economics reading 14
TRANSCRIPT
CFA 一级闪卡42
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 / ■ ver- tical ), 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 / □ ver- tical), 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
CFA 一级闪卡44
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
45第 2 章 Economics
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
CFA 一级闪卡46
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 dec- reases, 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)
47第 2 章 Economics
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 posi- tively 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 posi- tively sloped demand curve
CFA 一级闪卡48
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
49第 2 章 Economics
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
CFA 一级闪卡50
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)
51第 2 章 Economics
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
CFA 一级闪卡52
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
CFA 一级闪卡54
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
55第 2 章 Economics
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
CFA 一级闪卡56
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
57第 2 章 Economics
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 ( ■ in- crease / □ 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 pro- ducts 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 ( □ in- crease /□ 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 pro- ducts cost structures , relatively ( □ small / □ large) and frequent purchases, ( □ more / □ less) severe penalty for cheating, ( □ more / □ less) actual or potential competition would make collusion easier
CFA 一级闪卡58
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
59第 2 章 Economics
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 ( □ sensi- tive / ■ 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 (□ sensi- tive / □ 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
61第 2 章 Economics
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)
CFA 一级闪卡62
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
63第 2 章 Economics
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) =
CFA 一级闪卡64
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 -
65第 2 章 Economics
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 (□ dec- rease / ■ 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 ( □ dec- rease / □ increases) with the size of the economy
● Speculative demand is ( □ inversely related /□ related) to market’s return
CFA 一级闪卡66
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
67第 2 章 Economics
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 / ■ down- ward) 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 / □ insen- sitive) 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 / □ down- ward) 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 / □ insen- sitive) 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
CFA 一级闪卡68
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
69第 2 章 Economics
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
CFA 一级闪卡70
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
71第 2 章 Economics
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 inflation- ary 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 inflation- ary 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
CFA 一级闪卡72
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
CFA 一级闪卡74
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
75第 2 章 Economics
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)
CFA 一级闪卡76
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
77第 2 章 Economics
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
CFA 一级闪卡78
Consumer Behavior Answer
Consumer Behavior
The three major divisions are durable goods, non-durable goods, services
Households represent the largest single sector of consum- ption 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 specu- lative 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 consum- ption 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 specu- lative 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
79第 2 章 Economics
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
CFA 一级闪卡80
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 ( □ dec- rease / ■ 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 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 ( □ dec- rease / □ 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
81第 2 章 Economics
Theories of The Business Cycle Answer
Austrian School
Austrian school believe business cycles are due to inter- vention of government
Austrian economists advocate ( □ active / ■ limited ) gove- rnment 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) gove- rnment 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)
CFA 一级闪卡82
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
83第 2 章 Economics
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
CFA 一级闪卡84
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
85第 2 章 Economics
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
87第 2 章 Economics
Reading 18
MONETARY AND FISCAL POLICY
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
CFA 一级闪卡88
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
89第 2 章 Economics
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 ( ■ con- tractionary / □ expansionary) money policy
When Policy rate < Neutral rate indicates the ( □ con- tractionary / ■ 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 ( □ con- tractionary / □ expansionary) money policy
When Policy rate < Neutral rate indicates the ( □ con- tractionary / □ 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
CFA 一级闪卡90
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
91第 2 章 Economics
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: , ,
CFA 一级闪卡92
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
MONETARY AND FISCAL POLICY
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)
95第 2 章 Economics
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
97第 2 章 Economics
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
Import- 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 ch- ange
National welfare
Decrea- ses in sm- all country
Decrea- ses in sm- all country
Decreases Decreases
Increases in large co- untry
Increases in large co- untry
Decreases Decreases
Fill in Blank of The Table
Tariff Import Quota
Export Subsidy VER
Impact on Import- ing country
Import- ing country
Export- ing country
Import- 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 cou- ntry
in small cou- ntry
in large cou- ntry
in large cou- ntry
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
99第 2 章 Economics
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 ( □ deve- loped / ■ 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 ( □ deve- loped / □ 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
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 =
103第 2 章 Economics
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
105第 2 章 Economics
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