher the income and wealth, the greater the spending, including on imports; 2. Relative value of currencies—**a weaker currency stimulates exports and makes imports more expensive (and vice versa)**; 3. Relative price levels—the higher the price level, the more costly are goods/services for foreign buyers; 4. Import and export restrictions and tariffs—the greater the restrictions and tariffs, the lower the level of imports and/or exports; 5. Relative inflationary rates—the higher the inflation rate, the higher the cost of inputs, causing outputs to be more costly and less competitive in the world market.

Answer 62

* This curve is completely vertical, reflecting no relationship between aggregate supply and price level. * This form of supply curve is sometimes associated with the nature of supply in the very short term when factors of production cannot be changed and in the long term when all inputs to the production process are fully utilized (including having full employment).

Answer 63

This curve is horizontal up to the (assumed) level of output at full employment, then slopes upward, **reflecting that output is not associated with price level until full employment is reached**, at which point **increased output is associated with higher price levels**.

Answer 64

This curve has a continuously positive slope with a steeper slope beginning at the (assumed) level of output at full employment, reflecting that at full employment increased output is associated with proportionately higher increases in price levels.

Answer 65

Changes other than price level will affect aggregate supply and shift the aggregate supply curve under any of the theoretical assumptions described above. Factors that may change the position of the supply curve include: 1. **Resource availability** -- **An increase in economic resources** (e.g., increase in working age population) **will shift the curve outward** (to the right); a decrease would have the opposite effect; 2. **Resource cost** -- A **decrease in the cost of economic resources** (e.g., lower oil prices) **will shift the curve outward** (to the right); an increase will have the opposite effect; 3. **Technological advances** -- (e.g., more efficient production processes) **will shift the curve outward (to the right)**. Government prohibitions on the use of an existing technology, in the absence of a comparable alternative, will shift the curve inward (to the left).

Micro & Macro Economics (18%) Flashcards

(90 cards)