Principles 1 Flashcards
(206 cards)
1
Q
Public good have a ______ problem
A
Free rider
2
Q
4 main factors that determine the supply of savings
A
- consumption smoothing
- level of impatience
- marketing and psychological effects
- the level of the int. rate
3
Q
Often individuals tend to save more when saving is presented as a ______
A
default option
4
Q
What are the 2 main roles of intermediaries?
A
- They assist in bringing the equilibrium in the market for loanable funds.
- They reduce costs of moving funds from savers to borrowers and help mobilize savings toward productive uses
5
Q
Banks spread _____ of investments among many countless lenders
A
risk
6
Q
Define default risk
A
the situation when the borrower might go bunkrupt and be unable to pay his interest
7
Q
What is collateral?
A
somethings that by agreement becomes the property of the ledner if the borrower defaults
8
Q
formula for rate of return
A
(face value - price / price )*100
9
Q
Explain the arbitrage principle
A
the buying and selling of equally risky assets, ensures that vequally risky assets earn equal returns. If they had different prices no one would buy the one with higher price
10
Q
Which factors can cause intermediaries to fail?
A
- insecure property rights
- control of int. rate
- politized lending and govt. owned banks
- bank failures and panic
- inflation
11
Q
The difference between the value of a house and the unpaid amount of mortgage is referred to as :
A
equity
12
Q
Formula for equity:
A
E = V-D (the value of an asset minus debt)
13
Q
If someone has more leverage this means that their cash can be used to buy
A
bigger assets
14
Q
In financial economics buying an asset is called
A
moving an asset
15
Q
Having more liabilities than assets is referred to as being:
A
insolvent
16
Q
Insolvency is usually followed by
A
bankruptcy
17
Q
Selling assets very quickly is referred to as a :
A
fire sale
18
Q
A run bank occurs when a large amount of _________ has to be paid off in a short amount of time
A
liabilities
19
Q
According to Bagehot the way to combat an internal drain is to:
A
lend freely and signal that there is no reserve shortage
20
Q
According to Bagehot a healthy bank builds it reserve in times of _________ and spends it freely in times of _______
A
propensity; panic
21
Q
Crowding out is a problem that occurs in particular when
A
the economy is in an upturn and the govt. reduces public spending
22
Q
According to Bagehot, banks should lend _____ when there is a crisis
A
freely
23
Q
Why does free lending work to battle financial crises and panic?
A
Because by lending freely banks signal to customers that there is still money to be given and taking money out of the bank is unnecessary
24
Q
The most immediate cause of the wealth of nations is that countries with high ___________ so that innovations and productivity can improve most efficiently
A
GDP per capita
25
The desire to have goods and services sooner rather than later is called
time preference
26
When a company opens up itself to the stock market for the very first time this is called an :
IPO
27
How do we call people who pay for a share of the costs of a public good but who do not enjoy the benefits
forced rider
28
Because forced riders exist public goods are not produced in the _____ quantity in the free market
optimal
29
Examples of common resources include:
fish , forests and agricultural land
30
List 3 solutions to the 'tragedy of the commons'
command
control
tradable allowances
31
Example of a command and control solution :
Governments try to command and control solutions like limiting the number of fishing boats
32
A recession is a:
significant, widespread decline in real income and employment
33
In times of recession all kinds of resources are not fully ________.
employed
34
The AD curve shows all the combinations of :
inflation and real growth that are consitent with a specific rate of spending growth
35
growth rate of money supply + velocity growth =
inflation + real growth in GDP
36
If money supply grows by 6% per year and velocity is stable at 0% then inflation and real growth must be equal to :
6%
37
The LRAS curve is vertical at the :
Solow growth rate
38
The rate of growth as given by the real factors of production is called the :
Solow growth rate
39
Any shocks that shift the potential growth rate, also shift the _____growth rate
Solow
40
Real shocks either increase or diminish the level of
productivity in an economy
41
Examples of real shocks:
- oil price shocks or other important input shock
- wars
- terrorist attacks
- tax rate changes
- mass strikes
- new technologies
- bad weather
- earthquake
42
Negative shocks shift the LRAS curve to the :
left
43
The SRAS curve shows the positive relationship between the inflation rate and real growth during the period when prices and wages are ______
sticky
44
The costs of changing prices are called :
menu costs
45
In the short run an increase in AD will lead to an increase in the _____ rate and ____
inflation rate and growth rate
46
Prices and wages adjust way slower to a fall or an increase in AD>?
fall in AD
47
Wages are especially sticky in the ______ direction.
DOWNWARD
48
Components of AD :
C + G + I + (X-M)
49
Some factors shift the AD curve:
- Faster money growth rate
- Confidence
- Lower taxes
- Increased wealth
- Increased Export Growth
50
Fear among consumers can be regarded as a ______ shock
negative AD shock
51
In a low quality legal system property rights are not ______
guaranteed
52
What is the doubling time is a country's growth rate is 2%
35 years woohooo
53
____, ____ and ______ are classified as intermediaries
Banks, bond markets, stock markets
54
Reasons for why people save:
- consumption smoothing
- level of impatience
- marketing and psychological effects
- level of int. rates
55
If there is a shortage of savings demanders will bid the :
interest rate up
56
When does a decreasing cost industry pop up?
when many firms of the same industry are established close together
57
when it comes to price discrimination , to maximize profits a firm should set higher prices in markets with _____ demand
inelastic
58
What can shift the demand curve right up for savings
Gov can offer a temporary investment tax credit to a company, so they borrow money to fund their new investments
59
CS + PS =
total gains from trade
60
Smuggling is a special example of ______
arbitrage
61
Bundling is most effective in a _______ cost industry
high fixed cost and low marginal cost
62
In the bond market, instead of borrowing from a bank, firms borrow money directly from
investors
63
Profits of firms in a perfectly comp. industry _____ when firms exit the market
increase
64
Above-normal profits are eliminated by
entry
65
Below-normal profits are eliminated by
exit
66
In some cases all the money borrowed through a bond is owed on 1 specific day. How is it called?
date of maturity
67
In the bond market, annual interest rate paid on a bond is called:
coupon payment
68
When the marginal costs of one firm in the same industry equal the marginal costs of another firm in the same insutry, this occurs:
total cost minimization
69
Property 2 of the invisible hand is the :
balance of industries
70
The invisible hand works when prices _____ signal costs and benefits
accurately
71
______ growth is the growth rate of real GDP per capita
real
72
_____ value is the value of a bond at maturity
face
73
The division of labour is a consequence of the :
propensity to barter trade and exchange
74
Factors that shift supply:
- technological innovations
- taxes and subsidies
- expectations
- changes in opp. costs
- entry or exit of producers
75
What are treasury bonds?
Long-term fixed interest rate bonds exeeding 10 years, usually paying interest every 6 months
76
What increased with larger trade
- specialization
- division of knowledge
- productivity
77
The market value of all final G + S produced within a country in one year is called
GDP
78
Futures are used to:
Reduce the risk of price fluctuations
79
Factors that contribute to the wealth of nations:
- incentives and institutions
- property rights
- honest govt.
- political stability
- gdp per capita
- location as landlocked countries are statistically less wealthy
- a dependable legal system
80
What are futures?
Futures are standarized contracts to buy/sell specified quantities of a good/finantial instrument at a specific price in the future
81
A price is a signal wrapped up in an ______
incentive
82
A prediction market is designed so that prices can be interpreted as
Probabilities, signals and used to make predictions
83
When a price rises it signal to BUYERS to buy ____ of it and look for cheaper _____
less; substitutes
84
When interest rates go up, bond prices...
fall
85
Speculation is an attempt to ______ from future price changes
profit
86
What 3 circumstances does A. Smith attribute to division of labour increasing qt. of work
1. increase of dexterity in every workman
2. the saving of time lost in passing from 1 task to another
3. invention of machines which allow for 1 man to do the work of many
87
Which 3 things occur when a free market is said to maximize gains from trade
1) the supply of goods is bought by buyers with higest willingness to pay
2) The supply of goods is sold by the sellers with the lowest costs
3) There are no unexploited gains and no wasted suppies
88
The pursuit of profits in a perfectly comp. market minimizes ______ costs
total industry costs
89
This term describes the process of analyzing futures prices to make inferences about future events
signal watching
90
In a perfect competition the profit a firm makes is found by:
MR-MC
91
Give an examole of a shift in supply and demand in one market affecting another
When oil prices in 70s started rising the rose industry in america suffered from high costs of heating so they moved from growing roses in US to Kenya
92
List the 3 BENEFITS of trade
1. Trade makes people better off when preferences differ
2. Trade increases productivity through the division of labour
3. Trade increases total output (production) through comparative advantage
93
This happens when the production process is divided into multiple, distinct tasks
division of labour (A. Smith)
94
A profit exists when MC is _____ than AC
lower
95
What does price discrimination encourage?
smuggling
96
Once a cluster is established in a decreasing cost industry what happens?
Constant or increasing costs become the NORM
97
Firms tend to be larger when:
1) organization costs are low
2) When entreprenuer is less likely to make mistakes
3) When by becoming a larger firm the price of FOPs is lower
98
Elasticity is a measure of how responsive QUANTITY DEMANDED is to a change in ______
price
99
The demand for a firm's product in a perfectly comp. industry is _______ elastic
perfectly
100
A bond that involves a collateral usually has a ______ interest rate
lower
101
Firms want to keep on producing as long as MR _____ than MC
is greater than
102
Define Arbitrage
It legally takes advantage if orice differences on various markets by buying goods where they are cheap and selling them on markets with high prices.
103
As long as Profit > AC in the long run a firm will
enter the market
104
If in the long run Profit < AC a firm will ______
exit the market
105
Under PPD there will be zero ________
consumer surplus since the monopolist takes all the gains from trade
106
How can Arbitrage be prevented
Firms can sell their product with different colour on different markets to easily distinguish 'em
107
Who competes with whom in the market?
Sellers with other sellers and buyers with other buyers
108
What does tying require
Unique right to produce a certain technological capability
109
Benefits of price discrimination
- Increases output
- Higher welfare (sometimes ;))
- can help cover fixed costs for R& D
110
Subcategories of transaction costs:
1) Costs of discovering relevant prices
2) cost of negotiating contracts
3) sales tax and other interferences
111
Why are super large firms not always a good idea?
because after a certain point there are diminishing marginal benefits and bureacracy costs begin to overwhelm the entrepreuner PLUS the entrepreuner is more likely to make mistakes
112
Unexploited gains occur when Qd is ___ than equilibrium
lower
113
List the shifters of demand
-income
-population
-prices of substitudes
-prices of complements
-tastes
-tastes
114
Wasted resources occur when Qs is ______ than equilibrium
higher
115
Define absolute advantage
When you can produce the same output with fewer inputs
116
According to A.Smith human cooperation in not based on belevolence bbut on
mutual self-interest
117
Tying works if :
the selling firm is the only firm allowed to sell the more expensive product
118
What is the division of labour limited by?
The extent of the market
119
The short run is the period _____ entry or exit has occured
before
120
Electricity is a ______ cost
variable
121
What is the 'real price' and 'nominal price'?
'Real price' - price adjusted for inflation
'Nominal price' - price not adjusted for inflation
122
Profit maximizing level of output is at :
MC=MR
123
When choosing which country should produce a good this should be analyzed
comparative advantage
124
Leverage ratio is a ratio between _______ and ______
what a person borrows and what he has in his pocket
125
Borrowing is necessary for ______ investments
large
126
How does our book define 'the long-run'
The period after all exit/entry has occured
127
This refers to the the advantages of large-scale production that reduce average cost as quantity increases.
economies of scale
128
Corrupt countries have lower _______
GDP per capita
129
Formula for profit
PQ-TC or (P-AC)Q
130
At PPD each customer is charged his _____
maximum willigness to pay
131
Example of PPD
University in its finantial aid programme might charge all students different prices based on their family's income that they had to submit.
132
Property 1 of Invisible Hand :
Minimization of total industry costs of production
133
Constant cost industry example :
Domain selling companies like GoDaddy xddd
134
Firm should shut down immediately in the short run, if its not able to cover either _______ or _____ costs
variable or fixed costs
135
What sould a firm do if P
Firm should exit immediately
136
If the firm is able to cover _____ but not _____ costs it should exit in the long run ( ASAP)
variable but not fixed costs
137
What is an economic force that works with the Invisible hand property (balance of industries)
Entrepreuners seeking profits and avoiding losses
138
What is the rate of return if Dominika could acquire a zero coupon bond for 950 euros which has a face value of 1000 at the day of maturity?
5.26%
139
If the rate of return on a bond is lower than the interest rate then the investor should ____ buy the bond
should not buy the bond
140
Buying an existing company's stocks is considered a transfer of _________
ownership rights
141
Firms acquiring currency obligations to avoid exchange rate risk is an example of :
futures contract
142
Does a dependable legal system lead to an increase in physical capital?
Yes
143
Is a country's wealth a result of it exploting its absolute advantages?
No
144
What limitations for the division of labour does Adam Smith explain?
1. the extent of the market
2. work alienation such as becoming bored of a task
3. technical limitations such as the extent of technology
145
When is govt. spending most effective?
when there are lower rayes of private spending
146
What happens in the SHORT RUN when speculators buy up oil reserves?
They reduce overall supply, in turn leading to a rise in value then( driving up the prices)
147
Why is speculation important?
Cause when real shocks like wars occur, speculators increase supply in times of crisis. Consequently, prices fall.
148
Overall society is better thanks to speculation because it _______ prices.
stabilizes
149
Futures markets are not only for SPECULATION but also for reducing _______
RISK
150
Change in demand equates to a ________
shift of the demand curve
151
Change in quantity demanded equates to a ________
movement along the demand curve
152
Prices tell the _______ which areas of production consumers what expanded and which abandoned.
entrepreuners
153
In a successful economy there will be many _______
unsuccessful firms
154
The theory of comparative advantage states that if countries specialise in producing goods where they have a __________________– then there will be an increase in economic welfare.
lower opp. cost
155
How does trade affects wages?
It raises wages
156
List the lags that affect the effectiveness of fiscal policy
- Recognition lag
- Legislature lag
- Implementation lag
- Effectiveness lag
- Evaluation lag
157
This term refers to the is the
additional increase in AD caused when expansionary fiscal policy increases income and thus consumer spending
multiplier effect
158
What are the 4 major limits to fiscal policy?
1. crowding out
2. a drop in a bucket
3. a matter of timing
4. real shocks
159
Crowding out is the ______ in private spendign when government increases ______
decrease, spending
160
How is raising taxes a cause for crowding out?
Because when taxes are raised private individuals have less funds for investments
161
What is money illusion?
This happens when someone believes the money earn is worth more than it actually is because they focus on nominal prices and not REAL prices
162
The costs of changing prices are referred to as :
menu costs
163
Prices rise like ______ and fall like _______
rockets ; feathers
164
Factors that increase AD ( shift AD curve to the right) :
- A faster money growth rate
- Increased Consumer Confidence
- Increased wealth
- Lower taxes
- Greater growth of govt. spending
- Increased Export Growth
- Decreased Import growth (PAMIETAJ)
165
Factors that decrease AD ( shift AD curve to the left)
- A slower money growth rate
- Consumer Fear
- Reduced Wealth
- Higher taxes
- Lower growth of govt. spending
- Decreased export growth
- Increased import growth
166
What is the standard investment tax credit ?
5 %
167
A federal tax incentive for business investment is called
investment tax credit
168
higher exports increase
AD
169
Changes in velocity of money tend to be
temporary
170
Real shocks are rapid changes in economic conditions that increase or diminish the _______ of capital and labour
productivity
171
Command and control policies are a solution to the _______
tragedy of the commons
172
Short run shutdown decision occurs when
Profit
173
Firm should shut down immediately in the short run, if its not able to cover either ______ or ______ costs
variable or fixed
174
In the short run, if a firm is able to cover ______ costs but not _____ costs, the firm should exit the market as soon as possible
variable but not fixed
175
Example of a decreasing cost industry :
Silicon Valley
176
Tax increases and decreases work only on:
Supply curve (shifting it)
177
How according to Hayek is the information spread out throughout the economy?
Information is spread out unevenly throughout society, and markets are best way to aggregate that information
178
What is "licensing"?
The psychological phenomenon that an individual who carbon offset one type of consumption tends to pollute more with another
179
What are marketing costs? What do they include?
Marketing costs are all the costs other than those connected to manufactuing the product (like wages, electricty, machinery). Examples of marketing costs are: Drafting a contract, setting up meetings and opportunity costs of driving to that meetings
180
What 3 "Big Ideas" can be connected to A.Smith's theory on division of labour
1) Incentives matter
2) Power of trade
3) Thinking on the margin
181
Who advocated the claim that: “the essence of strategy formulation is coping with competition”
Michael Porter
182
In a market with perfect competition, the profit a firm makes is found by:
market price and average cost so P-AC
183
Managing money supply is part of what kind of policy?
Monetary policy
184
What is the difference between monetary and fiscal policy?
Monetary policy is everything that central banks does, while fiscal policy is everything that gov does
185
Slower growth rate in Money supply will...
Decrease AD as people have less money to spend due to slower grwoth compared to hypothetical "normal growth"
186
Lower money supply causes...
Lower AD and therefore deflation
187
Increasing money supply causes....
Higher AD and therefore inflation
188
What is a 'Bagehot Dictum'
To avert panic, central banks should lend early and freely (ie without limit), to commercial banks and at high interest rates.
189
What is fixed cost? What does it influence?
Fixed costs are constant costs of running a business that don not change with output. Moreover, fixed cost does not affect supply of goods that are produced
190
An icrease in one asset will either be offest by
a decrease in another asset
an increse in a liability
191
What is bookkeeping?
The recording of economic transactions on a daily (often real-time) basis
192
The left side of the T-account is called the :
debit side
193
the difference between equity on december 31 2022 and equity on december 31 2021 is regarded as the :
net income for 2021
194
revenues and expenses are CHANGES IN _____ not in ______
equity; cash
195
The consumers always spend the same amount of money on this good when the elasticity is
unitary meaning that it has a value of -1.
196
For durable goods the demand is more ________ in the short run than in the long run
inelastic
197
ATC are minimal when they are equal to
MC
198
If a firm has increasing returns to scale this means that its costs are :
declining in the long run (decling average costs)
199
Salience is the cognitive bias that _____-
predisposes shoppers to focus on items that are more prominent in valuie
200
Rules of thumb are essentially
mental shortcuts
201
Fairness is a bias in economics which concerns _______
making decision based off of moral rules
202
What is a bubble?
An increase in the price of a good based not on the market mechanism but primarily on the belief that the price will keep going up (housing bubble in the states)
203
An information cascade occurs when:
when one's action depends on the actions of others which were also based on others
204
when firm a and firm b choose a cooperative outcome they choose the outcome that ______
maximizes total gains
205
In a vertically integrated model value creation entails:
- content creation
- multimedia packaging services
- network infrastructure equipment
- telecom services
206
In a vertically integrated model , value capturing entails:
- revenue gets redistributed more or less equally among all firms
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