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69 Cards in this Set
- Front
- Back
own price elasticity
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% change in quantity demanded / % change in own price
(∆Q/Q) / (∆P/P) |
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income elasticity
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% change in quantity demanded / % change in income
(∆Q/Q) / (∆I/I) |
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cross price elasticity
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% change in quantity demanded / % change in the price of related goods
(∆Q/Q) / (∆P'/P') |
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accounting profit
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total revenue - total accounting (explicit) costs
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economic profit
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accounting profit - implicit opportunity costs = total revenue - total economic costs = total revenue - explicit costs - implicit costs
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normal profit
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accounting profit - economic profit
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total revenue (TR)
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P * Q
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average revenue (AR)
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TR / Q
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marginal revenue (MR)
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ΔTR / ΔQ
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total cost
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total fixed cost + total variable cost
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marginal cost
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ΔTC / ΔQ
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ATC
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average total cost = total costs / total product
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AFC
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average fixed costs = total fixed costs / total product
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AVC
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average variable costs = total variable costs / total product
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breakeven points
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perfection competition:
AR = ATC imperfect competition: TR = TC |
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short-run shutdown points
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perfect competition:
AR < AVC imperfect competition: TR < TVC |
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cost minimizing combination of inputs
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MP_1 / P_1 = MP_2 / P_2 = … = MP_N / P_N
where MP_N = marginal product of input N P_N = cost of input N N = number of inputs |
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profit maximizing combination of inputs
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MRP_1 / P_1 = MRP_2 / P_2 = … = MRP_N / P_N = 1
where MRP_N = marginal revenue product of input N P_N = cost of input N N = number of inputs" |
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norminal GDP for year t
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ΣP_i,t * Q_i,t = Σ(price of good I in the base year * quantity of good I produced in year t)
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GDP deflator for year t
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norminal GDP in year t / value of year t output at base year prices * 100
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GDP, expenditure approach
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GDP = C + I + G + (X - M)
C = consumption spending I = business investment (capital equipment, inventories) G = government purchases X = exports M = imports |
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GDP, income apporach
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GDP = national income + capital consumption allowance + statistical discrepancy
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national income
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compensation of employees (wages & benefits)
+ corporate and government enterprise profits before taxes + interest income + unincorporated business net income (business owners' incomes) + rent + indirect business taxes - subsidies (taxes and subsidies that are included in final prices) |
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personal income
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national income
+ transfer payments to households - indirect business taxes - corporate income taxes - undistributed corporate profits |
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personal disposable income
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personal income - personal taxes
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growth in potential GDP
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growth in technology + W_L(growth in labor) +
W_C(growth in capital) where W_L = labor's percentage share of national income W_C = capital's percentage share of national income |
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grwoth in per-capita potential GDP
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growth in technology + W_C(growth in the capital-to-labor ratio)
where W_C = capital's percentage share of national income |
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consumer price index
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cost of basket at current prices / cost of basket at base period prices * 100
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money multiplier
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1 / reserve requirement
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fisher effect
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nominal interest rate = real interest rate + expected inflation rate
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neutral interest rate
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real trend rate of economic growth + inflation target
when the policy rate is above(below) the neutral rate, the policy is contractionary(expansionary) |
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fiscal multiplier
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1 / (1 - MPC(1-t))
where t = tax rate MPC = marginal propensity to consume meaning: increase in aggregate demand / government spending |
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real exchange rate (d/f)
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norminal exchange rate (d/f) * (CPI_foreign / CPI_domestic)
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forward discount (+) or premium (-):
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forward/spot - 1
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interest rate parity
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forward (d/f) / spot (d/f) = (1 + interest rate_domestic) / (1 + interest rate_foreign)
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Marshall-Lerner condition
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W_X * ε_X + W_M * (ε_M -1) > 0
where W_M = proportion of trade that is imports W_X = proportion of trade that is exports ε_M = elasticity of demand for imports ε_X = elasticity of demand for exports |
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4 types of measurement?
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1. Nominal
2. Ordinal 3. Interval 4. Ratio |
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Marginal rate of substituion (MRS)?
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the rate at which the consumer will willingly exchange units of Good x for units of Good Y (x is the horizontal axis in this case)
The marginal rate of substitution is equal to the negative of the slope of the tangent to the indifference curve at that point |
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Normal goods, Giffen Goods and Veblen Goods?
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Normal goods have positive substitution and income effect
Giffen goods have positive substitution effect and negative income effect (overall negative effect) Veblen goods cannot be explained in the framework provided (higher price leads to more demand) |
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Normal Profit?
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Normal profit is the level of accounting profit such that implicit opportunity costs are just covered; thus, it is equal to a level of accounting profit such that economic profit is zero.
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How to calculate MR for monopoly market?
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MR = P*[1 - 1/E_p]
E_p = demand elasticity |
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The three-firm Herfindahl-Hirschmann Index?
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company_1 concentration^2 + company_2 concentration^2 + company_3 concentration^2
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How to calculate GDP by expenditure and income?
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Expenditure approach:
GDP = C + I + G + (X - M) Income approach: GDP = national income + capital consumption allowance + statistical discrepancy CCA measures the depreciation of physical capital from the production of goods or services over a period |
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What is government budget deficit and how to calculate?
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government deficit = G - T
(G - T) = (S - I) - (X - M) |
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What does IS curve show?
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If income and expenditure are to remain in equilibrium, there must be an inverse relationship between the real interest rate and income.
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What does LM curve show?
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the combinations of GDP or real income and real interest rate that keep the quantity of real money demanded equal to the quantity of real money supplied.
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What is quantity theory of money?
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MV = PY
M = money supply V = velocity of money in transactions (long term, not easily changed in short term) P = price level Y = real GDP (long term, not easily changed in short term) |
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What is the intersection between IS and LM curves?
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It determines the equilibrium levels of prices and real income for a given level of the real money supply
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What is the slope of LRAS, SRAS and VSRAS?
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LRAS is vertical, VSRAS is horizontal, SRAS is inbetween
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What is stagflation?
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an environment of both high unemployment and increasing inflation
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What are the typical characteristics of Trough (business cycle)?
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GDP growth rate changes from negative to positive
high unemployment rate, increasing use of overtime and temporary workers spending on consumer durable goods and housing may increase moderate or decreasing inflation rate |
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What are the typical characteristics of Expansion (business cycle)?
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GDP growth rate increases
Unemployment rate decreases as hiring accelerates investment increases in producers' equipment and home construction inflation rate may increase imports increase as domestic income growth accelerates |
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What are the typical characteristics of Peak (business cycle)?
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GDP growth rate decreases
unemployment rate decreases but hiring slows consumer spending and business investment grow at slower rates inflation rate increases |
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What are the typical characteristics of contraction (business cycle)?
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GDP growth rate is negative
hours worked decrease, unemployment rate increases consumer spending, home construction, and business investment decreases inflation rate decreases with a lag imports decrease as domestic income growth slows |
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What is the belief of Neoclassical school on business cycle?
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aggregate demand and aggregate supply are primarily drive by changes in technology. Business cycles are temporary deviation from long-run equilibrium.
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What is the belief of Keynesian school on business cycle?
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shifts in aggregate demand due to changes in expectations are primary cause of business cycles.
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What is the belief of Monetarist school on business cycle?
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Business cycles are due to inappropriate decisions by the monetary authorities.
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What is the belief of Austrian school on business cycle?
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Business cycles are caused by government intervention in the economy.
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What is the belief of New Classical school on business cycle?
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real business cycle theory
real economic variables such as changes in technology and external shocks have an effect on business cycles |
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What is the purpose of precautionary money and it is related to ?
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Precautionary money is reserved for unforeseen activities, thus it's positively correlated to GDP. (when the volume and value of transactions in the economy are high)
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What is the theory of money neutrality?
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an increase in the supply of money leads to an increase in price level ultimately and leaves real variables unaffected in the long run
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What is the difference between Ricardian Model of Trade and Heckscher and Ohlin Model?
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Ricardian model of trade has only factor of production ,labor. The source of difference in production cost is differences in labor productivity caused by difference in technology.
Heckscher and Ohlin model has two factors of production, capital and labor. The source of comparative advantage is the differences in the relative amounts of each factor the countries possess. |
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Difference between FTA, customs union, common market, economic union and monetary union?
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page 218, Econ book
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What does BOP (balance of payments) include? and what do those accounts include?
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current account: merchandise and services, income receipts, unilateral transfers
capital account: capital transfers, sales and purchases of non-financial assets financial account: government-owned assets abroad, foreign-owned assets in the country |
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How to calculate real exchange rate (d/f)?
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real exchange rate (d/f) = nominal exchange rate (d/f) * CPI_f / CPI_d
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What is direct exchange rate and indirect exchange rate?
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Direct exchange rate: d/f
Indirect exchange rate: f/d |
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What are the different currency regimes and the corresponding characteristics?
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Dollarization: use the currency of another country
Monetary Union: like EU, using same currency among several countries Currency board arrangement: exchange domestic currency for a specified foreign currency at a fixed change rate (issuing money requires inflow of foreign currency to back up) more on page 238 econ book |
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What are the three factors influencing the demand for money?
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1. transaction demand
2. precautionary demand 3. speculative demand, inversely related to returns in the market, positively related to the risk of other investment instruments |
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What is the transmission mechanism for monetary policy?
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decrease in inter-bank lending rates have effects:
1. market rates decrease 2. Asset prices increase because lower discount rate is used 3. firms and individuals increase their expectations 4. the domestic currency depreciates due to outflow of foreign money Net effect: people consume more and business export more |