Economics Reading 14

第 2 章

EconomicsReading 14

TOPICS IN DEMAND AND SUPPLY ANALYSIS

第 2 章

EconomicsReading 14

TOPICS IN DEMAND AND SUPPLY ANALYSIS

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　　　Demand and Supply Concepts Answer

Movements Along & Shifts

A change in the market price that simply increases or decreases the quantity supplied or demanded is represented by ( ■ a movement along the curve / □ a shift of the curve itself )

A change in one of the independent variables other than price will result in ( □ a movement along the curve / ■ a shift of the curve itself )

The Inverse Demand Function

Assume demand function QD = 12.34 - 1.5P, then the inverse demand function can be expressed as P = 8.23 - 0.667QD

Movements Along & Shifts

A change in the market price that simply increases or decreases the quantity supplied or demanded is represented by ( □ a movement along the curve /□ a shift of the curve itself)

A change in one of the independent variables other than price will result in ( □ a movement along the curve / □ a shift of the curve itself)

The Inverse Demand Function

Assume demand function QD = 12.34 - 1.5P, then the inverse demand function can be expressed as P =

43第 2 章　Economics

　　 Own-price Elasticity of Demand Answer

Definition

Own-price Elasticity of Demand =

A perfectly elastic demand curve is ( ■ horizontal / □ vertical ), and its elasticity is ( ■ infinite / □ zero). If the price increases, quantity demanded goes to zero

A perfectly inelastic demand curve is ( □ horizontal / ■ vertical ), and elasticity is zero. If the price changes, there will be ( □ change / ■ no change ) in the quantity demand

The demand curve with highly elastic is ( □ steeper / ■ less steep) than the curve with lowly curve

Maxim Revenue

Total revenue is maximized at the price and quantity where demand is unit elastic where price elasticity = -1

When price is in the elastic region of the demand curve, a price increase will ( ■ decrease / □ increase) total revenue

Definition

Own-price Elasticity of Demand = A perfectly elastic demand curve is ( □ horizontal /

□ vertical), and its elasticity is ( □ infinite /□ zero). If the price increases, quantity demanded goes to

A perfectly inelastic demand curve is ( □ horizontal / □ vertical), and elasticity is zero. If the price changes, there will be ( □ change / □ no change) in the quantity demand

The demand curve with highly elastic is ( □ steeper / □ less steep) than the curve with lowly curve

Maxim Revenue

Total revenue is maximized at the price and quantity where demand is where price elasticity =

When price is in the elastic region of the demand curve, a price increase will ( □ decrease /□ increase) total revenue

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　 Factors that Influence the Elasticity Answer

Factors that influence the elasticity of demand consists of

Availability of substitutes refers to if good substitutes are available, a price ( □ decrease / ■ increase) in one product will induce consumers to switch to a substitute good

Relative amount of income spent on the good refers to when the portion of consumer budgets spent on a particular good is relatively small, demand for that good will tend to be relatively ( □ elastic / ■ inelastic)

Time since the price change refers to the price elasticity of demand for most products is ( ■ greater / □ lesser ) in the long run than in the short run

Whether the good or service is seen to be discretionary or non-discretionary refers to the more a good is seen as being necessary, ( ■ the less / □ the more) elastic its demand is likely to be

Factors that influence the elasticity of demand consists of

of substitutes refers to if good substitutes are available, a price ( □ decrease / □ increase) in one product will induce consumers to switch to a substitute good

of income spent on the good refers to when the portion of consumer budgets spent on a particular good is relatively small, demand for that good will tend to be relatively ( □ elastic / □ inelastic)

Time since the price change refers to the price elasticity of demand for most products is ( □ greater / □ lesser) in the long run than in the short run

Whether the good or service is seen to be discretionary or non-discretionary refers to the more a good is seen as being necessary, ( □ the less / □ the more)elastic its demand is likely to be


　 Cross & Income Elasticity of Demand Answer

Cross Elasticity of Demand

Cross elasticity of demand measures the change in the demand for a good in response to the change in price of a substitute or complementary good

Cross elasticity of demand =

Cross elasticity of demand is ( ■ positive / □ negative) for substitute goods

Cross elasticity of demand is ( □ positive / ■ negative) for complement goods

Income Elasticity of Demand

Income elasticity of demand measures the sensitivity of the quantity of a good or service demanded to a change in a consumer’s income

Income Elasticity of Demand =

For nominal goods , E > 0 ● For Luxuries, E > 1; for Necessities, E between 0 and 1

For Inferior Goods , E < 0

Cross Elasticity of Demand

Cross elasticity of demand measures the change in the demand for a good in response to the change in price of a good

Cross elasticity of demand = Cross elasticity of demand is ( □ positive / □ negative) for

substitute goods Cross elasticity of demand is ( □ positive / □ negative) for

complement goods

Income Elasticity of Demand

Income elasticity of demand measures the sensitivity of the quantity of a good or service demanded to a change in a

Income Elasticity of Demand = For nominal goods , E

● For Luxuries, E ; for Necessities, E For Inferior Goods , E

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　　 Substitution and Income Effects Answer

Substitution Effect

Substitution effect refers to when the price of Good X decreases, the relative price of Good X against other goods will ( ■ decrease / □ increase). Consumer equilibrium moves along the indifference curve, which leads to an ( □ decrease / ■ increase) in the demand of Good X

Income Effect

Income effect refers to when the price of Good X decreases, consumer’s real purchasing power will ( □ decrease / ■ increase)

Fill in The Blank of The Table

Substitution Effect Income Effect

Normal good Buy ( ■ more / □ less) Buy ( ■ more / □ less)

Inferior good Buy ( ■ more / □ less) Buy ( □ more / ■ less)

Substitution Effect

Substitution effect refers to when the price of Good X decreases, the relative price of Good X against other goods will ( □ decrease /□ increase). Consumer equilibrium moves along the indifference curve, which leads to an ( □ decrease / □ increase ) in the demand of Good X

Income Effect

Income effect refers to when the price of Good X decreases, consumer’s real purchasing power will ( □ decrease / □ increase)

Fill in The Blank of The Table

Substitution Effect Income Effect

Normal good Buy ( □more /□ less) Buy ( □more /□ less)

Inferior good Buy ( □more /□ less) Buy ( □more /□ less)


　　 Giffen Goods & Veblen Goods Answer

For Giffen Goods

For Giffen goods, Income effect ( ■ >/ □ < / □ =) substitution effect. Demand curve has positive slope

Veblen Goods (Conspicuous Goods)

Both the substitution and income effects of a price increase are to ( ■ decrease / □ increase) consumption of the good

Two Distinctions Between Giffen Goods and Veblen Goods

First, Giffen goods are inferior goods, while Veblen goods certainly are not

Second, the existence of Giffen goods ( ■ is / □ is not) theoretically supported by our rules of consumer choice, while the existence of Veblen goods ( □ is / ■ is not )

Giffen Goods & Veblen Goods

( □ Giffen goods / □ Veblen goods / ■ Both) indicate a positively sloped demand curve

For Giffen Goods

For Giffen goods, Income effect ( □ > / □ < / □ =) substitution effect. Demand curve has positive slope

Veblen Goods (Conspicuous Goods)

Both the substitution and income effects of a price increase are to ( □ decrease/□ increase) consumption of the good

Two Distinctions Between Giffen Goods and Veblen Goods

First, Giffen goods are , while Veblen goods certainly are not

Second, the existence of Giffen goods ( □ is / □ is not) theoretically supported by our rules of consumer choice, while the existence of Veblen goods ( □ is / □ is not)

Giffen Goods & Veblen Goods

( □ Giffen goods / □ Veblen goods/ □ Both) indicate a positively sloped demand curve

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　　　　　　　　Revenue Answer

Definition of TR, AR & MR Total revenue (TR) = P × Q Average revenue (AR)= TR / Q

Marginal revenue (MR) =

Under Imperfect Competition

When sell more goods, average revenue (AR) and marginal revenue (MR) will ( □ increase / ■ decrease)

AR is ( □ equal to / ■ not equal to) MR except the quantity is one

The decrease in ( ■ MR / □ price / □ AR) is more obvious If MR = 0，then total revenue (TR) reaches maximized

Under Perfect Competition

The individual firm has virtually ( □ impact / ■ no impact) on market price, price taker

The individual seller faces a horizontal demand curve AR ( ■ is / □ is not) equal to MR and ( ■ is / □ is not) equal

to P

Definition of TR, AR & MR Total revenue (TR) = Average revenue (AR) = Marginal revenue (MR) = =

Under Imperfect Competition

When sell more goods, average revenue (AR) and marginal revenue (MR) will ( □ increase / □ decrease)

AR is ( □ equal to / □ not equal to) MR except the quantity is one

The decrease in ( □ MR / □ price /□ AR) is more obvious If MR = , then total revenue (TR) reaches maximized

Under Perfect Competition

The individual firm has virtually (□ impact/ □ no impact) on market price, price taker

The individual seller faces a demand curve AR ( □ is/□ is not) equal to MR and ( □ is /□ is not) equal

to P


　　　　　　　 TP, AP & MP Answer

TP, AP & MP Total product (TP) = Q Average product (AP) = TP/L Marginal product (MP) = ∆Q / ∆L TP, AP and MP are ( □ U-shaped / ■ inversed U-shaped ) MP intersects AP at its max points TP is at its max points, when MP = 0

The Law of Diminishing Returns

States that as more and more resources (such as labor) are devoted to a production process, they increase output but at an ever ( ■ decreasing / □ increasing) rate

TP, AP & MP Total product (TP) = Average product (AP) = Marginal product (MP) = TP, AP and MP are ( □ U-shaped / □ inversed U-shaped) MP intersects AP at its TP is at its max points, when MP =

The Law of Diminishing Returns

States that as more and more resources (such as labor) are devoted to a production process, they increase output but at an ever ( □ decreasing /□ increasing ) rate

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　　　　　　　 TC, AC & MC Answer

Long-term & Short-term

The technology of production is（■ fixed / □ variable）in the short-term

Definition

Marginal cost (MC) = Change in total cost / change in output Average cost (AC) = Total cost / output = AFC + AVC SMC = w / MPL

Relationship

When the quantity of output is very small, MC ( ■ declines / □ increases) initially，then ( □ declines / ■ increases)

MC intersects AVC at its lowest points; MC intersects ATC at its lowest points

ATC curve minimum point stands for the lowest cost per unit, but it ( □ does / ■ does not) mean the profit-maximizing point of the production

When AP (MP) achieves its max point, AC (MC) achieves its ( □ max point / ■ minimum point)

Long-term & Short-term

The technology of production is（ □ fixed /□ variable）in the short-term

Definition

Marginal cost (MC) = Average cost (AC) = = SMC =

Relationship

When the quantity of output is very small, MC ( □ declines / □ increases) initially, then ( □ declines/ □ increases)

MC intersects AVC at its points; MC intersects ATC at its points

ATC curve minimum point stands for the lowest cost per unit, but it ( □ does / □ does not) mean the profit-maximizing point of the production

When AP (MP) achieves its max point, AC (MC) achieves its ( □ max point/ □ minimum point)


　　　Shutdown and Breakeven Point Answer

Shutdown Point

If AR < AVC in the short run, the firm should halt production, where is its short run shutdown point

If AR > AVC in the short run, the firm should continue to operate, ignoring its losses

if AR < ATC in the long run, the firm should halt production, where is the long run shutdown point

The Conclusion for Pure Competition

If P > ATC, the firm can realize economic profit If ATC > P > AVC, the firm will face a loss, but he can compensate some fixed cost more or less

If P < AVC, the firm can’ t compensate even variable cost, so he will leave this industry

Shutdown and Breakeven under Perfect Competition

TR = TC means a breakeven point When TC > TR > TVC, firm should not shutdown in the

short run but shutdown in the long run When TR < TVC, firm should shutdown regardless of in

the short run or long run

Shutdown Point

If AR < in the short run, the firm should halt production, where is its short run shutdown point

If AR > in the short run, the firm should continue to operate, ignoring its losses

if AR < in the long run, the firm should halt production, where is the long run shutdown point

The Conclusion for Pure Competition

If P > , the firm can realize economic profit If > P > , the firm will face a loss, but he can compensate some fixed cost more or less

If P < , the firm can’ t compensate even variable cost, so he will leave this industry

Shutdown and Breakeven under Perfect Competition

TR = means a breakeven point When > TR > , firm should not shutdown in the

short run but shutdown in the long run When TR < , firm should shutdown regardless of in

the short run or long run

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Profit Maximizing & Economies of Scale Answer

Profit Maximizing Output under Perfect Competition Occurs When

The difference between total revenue (TR) and total costs (TC) is the ( ■ greatest / □ smallest)

Marginal revenue (MR) equals marginal cost (MC)

Profit Maximizing Output under Imperfect Competition

The MR and demand curves ( □ are / ■ are not) identical for this firm. The profit-maximizing rule is to find the level of Q that equates MC to MR

Envelope Curve

Long run average total cost curve (LRAC) is the envelope curve of all possible short run average total cost curves

Economies of Scale and Diseconomies of Scale

The negative slope segment of the long run average total cost curve means the ( ■ economies of scale / □ dise-conomies of scale). The positive slope segment of this long run average total cost curve means that ( □ economies of scale / ■ diseconomies of scale) are present

The ( ■ minimum / □ maximum) point on the LRAC curve is referred to as the minimum efficient scale

Profit Maximizing Output under Perfect Competition Occurs When

The difference between total revenue (TR) and total costs (TC) is the ( □ greatest /□ smallest)

Marginal revenue (MR) equals

Profit Maximizing Output under Imperfect Competition

The MR and demand curves ( □ are / □ are not) identical for this firm. The profit-maximizing rule is to find the level of Q that equates MC to

Envelope Curve

is the envelope curve of all possible short run average total cost curves

Economies of Scale and Diseconomies of Scale

The negative slope segment of the long run average total cost curve means the ( □ economies of scale / □ disecono-mies of scale). The positive slope segment of this long run average total cost curve means that ( □ economies of scale /□ diseconomies of scale) are present

The ( □ minimum / □ maximum) point on the LRAC curve is referred to as the minimum efficient scale

Reading 15

THE FIRM AND THE MARKET STRUCTURES

Reading 15

THE FIRM AND THE MARKET STRUCTURES

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　　　　　Perfect Competition Answer

Under Perfect Competition Condition

A price taker is a firm that ( ■ can / □ cannot) influence the market price and that sets its own price at the market price

The demand of the individual firm is perfectly ( ■ elastic / □ inelastic)

Price = Demand = Marginal Revenue = Average revenue

Short run Supply Curve

Short run supply curve for a firm is the segment of MC that ( ■ above / □ below) the AVC

When DWL = 0, optimum allocation can be achieved When firm in perfectly competitive market, its the long run

equilibrium output level is where MR = MC = ATC. At that point, ATC is the lowest and economic profit is zero

Under Perfect Competition Condition

A price taker is a firm that (□ can /□ cannot) influence the market price and that sets its own price at the market price

The demand of the individual firm is perfectly (□ elastic / □ inelastic)

Price = Demand = =

Short run Supply Curve

Short run supply curve for a firm is the segment of MC that ( □ above / □ below) the AVC

When DWL = , optimum allocation can be achieved When firm in perfectly competitive market, its the long run

equilibrium output level is where MR = MC = . At that point, ATC is the lowest and economic profit is


　　　　 Monopolistic Competition Answer

Demand Curve

In monopolistic competition market, firms face ( ■ downward- sloping / □ horizon) demand curves which are ( ■ highly / □ lowly) elastic

Monopolistic vs. Perfect Competition

Under monopolistic market, P ( ■ > /□ = /□ <) MC Price of the output is ( ■ higher / □ lower) than that under

perfect competition There ( □ is / ■ is no) supply function for the firm under

Monopolistic Competition

Innovation and Product Development Indicates that

( ■ Less-elastic / □ More-elastic) demand curve, so firms can earn economic profit

Substitutes will eventually ( □ create / ■ erode) the economic profit that the firm earns at the beginning

Market

Advertising indicates that: ( □ Low / ■ High) fees for firms in monopolistic competition

Demand Curve

In monopolistic competition market, firms face (□ downward- sloping / □ horizon ) demand curves which are ( □ highly / □ lowly) elastic

Monopolistic vs. Perfect Competition

Under monopolistic market, P ( □ > /□ = /□ <) MC Price of the output is ( □ higher /□ lower) than that under

perfect competition There ( □ is / □ is no) supply function for the firm under Mono-

polistic Competition

Innovation and Product Development Indicates that

( □ Less-elastic / □ More-elastic) demand curve, so firms can earn economic profit

Substitutes will eventually ( □ create/ □ erode) the economic profit that the firm earns at the beginning

Market

Advertising indicates that: ( □ Low / □ High) fees for firms in monopolistic competition

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　　　　　　　　 Oligopoly Answer

Kinked Demand Curve Model

The kinked demand curve model of oligopoly assumes that each firm believes that if it raises its price, others ( □ will / ■ will not) follow, but if it cuts its price, other firms ( ■ will / □ will not) cut theirs

Shortcoming of the model is that the model ( □ does / ■ does not) explain where does the market price come from

Prisoners’ Dilemma

Prisoner B is silent

Prisoner B confesses

Prisoner A is silent

A gets 8 months;B gets 8 months

A gets 9 years;B goes free

Prisoner A confesses

A goes free;B gets 9 years

A gets 3 years;B gets 3 years

Best overall outcome for prisoners A and B is to remain silent According to the Nash equilibrium, prisoners A and B

should confess

Kinked Demand Curve Model

The kinked demand curve model of oligopoly assumes that each firm believes that if it raises its price, others (□ will / □ will not) follow, but if it cuts its price, other firms (□ will / □ will not) cut theirs

Shortcoming of the model is that the model ( □ does / □ does not) explain where does the market price come from

Prisoners’ Dilemma

Prisoner B is silent

Prisoner B confesses

Prisoner A is silent

A gets 8 months;B gets 8 months

A gets 9 years;B goes free

Prisoner A confesses

A goes free;B gets 9 years

A gets 3 years;B gets 3 years

Best overall outcome for prisoners A and B is to According to the Nash equilibrium, prisoners A and B

should


　　　　　　　　 Oligopoly Answer

Dominant Firm Model

A single firm owns much market share and has relative (■ lower / □ higher) cost

Leader demand curve are ( ■ more / □ less) steeper which implies the leader will have a larger market share as P ( ■ increase / □ decreases)

( ■ Dominant firm / □ The other competitive firms) deter-mines the market price

Collusion

If the two parties comply with the collusion, the market is just like a monopoly firm, which will make ( □ more / ■ less) outputs and ( □ lower / ■ higher) price

( ■ Fewer/ □ More) firms, ( ■ more / □ less) similar products cost structures , relatively ( ■ small / □ large) and frequent purchases, ( ■ more / □ less) severe penalty for cheating, ( □ more / ■ less) actual or potential competition would make collusion easier

Dominant Firm Model

A single firm owns much market share and has relative (□ lower / □ higher) cost

Leader demand curve are ( □ more /□ less) steeper which implies the leader will have a larger market share as P ( □ increase /□ decreases)

( □ Dominant firm / □ The other competitive firms) determines the market price

Collusion

If the two parties comply with the collusion, the market is just like a monopoly firm, which will make (□ more / □ less) outputs and ( □ lower / □ higher) price

( □ Fewer / □ More) firms, (□ more /□ less) similar products cost structures , relatively ( □ small / □ large) and frequent purchases, ( □ more / □ less) severe penalty for cheating, ( □ more / □ less) actual or potential competition would make collusion easier

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　　　　　　　 Pure Monopoly Answer

Target

The monopolists want to maximize ( ■ profits / □ price), where MR = MC

For Price Discrimination to Work The Seller Must

Face ( ■ downward / □ upward) sloping demand curve According to different price elasticities of demand for the product, the customers can be classified at least two groups

Prevent arbitrage

Conclusion for Discrimination

Price discrimination ( ■ reduces / □ increase) the allocative inefficiencies that result from pricing above marginal cost. The major benefit is ( □ less / ■ more) output and profit

Government Regulation

Average cost pricing is the more common form to regulate the monopoly firm, at the point where P = ATC, ensuring the monopolist had a ( ■ normal profit / □ economic profit)

Under Marginal cost method, monopolists set P =MC. This will causes a loss

Government can sell the monopoly right to the highest bidder to regulate a monopoly

Target

The monopolists want to maximize ( □ profits/ □ price), where MR =

For Price Discrimination to Work The Seller Must

Face ( □ downward /□ upward) sloping demand curve According to different price elasticities of demand for the product, the customers can be classified at least groups

Prevent

Conclusion for Discrimination

Price discrimination ( □ reduces /□ increase)the allocative inefficiencies that result from pricing above marginal cost. The major benefit is (□ less / □ more) output and profit

Government Regulation

Average cost pricing is the more common form to regulate the monopoly firm, at the point where P = , ensuring the monopolist had a ( □ normal profit /□ economic profit)

Under Marginal cost method, monopolists set P = . This will causes a

Government can sell the to the highest bidder to regulate a monopoly


　　　　 Concentration Measures 　　 Answer

The N-Firm Concentration Ratio

Measures the market shares of the ( □ smallest / ■ largest) N-Firms in a market. Its limitation may be relatively ( □ sensitive / ■ insensitive)， when firms with large market shares mergers

The Herfindahl-Hirschman Index (HHI ) is

The sum of the squares of the largest firms’ market shares When HHI is less than 1 000, the market is competitive;

when HHI is between 1 000 and 1 800, the market is considered to be moderately competitive; when HHI is between 1 800 and 10 000, the market is considered to be not competitive, when HHI is greater than 10 000, the market is considered to be monopoly

Simple concentration measures can not indicate barriers to entry the market

The N-Firm Concentration Ratio

Measures the market shares of the ( □ smallest / □ largest) N-Firms in a market. Its limitation may be relatively (□ sensitive / □ insensitive), when firms with large market shares mergers

The Herfindahl-Hirschman Index (HHI ) is

The of the squares of the largest firms’ market shares When HHI is less than 1 000, the market is competitive;

when HHI is between 1 000 and 1 800, the market is considered to be ; when HHI is between 1 800 and 10 000, the market is considered to be when HHI is greater than 10 000, the market is considered to be

Simple concentration measures can not indicate to entry the market

Reading 16

AGGREGATE OUTPUT, PRICE, AND ECONOMIC GROWTH


Reading 16

AGGREGATE OUTPUT, PRICE, AND ECONOMIC GROWTH

　　　　　　　　　 GDP 　　Answer

Gross Domestic Product (GDP)

GDP calculates the total market value of the ( □ intermediate / ■ final ) goods and services

Judge The Following Goods (Services) should Include or

Exclude GDP

Final goods and services ( ■ include / □ exclude) In-process goods ( □ include / ■ exclude) By-products of production ( □ include / ■ exclude) Goods and services offered by government ( ■ include /

□ exclude) Underground economy ( □ include / ■ exclude) Barter transaction ( □ include / ■ exclude) Owner-occupied housing ( ■ include / □ exclude) Value of goods that produce in the past period of time and

sale or resale currently ( □ include / ■ exclude) Transfer payments offered by the state ( □ include / ■ exclude) Goods and services which is newly produced ( ■ include /

□ exclude) Labor value that are not sold ( □ include / ■ exclude) Illegal trade ( □ include / ■ exclude)

Gross Domestic Product (GDP)

GDP calculates the total value of the ( □ intermediate / □ final) goods and services

Judge The Following Goods (Services) should Include or

Exclude GDP

Final goods and services ( □ include / □ exclude) In-process goods ( □ include / □ exclude) By-products of production ( □ include / □ exclude) Goods and services offered by government ( □ include /

□ exclude) Underground economy( □ include / □ exclude) Barter transaction( □ include / □ exclude) Owner-occupied housing( □ include / □ exclude) Value of goods that produce in the past period of time and

sale or resale currently ( □ include / □ exclude) Transfer payments offered by the state( □ include / □ exclude) Goods and services which is newly produced ( □ include /

□ exclude) Labor value that are not sold ( □ include / □ exclude) Illegal trade( □ include / □ exclude)

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　　　　　　　　　 GDP 　　　Answer

GDP vs. GNP

( □ GNP / ■ GDP) is more closely related to the employment and growth of a country

GDP Deflator

GDP deflator for year t

=

=

Two GDP Measurements

There are two GDP measurements: The Value-of-Final-Output Method and The Sum-of-Value-Added Method

GDP vs. GNP

( □ GNP/ □ GDP) is more closely related to the employment and growth of a country

GDP Deflator

GDP deflator for year t = =

Two GDP Measurements

There are two GDP measurements: The Value-of- Method and The -Added Method


　　　　　 Expenditure Approach Answer

Expenditure Approach

Under the ( ■ expenditure approach / □ income approach), we can sum the amounts spent on goods and services produced during the period to calculate GDP = C + I + G + (X – M)

Consumption C = a + b(Y – tax) Marginal propensity to consume (MPC) refers to the part of

additional unit of disposable income spent on consumption MPC + MPS = 1 Investment is ( □ positively / ■ negatively) related to interest For economic activity, government purchases can be viewed

as ( □ dependent / ■ independent) variable Net exports depend on domestic disposable incomes

and foreign disposable incomes According to Expenditure Approach and Income Approach,

(G - T) = (S – I) – (X – M)

Expenditure Approach

Under the ( □ expenditure approach /□ income approach), we can sum the amounts spent on goods and services produced during the period to calculate GDP =

Consumption C = refers to the part of additional unit

of disposable income spent on consumption MPC + MPS = Investment is ( □ positively / □ negatively) related to interest For economic activity, government purchases can be viewed

as ( □ dependent / □ independent) variable Net exports depend on domestic disposable incomes and

According to Expenditure Approach and Income Approach,

(G - T) =

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　　　　　 Income Approach 　　　Answer

Income Approach

Under the ( □ expenditure approach / ■ income approach), we can sum the amounts earned by households and companies during a given period to calculate GDP = National income + capital consumption allowance + statistical discrepancy

National income = Compensation of employees + corporate and government enterprise profits before taxes + interest income + unincorporated business net income + rent + indirect business taxes less subsidies

Personal income = National income – indirect business tax – corporate income tax – undistributed corporate profit + transfer payment

Personal disposable income = Personal income - personal taxes

Income Approach

Under the ( □ expenditure approach / □ income approach), we can sum the amounts earned by households and companies during a given period to calculate GDP =

National income = Compensation of employees + before taxes + + net income + + less subsidies

Personal income = National income Personal disposable income = Personal income -


　　　　 IS Curves & LM Curves 　　Answer

IS Curves

IS indicates that there must be an ( □ direct / ■ inverse) relationship between the real interest rate and income

IS shift ( □ left / ■ right) with increasing G IS shift ( □ left / ■ right) with increasing X-M

LM Curves

Reasons for holding money ● The Demand for money is determined by interest rates and it is also influenced by income level and price level

● As the level of real GDP increases, the demand trans- actions ( □ decrease / ■ increases)

● The total amount of precautionary demand for money (□ decrease / ■ increases) with the size of the economy

● Speculative demand is ( ■ inversely related / □ related) to market’s return

IS Curves

IS indicates that there must be an ( □ direct / □ inverse) relationship between the real interest rate and income

IS shift ( □ left / □ right) with increasing G IS shift ( □ left / □ right) with increasing X-M

LM Curves

Reasons for holding money ● The Demand for money is determined by and it is also influenced by income level and price level

● As the level of real GDP increases, the demand trans- actions ( □ decrease / □ increases)

● The total amount of precautionary demand for money ( □ decrease / □ increases) with the size of the economy

● Speculative demand is ( □ inversely related /□ related) to market’s return

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　　　　　　　　LM Curve 　　Answer

LM Curve

The supply of money ● The supply of money is decided by the central bank and ( □ is / ■ is not) affected by changes in interest rates. Thus the supply of money curve is ( ■ vertical / □ horizon)

● M1 comprises notes and currency in circulation, travelers checks, demand deposits and other deposits on which checks can be written

● M2 includes M1, plus savings and money market deposits, time deposits of less than $100 000, plus other balances in retail money market and mutual funds

The LM curve shows there is a ( ■ positive / □ negative) relationship between real income and real interest rate for a certain level of the real money supply

LM shift ( □ left / ■ right) with increasing money supply LM shift ( □ left / ■ right) with price decreasing

LM Curve

The supply of money ● The supply of money is decided by the central bank and ( □ is / □ is not) affected by changes in interest rates. Thus the supply of money curve is ( □ vertical /□ horizon)

● M1 comprises notes and in circulation, , and other on which checks can be written

● M2 includes M1, plus deposits, time of less than $100 000, plus other balances in and mutual funds

The LM curve shows there is a ( □ positive /□ negative) relationship between real income and real interest rate for a certain level of the real money supply

LM shift ( □ left / □ right) with increasing money supply LM shift ( □ left / □ right) with price decreasing


　　　　　　　　AD Curve 　　Answer

Definition

The aggregate demand curve illustrates the ( □ positive / ■ negative) relationship between the price level and real income; it is the intersection between the IS and LM curves

The aggregate demand curve slopes ( □ upward / ■ downward) because higher price levels harm real wealth, ( ■ increase / □ decrease) real interest rates, and make domestically produced goods more ( □ cheap / ■ expensive) than goods imported. All of above effects ( ■ reduce / □ increase) the domestic demand

The AD Curve will be Flatter if

Investment expenditure is highly ( ■ sensitive / □ insensitive) to the interest rate

Saving is ( □ sensitive / ■ insensitive) to income Money demand is ( □ sensitive / ■ insensitive) to interest

rates Money demand is ( □ sensitive / ■ insensitive) to income

Definition

The aggregate demand curve illustrates the ( □ positive / □ negative) relationship between the price level and real income; it is the intersection between the IS and curves

The aggregate demand curve slopes ( □ upward / □ downward) because higher price levels harm real wealth, ( □ increase / □ decrease) real interest rates, and make domestically produced goods more ( □ cheap / □ expensive) than goods imported. All of above effects ( □ reduce / □ increase) the domestic demand

The AD Curve will be Flatter if

Investment expenditure is highly ( □ sensitive / □ insensitive) to the interest rate

Saving is ( □ sensitive / □ insensitive) to income Money demand is ( □ sensitive / □ insensitive) to interest

rates Money demand is ( □ sensitive / □ insensitive) to income

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　　　　　　　　AD Curve 　　Answer

Following Factors that Increase Aggregate Demand

( □ Decrease / ■ Increase) in consumers’ wealth Consumer expectations of future income ( □ decrease /

■ increase) Business expectations ( □ decrease / ■ increase) ( ■ High / □ Low) capacity utilization Expansionary monetary policy and Expansionary fiscal policy If the relative value of a country’s currency ( ■ decrease /

□ increase), the country’s net exports will increase Global economic growth ( □ decrease / ■ increase)

Tax & Government Spending

A ( ■ decrease / □ increase) in taxes increases people’s wealth and spending on goods, while an ( □ decrease / ■ increase) in government spending increases the demand of the country

Following Factors that Increase Aggregate Demand

( □ Decrease / □ Increase) in consumers’ wealth Consumer expectations of future income ( □ decrease /

□ increase) Business expectations ( □ decrease / □ increase) ( □ High /□ Low) capacity utilization Expansionary and Expansionary fiscal policy If the relative value of a country’s currency ( □ decrease /

□ increase) , the country’s net exports will increase Global economic growth ( □ decrease / □ increase)

Tax & Government Spending

A ( □ decrease / □ increase) in taxes increases people’s wealth and spending on goods, while an ( □ decrease / □ increase) in government spending increases the demand of the country


　　　　　　　　AS Curve 　　Answer

Definition

The VSRAS curve is (■ perfectly elastic /□ perfectly inelastic) The LRAS curve is ( □ perfectly elastic / ■ perfectly inelastic) In the long run, input prices can influence the price level,

so the price level ( ■ will not / □ will) affect the long run aggregate supply

The SRAS curve is ( ■ upward /□ downward) sloping

Factors will shift the LRAS curve right

Increase in the amount and quality of labor Increase in the supply of natural resources Increase in the stock of physical capital Improve technology

Definition

The VSRAS curve is ( □ perfectly elastic /□ perfectly inelastic) The LRAS curve is ( □ perfectly elastic / □ perfectly inelastic) In the long run, input prices can influence the price level,

so the price level ( □ will not / □ will ) affect the long run aggregate supply

The SRAS curve is ( □ upward /□ downward )sloping

Factors will shift the LRAS curve right

Increase in the amount and quality of Increase in the supply of resources Increase in the supply of capital Improve

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　　　　　　　　AS Curve 　　Answer

The factors can cause the SRAS curve to shift to the right

( □ Decrease / ■ Increase) in labor productivity A ( ■ decrease / □ increase) in nominal wages or other

input prices such as natural resources will ( ■ decrease / □ increase) the costs

An ( □ decrease / ■ increase) in subsidy ( ■ Decrease /□ Increase) in business taxes ( □ Depreciation /■ Appreciation) of a country’s currency

will decrease the cost of production by importing material If expectation of the price of output ( □ decrease / ■ incr-

ease) in the future, more goods will be produced, increasing SRAS

The factors can cause the SRAS curve to shift to the right

( □ Decrease / □ Increase)in labor productivity A ( □ decrease / □ increase) in nominal wages or other

input prices such as natural resources will ( □ decrease / □ increase) the costs

An ( □ decrease/ □ increase) in subsidy ( □ Decrease /□ Increase) in business taxes ( □ Depreciation /□ Appreciation) of a country’s currency

will decrease the cost of production by importing material If expectation of the price of output ( □ decrease / □ incr-

ease) in the future, more goods will be produced, increasing SRAS


　　　　Combination of AS and AD 　　　　　Answer

Recession Gap

A recession gap is caused by a ( □ increase / ■ decline) in AD

Inflationary Gap

An ( ■ increase / □ decline) in AD resulting in an inflationary gap

Stagflation

Stagflation is generally associated with a sharp ( ■ decrease / □ increase) in aggregate supply

Effect of Combination of AS and AD

Demand-driven expansions are normally associated with ( ■ rising / □ falling) interest rates and inflation, whereas contractions are associated with ( ■ lower / □ higher)inflation and interest rates

Supply-driven expansions are associated with ( ■ lower / □ higher) inflation and interest rates, whereas supply-driven contractions are associated with ( ■ rising / □ falling) inflation and interest rates

Recession Gap

A recession gap is caused by a ( □ increase / □ decline) in AD

Inflationary Gap

An ( □ increase / □ decline) in AD resulting in an inflationary gap

Stagflation

Stagflation is generally associated with a sharp (□ decrease / □ increase) in aggregate supply

Effect of Combination of AS and AD

Demand-driven expansions are normally associated with ( □ rising / □ falling) interest rates and inflation, whereas contractions are associated with ( □ lower / □ higher )inflation and interest rates

Supply-driven expansions are associated with ( □ lower / □ higher) inflation and interest rates, whereas supply-driven contractions are associated with ( □ rising / □ falling) inflation and interest rates

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　　　　　　Economic Growth 　　　　　Answer

Potential GDP

Growth in potential GDP = Growth in technology + WL(growth in labor) + WC (growth in capital)

WL and WC are labor’s relative shares in national income and relative shares of capital in national income

Total factor productivity is the amount by which output would rise because of improvements in the production process. It is calculated as a residual

Diminishing Marginal Productivity

Diminishing marginal productivity of capital has two major implications for potential GDP

Long-term sustainable growth ( □ can / ■ can not) rely solely on capital deepening investment

There ( ■ should / □ should not) be a convergence of incomes between developed and developing countries over time

Potential GDP

Growth in potential GDP = Growth in technology +

WL and WC are relative shares in national income and relative shares of in national income

is the amount by which output would rise because of improvements in the production process. It is calculated as a residual

Diminishing Marginal Productivity

Diminishing marginal productivity of capital has two major implications for potential GDP

Long-term sustainable growth ( □ can/ □ can not) rely solely on capital deepening investment

There ( □ should/ □ should not) be a convergence of incomes between developed and developing countries over time

Reading 17

UNDERSTAND BUSINESS CYCLES

Reading 17

UNDERSTAND BUSINESS CYCLES

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Typical Business Cycle Characteristics 　　　　　Answer

Describe The Characteristics of Trough Phase

Initially, GDP growth rate is negative, then turn to be positive ( ■ High / □ Low) unemployment rate, ( ■ increasing /

□ decreasing) working hours and the use of temporary workers

Purchase of durable goods and housing will ( ■ increase / □ decrease)

Inflation rate is moderate or decreasing

Describe The Characteristics of Expansion Phase

Growth rate of GDP ( ■ increase / □ decrease) Unemployment rate begins to ( □ increase / ■ decrease) Investment begins to ( ■ increase / □ decrease) Inflation rate would ( ■ increase / □ decrease) Imports ( ■ increase / □ decrease) as people’s incomes grow

Describe The Characteristics of Trough Phase

Initially ,GDP growth rate is , then turn to be ( □ High / □ Low) unemployment rate, ( □ increasing /

□ decreasing) working hours and the use of temporary workers

Purchase of durable goods and housing will ( □ increase / □ decrease)

Inflation rate is

Describe The Characteristics of Expansion Phase

Growth rate of GDP ( □ increase /□ decrease) Unemployment rate begins to ( □ increase / □ decrease) Investment begins to ( □ increase /□ decrease) Inflation rate would (□ increase /□ decrease) Imports ( □ increase /□ decrease) as people’s incomes grow


Typical Business Cycle Characteristics 　　　　　Answer

Describe The Characteristics of Peak Phase

GDP growth rate ( □ increases / ■ decrease) Unemployment rate begins to ( □ increases / ■ decrease) Consumption and investment growing rate is ( ■ slower /

□ faster) than before Inflation rate ( ■ increases / □ decrease)

Describe The Characteristics of Contraction/Recession Phase

GDP growth rate is ( □ positive / ■ negative) Working hours ( □ increases / ■ decrease) Unemployment rate ( ■ increases / □ decrease) Consumption and investment ( □ increases / ■ decrease) Finally, inflation rate ( □ increases / ■ decrease) Imports ( □ increases / ■ decrease)

Describe The Characteristics of Peak Phase

GDP growth rate ( □ increases / □ decrease) Unemployment rate begins to ( □ increases / □ decrease) Consumption and investment growing rate is ( □ slower /

□ faster) than before Inflation rate (□ increases / □ decrease)

Describe The Characteristics of Contraction/Recession Phase

GDP growth rate is ( □ positive / □ negative) Working hours ( □ increases / □ decrease) Unemployment rate ( □ increases /□ decrease) Consumption and investment ( □ increases / □ decrease) Finally, inflation rate (□ increases / □ decrease) Imports ( □ increases / □ decrease)

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　　　　　　　Resource Use 　　　　　　 Answer

Inventory

When an economy is reaching its peak, the growth rate of sales begins to ( ■ slow / □ fast), and more inventories are unsold . So there is an ( ■ increase / □ decrease) in the inventory-sales ratio

Utilization of Labor and Physical Capital

Firms adjust less or more output per hour or adjust the hours they work by adding or reducing work overtime at the beginning of the economy’s turning point

During contractions, firms ( □ will / ■ will not) sell fixed assets at first. They can spend less on maintenance or delay the replacement of equipment to reduce the physical capacity of the firm

Inventory

When an economy is reaching its peak, the growth rate of sales begins to ( □ slow / □ fast), and more inventories are unsold. So there is an (□ increases /□ decrease) in the inventory-sales ratio

Utilization of Labor and Physical Capital

Firms adjust less or more output per hour or adjust they work by adding or reducing work overtime at the beginning of the economy’s turning point

During contractions, firms (□ will / □ will not) sell fixed assets at first. They can spend less on or delay the of equipment to reduce the physical capacity of the firm


　　　　　　　Fluctuation　　　　　 Answer

Fluctuation in Capital Spending

In the early stage of a contraction, the ( ■ downturn / □ upturn) in spending on equipment

The initial cuts typically occur in orders for technology and light equipment

It often takes longer to cancel or halt construction activity or the installation of larger, more complex pieces of equipment

In the early stages of an expansion, capital spending may begin to ( □ increases / ■ decrease)

The orders initially reinstated are for equipment with a ( ■ high / □ low) rate of obsolescence

In the ( ■ later stage / □ early stage) of expansion, productive capacity may begin to limit ability to respond to demand

Fluctuation in Capital Spending

In the early stage of a contraction, the ( □ downturn / □ upturn) in spending on equipment

The initial cuts typically occur in orders for and equipment

It often takes longer to cancel or halt activity or the of larger, more complex pieces of equipment

In the early stages of an expansion, capital spending may begin to ( □ increases / □ decrease)

The orders initially reinstated are for equipment with a ( □ high /□ low) rate of obsolescence

In the ( □ later stage / □ early stage) of expansion, productive capacity may begin to limit ability to respond to demand

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　　　　　Consumer Behavior　　　　　 Answer

Consumer Behavior

The three major divisions are durable goods, non-durable goods, services

Households represent the largest single sector of consumption almost every developed economy

During economic downturns households can postpone ( ■ durable goods / □ non-durable goods and services) purchase

A ( ■ weakness/□ strength) in durables spending may be an early indication of general economic weakness

Important Determinants in The Housing Sector

Mortgage rates: ( ■ Low / □ High) interest rates will ( ■ increase / □ reduce) purchase and construction of housing

Housing costs relative to income: If home prices are rising ( □ slower / ■ faster) compared to incomes, then there will be a ( □ increases / ■ decrease) in housing activity

Speculative activity: Falling prices will reduce the speculative demand so there will be a ( □ increases / ■ decrease) in housing activity

Demographic factors: The proportion of the middle-aged people is ( ■ positively / □ negatively) related to housing activity

Consumer Behavior

The three major divisions are durable goods, non-durable goods,

represent the largest single sector of consumption almost every developed economy

During economic downturns households can postpone ( □ durable goods / □ non-durable goods and services) purchase

A ( □ weakness /□ strength) in durables spending may be an early indication of general economic weakness

Important Determinants in The Housing Sector

Mortgage rates: ( □ Low / □ High) interest rates will ( □ increase /□ reduce) purchase and construction of housing

Housing costs relative to income: If home prices are rising ( □ slower / □ faster) compared to incomes, then there will be a ( □ increases / □ decrease) in housing activity

Speculative activity: Falling prices will reduce the speculative demand so there will be a ( □ increases / □ decrease) in housing activity

Demographic factors: The proportion of the middle-aged people is ( □ positively / □ negatively) related to housing activity


　　　Theories of The Business Cycle　　　　　Answer

Neoclassical School

Neoclassical economists believe aggregate demand and aggregate supply will change as long as technology changes over time

Neoclassical economists also believe that the economy will operate at full-employment equilibrium, finally

Neoclassical economists suggest that government ( □ should / ■ should not) intervene economy

Keynesian School

Keynesian economists believe that aggregate demand changes are determined by changes in expectations

Keynesian economists assume that wages are “ downward sticky ” , so economy can’t move from recession back to full employment

The policy prescription of Keynesian economists is to directly increase aggregate demand through monetary policy or through fiscal policy automatically

Neoclassical School

Neoclassical economists believe aggregate demand and aggregate supply will change as long as changes over time

Neoclassical economists also believe that the economy will operate at equilibrium, finally

Neoclassical economists suggest that government ( □ should / □ should not) intervene economy

Keynesian School

Keynesian economists believe that aggregate demand changes are determined by changes in

Keynesian economists assume that wages are “ sticky ” , so economy can’t move from recession back to

The policy prescription of Keynesian economists is to

directly increase through monetary policy or through fiscal policy automatically

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　　　Theories of The Business Cycle　　　　　Answer

New Keynesian School

It argue that the not only prices of productive inputs but also labor are“downward sticky”

Keynesian cyclical policies are focused on the ( ■ short / □ long) term

Monetarist school

Monetarists believe that external shocks or inappropriate ( ■ decreases / □ increase) in the money supply lead to the recessions

Monetarists suggest that to make demand and growing stably, the central bank should ensure a predictable ( □ decrease / ■ increase) in the money supply

The expression of quantity theory of money is

Monetarists believe that velocity and the real output vary ( ■ slowly / □ fast)

The view that real variables are not determined by monetary variables is known as money neutrality

New Keynesian School

It argue that the not only prices of productive inputs but also labor are“ sticky”

Keynesian cyclical policies are focused on the ( □ short / □ long) term

Monetarist School

Monetarists believe that external shocks or inappropriate ( □ decreases /□ increase) in the money supply lead to the recessions

Monetarists suggest that to make demand and growing stably, the central bank should ensure a predictable ( □ decrease / □ increase) in the money supply

The expression of quantity theory of money is Monetarists believe that velocity and the real output vary

( □ slowly /□ fast) The view that real variables are not determined by mone-

tary variables is known as


　　 Theories of The Business Cycle　　　　　Answer

Austrian School

Austrian school believe business cycles are due to intervention of government

Austrian economists advocate ( □ active / ■ limited ) government intervention in the economy

New Classical School Introduced Real Business Cycle Theory

(RBC)

The theory focus on the effect of real economic variables including changes in technology

This school suggests that government ( □ should / ■ should not ) try to offset business cycles because expansions and contractions of economy are ( ■ efficient / □ inefficient)

Austrian School

Austrian school believe business cycles are due to

Austrian economists advocate ( □ active / □ limited) government intervention in the economy

New Classical School Introduced Real Business Cycle Theory

(RBC)

The theory focus on the effect of real economic variables including changes in

This school suggests that government ( □ should / □ should not) try to offset business cycles because expansions and contractions of economy are ( □ efficient /□ inefficient)

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　　　　　　　Unemployment 　Answer

Calculation

Unemployment rate =

Labor force participation =

Unemployment rate is a ( ■ lagging / □ leading) economic indicator

Definition

Labor force refers to number of people who either have a job or are actively looking for a job

Frictionally unemployed refers to people who are not working because they are taking time to search for a job that matches their skills, interests and other preferences better than what is currently available

Structural unemployed refers to unemployed workers are not qualified for the job

Cyclical unemployment caused by that the whole envi- ronment of economic activity has changed

Underemployed refers to person who has a job but has qualifications to work a significantly higher-paying job

Voluntarily unemployed refers to person voluntarily outside the labor force

Calculation

Unemployment rate = 　　　 Labor force participation = Unemployment rate is a ( □ lagging /□ leading) economic

indicator

Definition

refers to number of people who either have a job or are actively looking for a job

refers to people who are not working because they are taking time to search for a job that matches their skills, interests and other preferences better than what is currently available

refers to unemployed workers are not qualified for the job

caused by that the whole envi- ronment of economic activity has changed

refers to person who has a job but has qualifications to work a significantly higher-paying job

refers to person voluntarily outside the labor force


　　　　　　　　Inflation 　Answer

Definition

Hyperinflation is an extremely fast increase in aggregate price level, which corresponds to an extremely high inflation rate

Deflation is a sustained decrease in aggregate price level, which corresponds to a negative inflation rate

Disinflation is a decline in the inflation rate

Laspeyres Index

It use ( □ current / ■ base year) basket of goods and services Limitation

● New goods bias the index ( □ downward / ■ upward) ● Quality changes making the price increase is not because of inflation

● Substitution makes consumers buy more ( ■ cheap / □ expensive) goods

Paasche Index

Paasche index is an index formula using the ( ■ current / □ base year) composition of the basket

Definition

is an extremely fast increase in aggregate price level, which corresponds to an extremely high inflation rate

is a sustained decrease in aggregate price level, which corresponds to a negative inflation rate

is a decline in the inflation rate

Laspeyres Index

It use ( □ current / □ base year) basket of goods and services Limitation

● New goods bias the index ( □ downward / □ upward) ● making the price increase is not because of inflation

● Substitution makes consumers buy more ( □ cheap / □ expensive) goods

Paasche Index

Paasche index is an index formula using the ( □ current / □ base year) composition of the basket

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　　　　　　　　 Inflation 　Answer

Cost-push Inflation

The two main sources of increases in costs are an increase in money wage rates and an increase in the money prices of raw materials

The increase in wage keeps in line with productivity, this will not increase the inflation

Demand-pull Inflation

Demand-pull inflation results from increase in the quantity of money; increase in government purchases; increase in exports

NAIRU

The term NAIRU is the rate of unemployment at which inflationary pressures are stable, below which inflation would accelerate

NAIRU vary from one economy to another and over time in a single economy

Cost-push Inflation

The two main sources of increases in costs are an increase in and an increase in the money prices of

The increase in wage keeps in line with , this will not increase the inflation

Demand-pull Inflation

Demand-pull inflation results from increase in the 　　　　of money; increase in government 　　　　　　　; increase in 　　　　　

NAIRU

The term NAIRU is the rate of unemployment at which inflationary pressures are 　　　　, below which inflation would accelerate

NAIRU 　　　 from one economy to another and over time in a single economy


　　　　　　Economic Indicators 　Answer

Economic Indicators

Economic Indicators reflect trends the turning points of economy, ( □ exact / ■ not exact) relationship with the business cycle

( □ All / ■ Not all ) changes in direction of leading indicator indexes can forecast the future business precisely

Leading economic Indicators consists of S&P 500 Stock Index, Leading Credit Index, Interest rate spread between 10-year treasury yields and overnight borrowing rates, average Consumer Expectations for Business and Economic Conditions

Economic Indicators

Economic Indicators reflect trends the turning points of economy, ( □ exact /□ not exact) relationship with the business cycle

( □ All / □ Not all) changes in direction of leading indicator indexes can forecast the future business precisely

Leading economic Indicators consists of S&P 500 Stock Index, Leading Credit Index, Interest rate spread between yields and overnight borrowing rates, average for Business and Economic Conditions

Reading 18

MONETARY AND FISCAL POLICY


Reading 18


　　　　　　　Monetary Policy 　　　　　Answer

Money Multiplier

Calculate the money multiplier =

Fisher Effect

According to Fisher Effect , RNom = The changes in interest rates are due to changes in interest

rates, which ( ■ is / □ is not) in line with money neutrality

Center Bank

The primary objective is to control inflation Expected inflation cause menu costs, shoe leather costs Unanticipated (unexpected) inflation can lead to inequitable

transfers of wealth between borrowers and lenders

Exchange Rate Targeting

By tying a domestic currency to that of an economy with inflation, the domestic economy would effectively ( ■ import / □ export) the inflation of the foreign economy

Central banks should be independence, credible and transparency

Money Multiplier

Calculate the money multiplier =

Fisher Effect

According to Fisher Effect, RNom = The changes in interest rates are due to changes in ,

which ( □ is /□ is not ) in line with money neutrality

Center Bank

The primary objective is to control Expected inflation cause costs , costs Unanticipated (unexpected) inflation can lead to inequitable

transfers of between borrowers and lenders

Exchange Rate Targeting

By tying a domestic currency to that of an economy with inflation, the domestic economy would effectively (□ import / □ export) the inflation of the foreign economy

Central banks should be independence, credible and

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　　　　 Tools of Monetary Policy 　　　　　Answer

Policy Rate

In the United States, the federal funds rate is overnight borrowing rates for commercial bank

A lower rate leads to ( □ increase / ■ decrease) interest rates

Reserve Requirements

Increase reserve requirement leads interest rate ( □ falling / ■ rising), which is a ( ■ contractionary / □ expansionary)policy

Reserve requirements works ( □ well / ■ worse) if banks are not willing to lend and customers are not willing to borrow

Open Market Operations

Central bank buy securities leads interest rate ( ■ falling / □ rising)

Open market operations is the Fed’s most common tool to adjust the rate

Central banks’ manipulation of short-term rates ( ■ does / □ does not) affect real variables

Policy Rate

In the United States, the is overnight borrowing rates for commercial bank

A lower rate leads to ( □ increase/ □ decrease) interest rates

Reserve Requirements

Increase reserve requirement leads interest rate ( □ falling / □ rising), which is a ( □ contractionary / □ expansionary) policy

Reserve requirements works ( □ well / □ worse) if banks are not willing to lend and customers are not willing to borrow

Open Market Operations

Central bank buy securities leads interest rate ( □ falling / □ rising)

is the Fed’s most common tool to adjust the rate

Central banks’ manipulation of short-term rates ( □ does / □ does not) affect real variables


　　 Neutral Interest Rate & Limitation 　　　　　Answer

Neutral Interest Rate

Neutral interest rate = Real trend rate of economic growth + inflation target

When Policy rate > Neutral rate indicates the ( ■ contractionary / □ expansionary) money policy

When Policy rate < Neutral rate indicates the ( □ contractionary / ■ expansionary) money policy

Monetary Policy

If inflation is caused by supply shocks, and the economy is already operating below full employment, a contractionary monetary policy will make the situation ( □ better / ■ worse)

Limitation of Monetary Policy

Long-term rates may not remain in line with short-term rates’ movement

In liquidity trap, increasing growth of the money supply ( □ will / ■ will not) decrease short-term rates. Quantitative easing can handle liquidity trap problem

( □ Inflation / ■ Deflation) is more difficult for central banks to solve

Neutral Interest Rate

Neutral interest rate = When Policy rate > Neutral rate indicates the ( □ contractionary / □ expansionary) money policy

When Policy rate < Neutral rate indicates the ( □ contractionary / □ expansionary) money policy

Monetary Policy

If inflation is caused by supply shocks, and the economy is already operating below full employment, a contractionary monetary policy will make the situation ( □ better / □ worse)

Limitation of Monetary Policy

may not remain in line with short-term rates’ movement

In liquidity trap, increasing growth of the money supply ( □ will / □ will not) decrease short-term rates. can handle liquidity trap problem

( □ Inflation / □ Deflation) is more difficult for central banks to solve

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　　　　　　　 Fiscal Policy 　　　　　Answer

Tools of Fiscal Policy

Spending tools include transfer payments, current spending and capital spending

Revenue Tools include direct taxes and indirect taxes ( ■ Direct taxes / □ Indirect taxes) are levied on income,

wealth, while ( □ direct taxes / ■ indirect taxes) are taxes on spending on a variety of goods and services

Quick implementation of ( □ direct taxes / ■ indirect taxes) also indicates that government can increase its revenues through this costless way

Fiscal Multiplier

Calculate fiscal multiplier =

The fiscal multiplier is ( □ directly related / ■ inversely related ) to the tax rate and ( ■ directly related / □ inversely related ) to the marginal propensity to consume

Discretionary Fiscal Policy

During recessions, ( ■ expansionary / □ contractionary) policy should be taken

When inflationary economic raises, ( □ expansionary / ■ contractionary) policy should be taken

Tools of Fiscal Policy

Spending tools include , current spending and capital spending

Revenue Tools include and ( □ Direct taxes / □ Indirect taxes) are levied on income,

wealth, while ( □ direct taxes / □ indirect taxes) are taxes on spending on a variety of goods and services

Quick implementation of ( □ direct taxes / □ indirect taxes) also indicates that government can increase its revenues through this costless way

Fiscal Multiplier

Calculate fiscal multiplier = The fiscal multiplier is (□ directly related / □ inversely related)

to the tax rate and ( □ directly related /□ inversely related) to the marginal propensity to consume

Discretionary Fiscal Policy

During recessions, ( □ expansionary / □ contractionary) policy should be taken

When inflationary economic raises, ( □ expansionary / □ contractionary) policy should be taken


　　　　 Limitation of Fiscal Policy 　　　　　Answer

Ricardian Equivalence

Ricardian Equivalence means that increases in the current deficit will be repaid by (■ greater / □ smaller) taxes aftertime

Debt Ratio

Debt ratio can be expressed as aggregate debt divide GDP. If the real growth rate of the economy is lower compared to the real interest rate on the government’s debt , then the debt ratio will ( ■ increase / □ decrease)

Crowding-out Effect

( ■ Increasing / □ Decreasing) interest rates due to gover-nment borrowing, so private firms will ( □ raise / ■ reduce) their investment

Time Lag

The lag can be divided into three types: Recognition lag, Law-making lag, Impact lag

Ricardian Equivalence

Ricardian Equivalence means that increases in the current deficit will be repaid by (□ greater / □ smaller) taxes aftertime

Debt Ratio

Debt ratio can be expressed as aggregate debt divide . If the real growth rate of the economy is lower compared to the real interest rate on the government’s debt , then the debt ratio will ( □ increase /□ decrease)

Crowding-out Effect

( □ Increasing /□ Decreasing) interest rates due to government borrowing, so private firms will (□ raise / □ reduce) their investment

Time Lag

The lag can be divided into three types: , ,

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　　　　Monetary and Fiscal Policy 　　　　　Answer

Fill in The Bank of The Table

Fiscal policy

Monetary policy

Interest rate Output Private

spendingGovernment spending

Tight Tight Raise Fall Drop Drop

Easy Easy Fall Raise Growing Growing

Easy Tight Raise Raise Drop Larger

Tight Easy Fall Uncertain Stimulated Shrink

Fill in The Bank of The Table

Fiscal policy

Monetary policy

Interest rate Output Private

spendingGovernment spending

Tight Tight

Easy Easy

Easy Tight

Tight Easy

Reading 19


Reading 19


CFA 一级闪卡94

　　　　　　　Terminology 　　　　　Answer

Basic Terminology

Autarky or closed economy refers to a country that does not trade with other countries

Terms of trade is defined as the ratio of the price of exports to the price of imports, representing those prices by export and import price indices, respectively

Comparative Advantage

A B

Wheat 10( 个产品 ) 9

Computer 5 3

According to the above table The opportunity of one unit wheat for country A is 1/2 unit computer. The opportunity of one unit wheat for country B is 1/3 unit computer

So country A should produce ( ■ wheat / □ computer); country B should produce ( □ wheat / ■ computer)

Basic Terminology

refers to a country that does not trade with other countries

is defined as the ratio of the price of exports to the price of imports, representing those prices by export and import price indices, respectively

Comparative Advantage

A B

Wheat 10( 个产品 ) 9

Computer 5 3

According to the above table The opportunity of one unit wheat for country A is unit computer. The opportunity of one unit wheat for country B is unit computer

So country A should produce ( □ wheat / □ computer); country B should produce ( □ wheat / □ computer)


　 Ricardian & Heckscher-Ohlin Model 　　　　　Answer

Ricardian Model

Differences in labor productivity (reflecting underlying differences in technology) are the source of comparative advantage

Heckscher-Ohlin Model

In the Heckscher-Ohlin Model, ( □ capital / □ labor / ■ both capital and labor) are variable factors of production

A country having relatively abundant labor would export relatively ( ■ labor-intensive / □ capital-intensive) goods and import relatively ( □ labor-intensive / ■ capital-intensive) goods

In a country, the prices of production factor which are more available will ( ■ decrease / □ increase)

Ricardian Model

Differences in (reflecting underlying differences in technology) are the source of comparative advantage

Heckscher-Ohlin Model

In the Heckscher-Ohlin Model, ( □ capital /□ labor / □ both capital and labor) are variable factors of production

A country having relatively abundant labor would export relatively ( □ labor-intensive / □ capital-intensive) goods and import relatively ( □ labor-intensive / □ capital-intensive) goods

In a country, the prices of production factor which are more available will ( □ decrease /□ increase)

CFA 一级闪卡96

　　　　　　　Welfare Effects 　　　　　Answer

Welfare Effects of an Import Tariff or Quota

A B C D

0

Pt

Pe

Q1 Q2 Q3 Q4

According to the picture, fill in the blank of the table

Importing Country

Consumer surplus – (A+B+C+D)

Producer surplus +A

Tariff revenue or Quota rents +C

National welfare – B – D

Welfare Effects of an Import Tariff or Quota

A B C D

0

Pt

Pe

Q1 Q2 Q3 Q4

According to the picture, fill in the blank of the table

Importing Country

Consumer surplus

Producer surplus

Tariff revenue or Quota rents

National welfare


　　　 Effects of Trade Restrictions 　　　　　Answer

Fill in Blank of The Table

Tariff Import Quota

Export Subsidy VER

　Impact on 　Import- ing country

　Import- ing country

　Export- ing country


　Price 　Increases 　Increases 　Increases 　Increases

　Domesticconsumption

　Decreases 　Decreases 　Decreases 　Increases

　Domestic production

　Increases 　Increases 　Increases 　Increases

　Trade　Imports decrease

　Imports decrease

　Exportsincrease

　Imports decrease

　Governm- ent revenue

　Increases 　Mixed 　Falls 　No change

　National welfare

　Decrea- ses in small country

　Decrea- ses in small country

　Decreases 　Decreases

　Increases in large country

　Increases in large country

　Decreases 　Decreases

Fill in Blank of The Table

Tariff Import Quota

Export Subsidy VER

　Impact on 　Import- ing country


　Export- ing country


　Price 　Increases 　Increases 　Increases 　

　Domesticconsumption

　Decreases 　Decreases 　　Increases

　Domestic production

　Increases 　Increases 　Increases

　Trade　Imports decrease

　Imports decrease

　Exports　

　Imports decrease

　Governm- ent revenue

　Increases 　　　

　National welfare

　 in small country

　 in small country

　　

　 in large country

　 in large country

　　

CFA 一级闪卡98

　　　　 Nation’s Cooperation 　　　　　Answer

Trading Blocs, Common Markets and Economic Unions

In free trade areas, all barriers to the flow of goods and services among members have been eliminated

A customs union create a common trade policy against non-members

A common market allow free movement of factors of production among members

An economic union requires common economic institutions and coordination of economic policies among members

In monetary union, members of the economic union decide to adopt a common currency

Trading Blocs, Common Markets and Economic Unions

In , all barriers to the flow of goods and services among members have been eliminated

A create a common trade policy against non-members

A allow free movement of factors of production among members

A requires common economic institutions and coordination of economic policies among members

In , members of the economic union decide to adopt a common currency


　　　 Balance of Payments (BOP) 　　　　　Answer

Current Account

Current account includes the flows of goods and the flows of services, it has following item ● Merchandise and services ● Income receipts include foreign income from dividend on stock holdings and interest on debt securities

● Unilateral transfers are one-way transfers of assets

Capital Account

Capital account consists of capital transfers and net sales of ( □ produced / ■ non-produced), ( □ financial / ■ non-financial ) assets

Financial Account

Financial account records investment flows, it deals with government-owned assets abroad and foreign-owned assets

Current Account

includes the flows of goods and the flows services, it has following item ● and services ● include foreign income from dividend on stock holdings and interest on debt securities

● are one-way transfers of assets

Capital Account

Capital account consists of capital transfers and net sales of ( □ produced / □ non-produced ), ( □ financial / □ non-financial) assets

Financial Account

Financial account records flows, it deals with government-owned assets abroad and foreign-owned assets

CFA 一级闪卡100

　　　 International Organization 　　　　　Answer

International Monetary Fund (IMF)

It provides a forum for cooperation on international monetary problems

It facilitates the growth of international trade It supports exchange stability Lends foreign exchange to members when needed

World Bank

World Bank Group’s main objective is to help ( □ developed / ■ developing) countries fight poverty and enhance environmentally sound economic growth

World Trade Organization

It is the only international organization dealing with the global rules of trade between nations

It ensures trade flows is free without barrier

International Monetary Fund (IMF)

It provides a forum for cooperation on international a problems

It facilitates the growth of international It supports stability Lends to members when needed

World Bank

World Bank Group’s main objective is to help ( □ developed / □ developing) countries fight poverty and enhance environmentally sound economic growth

World Trade Organization

It is the only international organization dealing with the global of trade between nations

It ensures is free without barrier

Reading 20

CURRENCY EXCHANGE RATE

Reading 20

CURRENCY EXCHANGE RATE

CFA 一级闪卡102

　　　　　　　Basic Term 　　　　　Answer

Nominal and Real Exchange Rate

FX real (d/f ) = FX nominal (d/f )×(CPIf /CPId)

Forward Discount or Premium

Forward discount or premium = F – S A currency selling at a ( ■ forward premium / □ forward

discount) is considered“ strong ”relative to the second currency and is expected to appreciate

Foreign Exchange Quotations

( ■ Direct quote / □ Indirect quote) is the value of one unit of a foreign currency in units of the home currency, it can be expressed D/F; where D is ( ■ price currency / □ base currency)

Cross Rate

Assuming 0.71USD/AUD, 9.82MXN/USD, calculate MXN/AUD = (USD/AUD)×(MXN/USD)=0.71×9.82 = 6.972 2

Assuming 1.82 CHF/USD, 2.13NZD/USD, calculate CHF/ NZD = (CHF/USD) ÷ (NZD/USD) =1.82 ÷ 2.13 = 0.854 5

Nominal and Real Exchange Rate

FX real (d/f ) =

Forward Discount or Premium

Forward discount or premium = A currency selling at a ( □ forward premium / □ forward

discount) is considered“ strong ”relative to the second currency and is expected to appreciate

Foreign Exchange Quotations

( □ Direct quote /□ Indirect quote) is the value of one unit of a foreign currency in units of the home currency, it can be expressed D/F; where D is ( □ price currency /□ base currency)

Cross Rate

Assuming 0.71USD/AUD, 9.82MXN/USD, calculate MXN/AUD =

Assuming 1.82CHF/USD, 2.13NZD/USD, calculate CHF/NZD =


　　　　　Interest Rate Parity (IRP) 　　　　　Answer

Calculation

Interest rate parity relationship can be expressed as

rX-rY

Application

Interest rate parity holds when any forward premium or discount just offsets differences in interest rates so that an investor will earn the ( ■ same / □ different) return inves- ting in either currency

If (1+rY) > 1 + rX, investor should borrow ( ■ X / □ Y )

currency, the profit will be

Regardless of the quoting convention, the currency with the higher interest rate will always trade at a ( □ premium / ■ discount) in the forward market

Calculation

Interest rate parity relationship can be expressed as

Application

Interest rate parity holds when any forward premium or discount just offsets differences in so that an investor will earn the ( □ same / □ different) return inves- ting in either currency

If (1+rY) > 1 + rX, investor should borrow ( □ X / □ Y) currency, the profit will be

Regardless of the quoting convention, the currency with the higher interest rate will always trade at a ( □ premium / □ discount) in the forward market

CFA 一级闪卡104

　　　　Exchange Rate Regimes 　　　　 Answer

When a Country that do not have Its Own Currency

The country can use the currency of another nation as its medium of exchange or participates in a monetary union

When Countries that have Their Own Currency

A currency board system is a commitment to exchange domestic currency at a fixed exchange rate

Conventional fixed peg arrangement allows a band of up to ±1 percent around the parity level

A target zone regime has a fixed parity with fixed horizontal intervention bands that are wider

In crawling peg, the exchange rate was adjusted frequently to keep pace with the inflation rate

In Fixed Parity with Crawling Bands, a country gradually permit more and more flexibility in the band

In Managed Float, a country may simply follow an exchange rate policy based on either internal or external policy targets

Independently Floating Rates indicates the exchange rate is left to market determination

When a Country that do not have Its Own Currency

The country can use the currency of another nation as its medium of exchange or participates in a

When Countries that have Their Own Currency

is a commitment to exchange domestic currency at a fixed exchange rate

Conventional fixed peg arrangement allows a band of up to percent around the parity level

A regime has a fixed parity with fixed horizontal intervention bands that are wider

In , the exchange rate was adjusted frequently to keep pace with the inflation rate

In , a country gradually permit more and more flexibility in the band

In , a country may simply follow an exchange rate policy based on either internal or external policy targets

indicates the exchange rate is left to market determination


The Trade Balance & Elasticity Approach 　　　　　Answer

The Trade Balance

X - M = (S - I ) + (T - G) ( □ Larger / ■ Smaller) private saving, ( ■ larger / □ sma-

ller) government deficits, and ( ■ high / □ low) rates of domestic investment will lead a current account deficit

Elasticity Approach

The currency depreciation will improve the trade deficit only when either import or export demand is ( ■ elastic / □ inelastic). For example, import or export goods are luxury goods, goods are with much substitutes, and goods spend a lot

One shortcoming of the elasticity approach is that it only considers trade flows and ignores capital flows

The Trade Balance

X - M = ( □ Larger / □ Smaller) private saving, ( □ larger /□ sma-

ller) government deficits, and ( □ high / □ low)rates of domestic investment will lead a current account deficit

Elasticity Approach

The currency depreciation will improve the trade deficit only when either import or export demand is ( □ elastic / □ inelastic).For example, import or export goods are , goods are with much substitutes, and goods a lot

One shortcoming of the elasticity approach is that it only considers trade flows and ignores

CFA 一级闪卡106

　　 J-curve & Absorption Approach 　　　Answer

J-curve

J-curve indicates import and export amount may be relatively ( □ sensitive / ■ insensitive) to currency depreciation in the short run, which may ( ■ worsen / □ improve) the trade balance for a while

Absorption Approach

Absorption Approach can be expressed as BT = Y – E If the economy is operating at less than full employment,

depreciation ( ■ can / □ cannot) improve trade balance; otherwise depreciation ( □ can/ ■ cannot) improve trade balance

The Absorption Approach also reminds us that currency depreciation ( □ can / ■ cannot) improve the trade balance unless it also induces a corresponding change in the capital account

J-curve

J-curve indicates import and export amount may be relatively ( □ sensitive / □ insensitive) to currency depreciation in the short run, which may ( □ worsen / □ improve) the trade balance for a while

Absorption Approach

Absorption Approach can be expressed as BT = If the economy is operating at less than full employment,

depreciation ( □ can / □ cannot )improve trade balance; otherwise depreciation ( □ can / □ cannot )improve trade balance

The Absorption Approach also reminds us that currency depreciation ( □ can / □ cannot ) improve the trade balance unless it also induces a corresponding change in the capital account

Documents

Economics Reading 14