8/13/2019 CC-Economics Revised
1/79
www.edupristine.com
Crash Course forEconomics
CFA Level-I Exam
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
2/79
www.edupristine.com Neev Knowledge Management Pristine
Economics
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
3/79
www.edupristine.com Neev Knowledge Management Pristine
Micro Economics
Elasticity Market & Efficiency Competitive Market Markets for factors ofProduction
Elasticity of SupplyElasticity of Demand
Price elasticity of Demand = % change inQuantity demanded / %change in Price%change = change in value / Average ValueIf absolute value > 1, demand is elastic;If absolute value < 1, demand is inelasticIf absolute value = 1, demand is unit elastic.
Elastic demand: A small price increase causes alarge decrease in quantity demandedInelastic demand: A large price increase causesa small decrease in quantity demandedPerfectly elastic demand: A small priceincrease reduces the quantity demanded to 0.Perfectly inelastic demand: A price changedoes not affect the quantity demanded.
Income Elasticity Cross Elasticity
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
4/79
www.edupristine.com Neev Knowledge Management Pristine
Elasticity of SupplyElasticity of Demand
Price elasticity has two main determinants:Availability of substitutes: If substitute goods are available, consumer mayswitch to a substitute good if price rise. The presence of many substitutesmay tend to increase demand elasticityShare of budget spent on product: goods that occupy relatively small portionof your budget will tend to be price inelasticAn inferior good has -ve income elastic
An normal good has +ve income elastic
Income elasticity of Demand =%change in Quantity demanded
/ %change in real income
Cross elasticity of Demand =%change quantity demanded /
%change in price of substituteor complement
Income Elasticity Cross Elasticity
Q.The cross elasticity of demand for asubstitute good and the incomeelasticity for an inferior good are:Cross elasticity Income elasticityA. < 0 > 0, < 1B. < 0 < 0C. > 0 > 0, < 1D. > 0
8/13/2019 CC-Economics Revised
5/79
www.edupristine.com Neev Knowledge Management Pristine
Elasticity of SupplyElasticity of Demand
Price elasticity of supply = % change inQuantity supplied / %change in Price
Two main determinants:
Available substitute for raw materialsused to produce the goods
Time elapsed since the last pricechange
Micro Economics
Elasticity Market & Efficiency Competitive Market Markets for factors ofProduction
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
6/79
www.edupristine.com Neev Knowledge Management Pristine
Elasticity of Demand, Supply& Tax Incidence
Consumer &Producer Surplus
Efficient ResourceAllocation
Idea AboutFairness
Market in Action
Q. Which of the following is least likely to
result in DWL?Indian RailwaysIndian OilMTNLAns. Indian railways operate in monopolymarket & Indian Oil sells subsidized good.In both cases DWL are bound to getcreated, whereas MTNL operates in acompetitive telecom market
Price ceiling is an upper limit onthe price a seller can charge.Price floor is the lowest limit onthe price that a buyer can offer fora good or service.A deadweight loss resultsbecause less than the efficientquantity is produced or consumed
Tax revenue fromsellers
Elastic Supply Curve
Tax revenue frombuyers
Ptax
PE
Ps
Price
SD
DWL
Quantity
Dtax
Qtax QE
Ttax revenue from sellers
Taxtax revenue from buyers
PPE
Ptax
Dtax
E
Inelastic Supply Curve
Price
SD
DWL
Quantity
Qtax QE
Elastic Demand Curve
Tax revenue fromsellers
Tax revenue frombuyers
Ptax
PE
PS
Price
S
D
DWL
Quantity
S
tax
Qtax QE
Inelastic Demand Curve
Tax revenue fromsellers
Tax revenue frombuyers
Ptax
PE
PS
Price
SD
DWL
Quantity
S tax
Qtax
QE
Micro Economics
Elasticity Market & Efficiency Competitive Market Markets for factors ofProduction
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
7/79www.edupristine.com Neev Knowledge Management Pristine
Tax revenue fromsellers
Elastic Supply Curve
Tax revenue frombuyers
Ptax
PE
Ps
Price
S
D
DWL
Quantity
Dtax
Qtax
QE
TTax revenue from sellers
TaxTax revenue from buyersPPE
Ptax
Dtax
E
Inelastic Supply Curve
Price
SD
DWL
Quantity
Qtax QE
Elastic Demand Curve
Tax revenue fromsellers
Tax revenue frombuyers
Ptax
PE
PS
Price
S
D
DWL
Quantity
S tax
Qtax
QE
Inelastic Demand Curve
Tax revenue fromsellers
Tax revenue frombuyers
Ptax
PE
PS
Price
SD
DWL
Quantity
S tax
Qtax
QE
Elasticity of Demand, Supply& Tax Incidence
Consumer &Producer Surplus
Efficient ResourceAllocation
Consumer surplus is the difference b/wwhat a consumer is willing to pay for a good
or service & what he actually pays for itProducer surplus is the difference b/w theprice a producer receives for a unit output &minimum supply price for (opportunity costof) that unit.Marginal social benefit is the sum of allconsumersmarginal benefit from a good orservice. The marginal social benefit curve isthe market demand curve for the good orservice
Idea AboutFairness
Market in Action
Q. If a consumer is ready to pay $300 for i-phone, but has to pay only $199, thedifference of $101 is?A) Consumer deficit B) Producer surplus C)Consumer surplusAns. Consumer surplus
Micro Economics
Elasticity Market & Efficiency Competitive Market Markets for factors ofProduction
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
8/79www.edupristine.com Neev Knowledge Management Pristine
Elasticity of Demand, Supply& Tax Incidence
Consumer &Producer Surplus
Efficient ResourceAllocation
Idea AboutFairness
Market inAction
Obstacles to Efficient ResourceAllocationPrice ControlsTaxes, Subsidies & Production quotas
MonopolyExternal BenefitsPublic Goods & Common Resources
Utilitarianismis the idea that the valueof an economy is maximized wheneach individual owns an equal amountof the resources.The Symmetry Principle implies that
when an economy is based on privateproperty & voluntary exchange ,individual get goods & services that areequal in value to their contribution tothe economy
Tax revenue fromsellers
Elastic Supply Curve
Tax revenue frombuyers
Ptax
PE
Ps
Price
S
D
DWL
Quantity
Dtax
Qtax QE
TTax revenue from sellers
TaxTax revenue from buyersPPE
Ptax
Dtax
E
Inelastic Supply Curve
Price
SD
DWL
Quantity
Qtax QE
Elastic Demand Curve
Tax revenue fromsellers
Tax revenue frombuyers
Ptax
PE
PS
Price
S
D
DWL
Quantity
S tax
Qtax QEInelastic Demand Curve
Tax revenue fromsellers
Tax revenue frombuyers
Ptax
PE
PS
Price
SD
DWL
Quantity
S tax
Qtax
QE
Micro Economics
Elasticity Market & Efficiency Competitive Market Markets for factors ofProduction
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
9/79www.edupristine.com Neev Knowledge Management Pristine
Parameter PerfectCompetition
Monopoly Monopolistic Market Oligopoly
Product Type Homogenous Well-definedproduct withno substitute
similar yet notperfectly substitutable
Similar ordifferentiated
Number of
Producers
Large no. ofindependent
producers
Single firm A large no. ofindependent sellers
A small no. offirms
Market Share Very Small Near 100% Small High
Barriers to Entry No barriers Very high Low High
Price Commanding
Power
Price Takers PriceSearchers
Very Low Follow
Demand Curve PerfectlyInelastic
DownwardSloping
Downward sloping DownwardSloping or
kinked
Price
discrimination
No Yes Low No
Four Firm
Concentration
Ratio
Below 40% 100% 40%-60% Greater than60%
Herfindahl
Hirschman Index
Less than 1,000 10,000 1,000-1,800 Greater than1,800
Micro Economics
Elasticity Market & Efficiency Competitive Market Markets for factors ofProduction
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
10/79www.edupristine.com Neev Knowledge Management Pristine
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Rate of change in priceindex over a given periodof timei = [current price index -last period price index] /last period price index
Jobs & Price Level
Aggregate supply Shift in Curve Aggregate Demand
QWhich of the following events is least likely to causea downward shift in short-run aggregate supply?a)A labor stoppage causes the price of steel to rise.b) Inflation increases from 4% to 7%.c) Oil exporting countries reduce their productionlevelsAns: B
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
11/79www.edupristine.com Neev Knowledge Management Pristine
Aggregate Supply Shift in Curve Aggregate Demand
Full EmploymentReal O/P
Long run Aggregate
supply (SAS)
Price Level
Real O/P (GDP)
Short run Aggregate
supply (SAS)
Aggregate supply in Long run and Short run
Q Which of the following events is least likely tocause a downward shift in short-run aggregatesupply?a)A labor stoppage causes the price of steel to rise.b) Inflation increases from 4% to 7%.c) Oil exporting countries reduce their productionlevels
Aggregate supply - amount ofgoods and services produced by aneconomy.Function of the price level - higherprices bring about a greater amountof supply in the short run.
The SAS and LAS curves will both shift when:
The full-employment quantity of labor changes
The amt of available capital in the economy changesAs technology improves the productivity capital, labor,or both.
There are some factors that will shift SAS, but notaffect LAS.
If the wage rate or prices of other productiveinputs increase, the SAS curve will shift to theleft, a decrease in short-run aggregate supply.
When businesses observe a rise in resourceprices, they will decrease their output as the profitmaximizing level of output declines.
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
12/79www.edupristine.com Neev Knowledge Management Pristine
Aggregate Supply Shift in Curve Aggregate Demand
GDP1 GDP*
Price Level
P0PSRPLR
LASSAS1
SAS0
AD0
AD1
Real O/P GDP
Adjustment to a decrease in aggregate demand
LAS
P2P1P0
SAS1
Real GDP
Price Level
Resulting increase in aggregate demand
SAS0
AD1
AD0
Decrease in AD from AD0to AD1willlead to a new short-run equilibriumwith the price level at PSR & realGDP at GDP1which is less than full-employment GDP (a recession)
From an initial state of long-runequilibrium at the intersection of AD0with LAS, assume that aggregatedemand increases to AD1. The newshort-run equilibrium will be at over fullemployment with real GDP at GDP1
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
13/79www.edupristine.com Neev Knowledge Management Pristine
Aggregate Supply Shift in Curve Aggregate Demand
Components of aggregate demand:Consumption (C)Investment (I)Government spending (G)Net exports (X), which is exports minusimports
Aggregate demand = C + I + G + X
Factors affecting Aggregate Demand:
Expectations about future incomes (C),inflation (C), and profits (I)
Fiscal policySpending G
Taxes or Transfer Payment (SocialSecurity) C
Monetary policy
Money supply Interest rate C and I AD
World economy : If country's exchangerate AD
Q. Increase in money supply will causeGDP to1. Increase in both short run and long
run2. Increase at higher rate in short run
and temporarily increase in longrun
3. Increase in short run andtemporarily increase in long run
Ans. Increase in money supply willcause GDP to increase at higher rate inshort run due to multiplier effect andtemporarily increase in long run whichreverses and GDP returns to fullemployment GDP level
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
14/79www.edupristine.com Neev Knowledge Management Pristine
Jobs Price LevelUnemployment & Inflation
Rate of unemployment: No. ofunemployed / no. of people in laborforce.Labor-force participation rate: Civilianlabor force / civilian population age 16 orolder.Employment-to-population ratio: %ageof working-age population who areemployedAggregate hours: Total hours worked ina year by all employed people.
Real wage rate: Money wages adjustedfor changes in the price level
Key Labor Market Indicators Types of Unemployment
Frictional unemployment arises from constantchanges in the economy that prevent qualifiedworkers from being matched with existing jobopenings in a timely manner.
Structural unemployment is caused bystructural changes in the economy that eliminatesome jobs while generating job openings forwhich unemployed workers are not qualified.
Cyclical unemployment is caused by a changein the general level of economic productivity.When the economy is operating at less than full
capacity, positive levels of cyclical unemploymentwill be present.
Q. Which of the following is most likely to be an example of structural unemployment?A) Jack was unable to find new job with a lucrative salary, though he was offered a salaryhike of 15% by another employerB) Demand for the actuarial candidates are quite high compared to insurance agentC) John is searching for a new job as he donthave expertise in handling new high risecrane, which his employer has installed recentlyAns: C
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
15/79www.edupristine.com Neev Knowledge Management Pristine
Jobs Price LevelUnemployment & Inflation
Unanticipated inflation: Anunexpected decrease i``n thepurchasing power of (real value of)currency.Effects:Long-term contracts of fixed futurepayments decrease in value.Decreases the value of a fixed-payment mortgage held by a bank,Gains and losses in the labormarket:
- real value of the wagesdecreases
- gain for employers at theexpense of employeesEven when inflation rates arecorrectly anticipated, it has adverseeffectsHigher transaction costs: Time &effects diverted from producingactivity reduces real GDPTax effects: Real after tax returns oninvestment are distorted by inflation
Demand Pull & CostPush Inflation
Phillips CurveUnanticipated &Anticipated Inflation
SR Phillips curveintersects the LR Phillipscurve at the expectedrate of inflation.
1
Short run PC whenexpected inflation=6%
Short run PC when
expected inflation=8%
GDP
F
12%
10
%
8%
6%
4%
Unemployment
Phillips Curve
Long Run PhillipsCurve
PC1
PC2Inflation
2GDP1 GDP2
Price Level
P3P2P1
LRASSRAS1
SRAS2
AD2
AD1
Real GDP
Demand Pull Inflation
SRAS1
GDP2GDP1GDP1
PriceLevel
P3
P2
P1
LRAS
SRAS2
AD2
AD
1
RealGDP
Cost Pull
Inflation
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
16/79www.edupristine.com Neev Knowledge Management Pristine
Jobs Price LevelUnemployment & Inflation
CPI measures the average price for a defined"basket" of goods and services that representsthe purchasing patterns of a typical urbanhousehold.CPI= [(cost of basket at current prices) / (cost ofbasket at base period prices)] x 100
CPI biasCPI overstates inflation due to:New goods: Older products replaced bynewer but initially more expensive productsQuality changes: If the price of a productincreases because the product has improvedCommodity substitution:When 2 goods aresubstitutes for each other, consumers increasetheir purchases of the relatively cheaper good &buy less of the relatively more expensive good.Outlet substitution: When consumers shift
their purchases toward discount outlets & awayfrom convenience outlets, they reduce their costof living in a way the CPI does not capture.
Q. Price of common salt was 5 cents in year 1990and is presently sold at 20 cents. During the sameperiod CPI has increased from 154.5 to 365.8. Whathas been the change in real price of salt over thisperiod?Ans: CPI Multiplier = 365.8/154.5= 2.36, CPIAdjusted Salt Price = 5*2.36 = 11.8, Real Increase =
20/11.8=> 69.5%
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
17/79www.edupristine.com Neev Knowledge Management Pristine
Function of Money Quantity of MoneyTheory
Demand & Supply forMoney
Federal Reserve &Supply of Money
DepositoryInstitution
LAS
P2P1P0
SAS1
Real GDP
Price Level
Resulting increase in aggregate demand
SAS0
AD1
AD0
5%
4%
Demand for
Money
MS0
Real Money
Interest Rate
Increase in Money Supply
MS1
(SR)
(LR)
(SR)
Medium of Exchange
Unit of ACCOUNT
Store of value
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
18/79www.edupristine.com Neev Knowledge Management Pristine
Function of Money Quantity of MoneyTheory
Demand & Supply forMoney
Federal Reserve &Supply of Money
DepositoryInstitution
Q. What is the maximum increasein the money supply on Feddecision if (a) Fed buys $2billion insecurities in the open market(b)required reserve ratio is 10%and (c)Currency drain is 2%?1. $20 bn2. $17 bn3. $16 bnAns. Change in quantity of money= (1.02)/(.12)= 8.5; 2 X 8.5 =17
What determines the demand formoney:
Interest rates: Most criticalInflation: Increase the demandfor nominal money
Real GDP growth: Alsoincreases the demand for money(nominal & real)
Money supply measures:
M1 refers to all currency in the
form of traveler's checkingaccount deposits of individuals &firms and currency not held inbanks,.
M2 refers to M1 plus timedeposits, savings deposits, &money-market mutual fundbalances
Money Multiplier: The moneymultiplier for a change in the
monetary base thus depends onboth the required reserve ratio andthe currency drain:
money multiplier = (1+ c) /(r + c)
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
19/79
www.edupristine.com Neev Knowledge Management Pristine
Discount rate is a rate atwhich banks can borrow
reserves from the fed.Lower Discount rate =>increased money supply,decreased interest rates;Higher rates => decreasedmoney supply & increaseinterest rate.
Reserve Requirement:Higher %age reduces themoney supply & increasesinterest rates; lower %ageincrease the money supply& decreases interest rates.
Opening marketoperations: Fed buying &selling of treasury securities.Fed purchases increasecash available for lending,decreasing interest rates.Fed sales remove cash,increasing interest rates
Fedsbalance sheetAssets: Gold, deposit withother central banks, IMFspecial drawing rights;Treasury securities; loansto bank at the discount rateLiabilities: U.S. currency incirculation; banks reservedeposits
Function of Money Quantity of MoneyTheory
Demand & Supply forMoney
Federal Reserve &Supply of Money
DepositoryInstitution
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
20/79
www.edupristine.com Neev Knowledge Management Pristine
Equation of exchange
money supply x velocity =price x real o/p= GDP
Velocity: average number oftimes per year each dollar isused to buy goods andservices (velocity = GDP /money supply),
BanksThrift institutionsMutual Funds
Their FunctionsCreate liquidity: Use short-termdeposits to make long-term loansAct as financial intermediaries:Lend at lower cost than borrowerscould achieve by seeking outindividual lenders.Pool default risks: Hold a portfolioof loans & monitor their risks
Risk management by Depository:Proportion of various types of loansPercentage of depositsTypes of depositsShare of ownerscapital
Deposit expansion multiplier = 1 /required reserve ratioPotential increase in money supply =deposit expansion multiplier *
increase in excess reserves
Function of Money Quantity of MoneyTheory
Demand & Supply forMoney
Federal Reserve &Supply of Money
DepositoryInstitution
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
21/79
www.edupristine.com Neev Knowledge Management Pristine
Fiscal Policy refers to Government's use of spending andtaxation, referred as supply side effects.
Monetary PolicyAutomatic Stabilizer
0%100% Laffer Curve
Taxrate
TaxRevenue
Taxes Savings Investment Capital Real GDPRicardo Barro effect refers to increase in fiscal
deficit shall cause higher taxes in future
Investment
Sources of investment financingNational savingsBorrowing from foreignersGovernment savingsThe crowding-out effect occurs whenbudget deficits (negative Govt. saving)caused by expansionary fiscal policylead to higher interest rates & lowerprivate investment.
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
22/79
www.edupristine.com Neev Knowledge Management Pristine
Importance of Timing in Fiscal Policy:Recognition Delay: Time it takespolicy to recognize that a policychange is necessary.Administrative or law making delay:Time lag b/w recognition & finalpassage of law or policy change.Impact delay: Time lag b/w passageof the law or policy & when its impactis felt in the economy
Fiscal Multiplier& factor affecting
fiscal Multiplier
Generational effects of Fiscal policy:The difference b/w the PV of futurebenefits promised to voters (such as
Medicare insurance in the US) & thecurrently collected taxes is referred toas a generational imbalance.
When government expenditures increases, aggregate demand& GDP increases by some multiple, as wages & paymentsreceived by workers & capital owners lead to future increasesin aggregate expenditures. This is referred to as theexpenditures (Govt. purchases) multiplier.
Government purchases multiplier: Adollar of government spendingcauses more than a $1 increase in
aggregate demand.
Tax multiplier: Tax cuts also havemagnified effects on aggregatedemand, less than government
purchases as some of the tax is saved.
Balanced budget multiplier:Combined program of governmentpurchases & taxes, an increase inspending and equal increase intaxes will have a stronger positiveeffect on aggregate demand
Fiscal Policy refers to Government's use of spending andtaxation, referred as supply side effects.
Monetary PolicyAutomatic Stabilizer
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
23/79
www.edupristine.com Neev Knowledge Management Pristine
Automatic Stabilizer
Automatic stabilizers are built-in fiscal devicesthat ensures surplus in a recession & deficitsduring booms. Automatic stabilizers minimizethe problem of proper timing. There are 2main stabilizers:
Induced Taxes: Peopledrop from the tax rolls
during downturns & areadded to tax rolls (orenter higher brackets)during booms.Corporate tax collectionis lower duringeconomic downturns
Needs-testedspending: Moremoney is paid
out as morepeople becomeunemployed
Business Cycle
A business cycle is characterizedby fluctuations in economicsactivity & has 2 phases(contraction & expansion) & 2turning points (through & peak)
Key determinants of businesscycle:Real GDPReal incomeEmploymentIndustrial ProductionWholesale-retail sales
Average
Expansion
Contraction(Recession)
Time
Business Cycle
Business Peak
RealGDP
Recessionary Trough
Fiscal Policy refers to Government's use of spending andtaxation, referred as supply side effects.
Monetary PolicyAutomatic Stabilizer
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
24/79
www.edupristine.com Neev Knowledge Management Pristine
Impact of expansionary monetary policy on
Inflation rate Small IncreaseReal GDP o/p &
employmentIncrease
Impact of restrictive monetary policy on:
Inflation rate Small Decrease
Real GDP o/p &employment
Decrease
Effects of change in Monetary Policy
Alternative monetary policy strategies Fed include:The McCallum rule, talks about the growth rate of the monetary base. Its main drawback is that shifts in thedemand for money can cause f luctuations in interest rates and aggregate demand.A rule that targets the growth rate of the money supply may also present problems in that changes in bothmoney demand and money velocity can cause volatility in aggregate demand and interest rates.Keeping the foreign exchange rate with other countries currencies stable would cause the domestic inflation
rate to match that of the other countries, over which the Fed has no control.Inflation rate targeting is used by many central banks, the notable exceptions being those of the U.S. & Japan.The performance of strict inflation targeting, compared to the Feds method of monetary policy determination is
still subject to debate.
Fiscal Policy refers to Government's use of spending andtaxation, referred as supply side effects.
Monetary PolicyAutomatic Stabilizer
Macro Economics
Inflation Aggregate Demand &Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
25/79
www.edupristine.com Neev Knowledge Management Pristine
Macro Economics
Inflation Aggregate Demand& Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level International Trade andCapital Flows
Recardian Model of TradeHas only one factor of
production- labor
Heckscher & Ohlin Model ofTrade- Redistribution of wealthwithin each country betweenlabor and owners of capital
Reasons for Trade restrictions:1.Infant Industry
2. National Security
Types of trade restrictions include:Tariffs- Taxes on imported goods collected by govt.
Quota- Limits on the amount of imports allowed over someperiod.
Export subsidiesGovt. payments to firms that exportgoods.
Minimum Domestic Content- requirement that some %ageof product content must be from the domestic country.
Voluntary Export Restraint- A country voluntarily restrictsthe amount of goods that can be exported.
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
26/79
www.edupristine.com Neev Knowledge Management Pristine
Macro Economics
Inflation Aggregate Demand& Supply
Monetary & FiscalPolicyMoney
Jobs & Price Level International Trade andCapital Flows
Effect of tariffs and quotas Types of TradingBlocs
Free Trade AreasCustom Union
Common MarketEconomic UnionMonetary Union
Balance Of Paymentsinclude:1. Current Accountconsists of:
A> Merchandise andservicesB> Income ReceiptsC> Unilateral Transfers2. Capital Accountconsists of:A> Capital transfersB> Sales and purchaseof non financial assets3. Financial Account
include:A> Govt. owned assetsabroadB> Foreign owned assetsin the country
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
27/79
www.edupristine.com Neev Knowledge Management Pristine
Trade restrictions:1. Tariffs2. Quotas3. Voluntary Export restraints
Arguments for trade restriction:1. Developing Industries2. Anti-dumping agreement3. National defense industries to be protected
Trade restriction which have little support:1. Protect jobs2. Create jobs
3. Low wage countries depress wage rates in high wagecountries
Economics
ForeignExchange
Exchange Rate &Balance of Payments
Trading withthe World
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
28/79
www.edupristine.com Neev Knowledge Management Pristine
Nominal & realexchange rate
Balance ofPayments
The nominal exchange rateis Amount of currency thatis required to buy one unitof other currencyThe real exchange ratereflects the cost ofpurchasing an identicalbasket of goods with 2different currenciesReal exchange rate=E*(P/P*)
Demand & supply inforeign exchange
current a/c + capital a/c + Officialreserve a/c =0Current account: Records trade ingoods and services, transferpayments, net profits and interests
earned on assets abroadCapital account : Recordstransactions in financial assets andlandOfficial settlement account :
Records changes in official reserveswhich are gold, foreign currency,SDRs
Exchange rate policies:
There are 3 fundamental typeof exchange rate policies:Fixed RateFloating RateCrawling exchange rate
Economics
ForeignExchange
Exchange Rate &Balance of Payments
Trading withthe World
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
29/79
www.edupristine.com Neev Knowledge Management Pristine
D0
D1
E1
E0
USD per INR
S1 S0
Quantity of INR
Decrease in
supply of INR
Increase in demand
for INR
Demand and Supply shifts in the foreign Exc hange markets
Nominal & realexchange rate
Balance ofPayments
Demand & supply inforeign exchange
There are 3 factors that determine thedemand for & supply of the currencyInterest rates for deposits in thecurrency
Future exchange rate expectationDemand for domestic products ininternational market is
Exchange rate policies:
There are 3 fundamental typeof exchange rate policies:Fixed RateFloating RateCrawling exchange rate
Economics
ForeignExchange
Exchange Rate &Balance of Payments
Trading withthe World
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
30/79
www.edupristine.com Neev Knowledge Management Pristine
Direct & IndirectQuotes
Cross CurrencyRates
Direct Quotes: Domestic currency perunit of foreign currencyIndirect Quotes: Foreign currency perunit of domestic currency
Spot Rate &Forward rate
Cross rates are the Exchangerates between two currenciesderived from exchange ratewith a common third currencyWhen rates quoted bydealer/bank are different fromcross rates obtainedtheoretically, triangulararbitrage may be possible
Forward Discount& Premium
Bid Price: price, the dealer will pay for1unit of base currency. It is smaller &listed firstAsk Price: price, at which dealer will sell
1unit of base currency. It is higher &listed second% Spread = 100
priceask
pricebidpriceask
Q. The bid ask quote for GBP in India is78.2078.50 (GBP:INR) . In New York thebid ask quote for Indian Rupee is 46
46.30 (USD:INR). What is the GBP:USDask as a cross rate.Ans. GBP:USDask = 78.5/46 = 1.7065
Economics
ForeignExchange
Exchange Rate &Balance of Payments
Trading withthe World
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
31/79
www.edupristine.com Neev Knowledge Management Pristine
Direct & IndirectQuotas
Cross CurrencyRates
Spot Rate &Forward rate
Spot rates are the exchange rates forthe immediate delivery of the currencyForward rates are the exchange ofcurrencies in future at the exchangerate agreed todayCovered Interest Arbitrage: It is thetrading strategy that exploits mispricingb/w spot & fwd rates.
Q. Let the exchange rate for USD and GBP is 1.65$ per GBPand forward rate is 1.60$ per GBP. Assuming Interest rateparity holds then in which country will be the interest ratehigher.
Ans.Forward price of a $ is quoting a lower price than the
current spot p[rice indicating that $ is expected to appreciategoing forward and thus quoting a premium in forward market.Assuming interest rate parity to hold true UK must be havinghigher interest rate relative to US, because of which GBP isexpected to depreciate.
Forward Discount& Premium
Forward Premium (discount) =
If forward price of Rs/$ is lesserthan spot price of Rs/$ Then, Rs isquoted as forward premium
dayscontract
forwardofno.
360
ratespot
ratespotrateforward
Economics
ForeignExchange
Exchange Rate &Balance of Payments
Trading withthe World
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
32/79
www.edupristine.com
Question 1
The demand for home dcor doubles when the average family income of Saunderland
increases from $15,000 per annum to $20,000 p.a. The income elasticity for homedcor is
A. Greater than 1, and Less than 2
B. Less than 1
C. Greater than 2
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
33/79
www.edupristine.com
Answer 1
C.
33.217500/5000
5.1/1IncomeAvgI/
QQ/Avg
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
34/79
www.edupristine.com
Question 2
Production at B leads to a loss due to inefficient production. This loss in efficiency is
known asA.Deadweight loss
B.Utilitarian loss
C.Producer loss
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
35/79
www.edupristine.com
Answer 2
A.
When production occurs at a point other than the equilibrium point the consumersurplus & the producer surplus is decreased by an amount. This is known asdeadweight loss.
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
36/79
www.edupristine.com
Question 3
If the price of the product does not change when the supply of the product increases
from zero to infinity. Then the supply elasticity for the product is most likelyA. Perfectly elastic
B. Unit Elastic
C. Perfectly inelastic
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
37/79
www.edupristine.com
Answer 3
A.
Perfectly Elastic
PriceElasticityPrice
Quantity/Time
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
38/79
www.edupristine.com
Question 4
John notices that when the price of a Product Z is increased from $15 to $25. The
demand declines from 40 units to 35 units. He also notices that the income elasticity ofthe product is negative. The price elasticity of the product is closest to and the productis an
A. 0.27 ; inferior good
B. 0.47; normal good
C. 0.30 ; normal good
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
39/79
www.edupristine.com
Answer 4
A.
Price elasticity = %Q = 5/37.5 = 0.27%P 10/20
When demand reduces with an increase in income the good is an inferior good & theincome elasticity is negative.
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
40/79
www.edupristine.com
Question 5
The least likely method of government intervention in farm production is through
A. Production quotasB. Taxes
C. Subsidies
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
41/79
www.edupristine.com
Answer 5
B.
The two methods of government intervention in farm production are through the use ofa) production quotas and b) subsidies. Taxes are a form of intervention but aregenerally not used to control farm production.
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
42/79
www.edupristine.com
Question 6
In the case of Enron scandal, the principal-agent problem occurred least likely in whichof the following two cases;
Principal Agent
A. Stockholders CEO
B. Stockholders Auditors
C. CEO Stakeholders
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
43/79
www.edupristine.com
Answer 6
C.
Stockholders/stakeholders are the ultimate principal. They have a stake in thecompany and the CEO is an agent appointed by them to oversee the companysactivities
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
44/79
www.edupristine.com
Question 7
The HHI for the silicon wafer industry in Saunderland is closest to
Firm Market ShareA 50%
B 10%
C 10%
D 5%
E 5%
ROI* 20%
*ROI Rest of Industry constituting 8 firms each with 2.5% market share
A. 3150
B. 2800
C. 5950
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
45/79
www.edupristine.com
Answer 7
B.
Herfindahl-Hirschman Index is calculated for the industry as follows:
HHI = 502 + 102 + 102 + 52 + 52 + 8 * (2.52) = 2,800
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
46/79
www.edupristine.com
Question 8
A shoemaker Zeebok requires producing 150 units per day. The cost of labor is $20and the cost of capital is $550 per unit. Calculate the most likely economical method ofproduction
Quantity of Inputs
Labor Capital
Manual Method 220 50
Automated Method 10 120
A. Automated and requires $56,400 per day
B. Manual and requires $31,900 per day
C. Manual and requires $34,500 per day
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
47/79
www.edupristine.com
Answer 8
B.
Manual Method requires = $ 20*220 + 550*50 = $31,900Automated Method requires = $ 20*10 + 550*120= $66,200
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
48/79
www.edupristine.com
Question 9
ZenithCorp. a major utility company runs 4 thermo-nuclear generators supplyingelectricity to the Greater Manhattan region. The company is planning to set up a 5thgenerator to meet the ever increasing demand for electricity. While analyzing thebusiness plan the company CFO notices that by adding one more units there is apositive but declining increase in marginal cost. This indicates that the total cost curveand the average total cost curve is most likely
Total Cost Curve Average Total Cost
A. Increasing DecreasingB. Increasing Increasing
C. Decreasing Increasing
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
49/79
www.edupristine.com
Answer 9
A.
When marginal cost increases in a declining manner the total costs increases howeverthe average total cost starts decreasing.
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
50/79
www.edupristine.com
Question 10
When an additional unit of labor is added to a companys work force then the marginal
returns increase initially but decline after a certain point. This is most likely the result of
A. Economies of scale
B. Law of diminishing returns
C. Diseconomies of scale
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
51/79
www.edupristine.com
Answer 10
B.
The law of diminishing returns occurs when the marginal product of an additionalworker is less than the marginal product of the previous worker. As more workers areadded there is less for them to do.
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
52/79
www.edupristine.com
Question 11
Which of the following statements best explains how automatic stabilizers work? Evenwithout a change in fiscal policy, automatic stabilizers tend to promote:
A. A budget deficit during a recession and a budget surplus during an inflationaryexpansion.
B. A budget surplus during a recession and a budget deficit during an inflationaryexpansion.
C. A budget deficit during a recession but do not promote a budget surplus during an
inflationary expansion.This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
53/79
www.edupristine.com
Answer 11
A.
A Budget deficit during a recession and a budget surplus during an inflationaryexpansion
Automatic stabilizers such as unemployment compensation, corporate profits tax, andthe progressive income tax run a deficit during a business slowdown but run a surplusduring an economic expansion. Therefore, they automatically implementcountercyclical fiscal policy without the delays associated with policy changes that
require legislative action.This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
54/79
www.edupristine.com
Question 12
In a perfectly competitive market the lowest possible long run average total cost occursmost likely at the point where MC (Marginal Cost) SR Firm Supply Curve, ATC (
Average Total Cost)
A. MC > SR Firm Supply Curve=ATC
B. MC=SR Firm Supply Curve=ATC
C. MC
8/13/2019 CC-Economics Revised
55/79
www.edupristine.com
Answer 12
B.
MCATC
AVC
Quantity
Price
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
56/79
www.edupristine.com
Question 13
The benefit that a person receives from consuming one or more unit of a good orservice is known as
A. Allocative benefit
B. Increasing benefit
C. Marginal benefit
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
57/79
www.edupristine.com
Answer 13
C.
Marginal benefit (MB) is the benefit that a person receives from consuming one ormore unit of a good or service. The MB is measured as the maximum amount that aperson is willing to pay for one or more unit of the good or service.
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
58/79
www.edupristine.com
Question 14
A public good is a good or service that is consumed by everyone, even if they dont pay
for it, then which of the following describes an external benefit
A. Benefit that accrues to people other than the buyer of the good or service
B. Benefit that accrues due to external factors like exchange rates, inflation etc.
C. Benefits that accrues to the consumer of a good or service
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
59/79
www.edupristine.com
Answer 14
A.
When an old building is restored or a park is built in a locality the benefit accrues toother people other than the owner of the building or the owner of the land on which thepark was built. An external benefit is thus the benefit that accrues to other people otherthan the buyer of a good.
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
60/79
www.edupristine.com
Question 15
Which of the following is least likely an obstacle in achieving the efficient allocation ofresources
A. Price Ceiling
B. Monopoly
C. Competition
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
61/79
www.edupristine.com
Answer 15
C.
The five items that are a significant obstacle to an efficient allocation of resources inthe market economy are: a. price ceilings & price floors b. taxes, subsidies & quotas c.monopoly d. external costs & benefits e. public goods & common resources.
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
62/79
www.edupristine.com
Question 16
Consider a firm in an oligopoly market that believes the demand curve for its product ismore elastic above a certain price than below this price. This belief fits most closely towhich of the following models?
A. Dominant firm model.
B. Kinked demand model.
C. Variable elasticity model.
This files has expired at 30-Jun-13
8/13/2019 CC-Economics Revised
63/79
www.edupristine.com
Answer 16
B.
The correct answer is Kinked demand model.The kinked demand model assumes that each firm in a market believes that at someprice, demand is more elastic for a price increase than for a price decrease.
This files has expired at 30-Jun-13
Q ti 17
8/13/2019 CC-Economics Revised
64/79
www.edupristine.com
Question 17
An insulin user is most likely to pay the entire tax when the demand and supply curvesfor insulin injectibles are respectively;
Demand Curve Supply Curve
A. Inelastic Elastic
B. Elastic Perfectly Inelastic
C. Perfectly inelastic Elastic
This files has expired at 30-Jun-13
A 17
8/13/2019 CC-Economics Revised
65/79
www.edupristine.com
Answer 17
A.
The buyer pays the tax when the demand curve is perfectly inelastic and the supplycurve is perfectly elastic. The seller will pay it when the demand curve is perfectlyelastic and the supply curve is perfectly inelastic.
This files has expired at 30-Jun-13
Q ti 18
8/13/2019 CC-Economics Revised
66/79
www.edupristine.com
Question 18
A high concentration ratio is most likely observed in
A. Perfect competitive marketB. Oligopoly
C. Monopolistic competition
This files has expired at 30-Jun-13
A 18
8/13/2019 CC-Economics Revised
67/79
www.edupristine.com
Answer 18
B.
In an oligopoly there is a high concentration ratio and the HHI is more than 1,800.
This files has expired at 30-Jun-13
Q ti 19
8/13/2019 CC-Economics Revised
68/79
www.edupristine.com
Question 19
A corporation has all of the following advantages except
A. Owners have limited liability
B. Professional management
C. Ease of set up
This files has expired at 30-Jun-13
A 19
8/13/2019 CC-Economics Revised
69/79
www.edupristine.com
Answer 19
C.
Advantages of a corporate setup is that owners of shares in a corporation have alimited liability and they can take advantage of a professional management.Proprietorships and partnerships are easy to set up.
This files has expired at 30-Jun-13
Question 20
8/13/2019 CC-Economics Revised
70/79
www.edupristine.com
Question 20
Sally has decided to give up working as an Investment Banker and set up a restaurantin London, all of the following can be considered as an opportunity cost except
A. interest on restaurant loan
B. salary foregone
C. perks foregone
This files has expired at 30-Jun-13
Answer 20
8/13/2019 CC-Economics Revised
71/79
www.edupristine.com
Answer 20
A.
The opportunity costs include a) explicit cost b) implicit cost. Wages foregone &interest on deposits foregone are examples of implicit costs.
This files has expired at 30-Jun-13
Question 21
8/13/2019 CC-Economics Revised
72/79
www.edupristine.com
Question 21
An employee stated that the electricity is being produced at ZenithCorp. at a pointabove the Production Possibility Frontier (PPF). This most likely indicates that
A. Production is inefficient
B. The employee is wrong
C. Production is efficient
This files has expired at 30-Jun-13
Answer 21
8/13/2019 CC-Economics Revised
73/79
www.edupristine.com
Answer 21
B.
All the points below the Production Possibilities Frontier (PPF) are possible thoughproduction is very inefficient. Maximum efficiency occurs on the PPF curve. Howeverall points above the curve are not possible.
This files has expired at 30-Jun-13
Question 22
8/13/2019 CC-Economics Revised
74/79
www.edupristine.com
Question 22
All of the following are the characteristics of a perfectly competitive market except
A. Many firms sell identical products to many buyers
B. No entry barriers
C. Information asymmetry between buyers & sellers
This files has expired at 30-Jun-13
Answer 22
8/13/2019 CC-Economics Revised
75/79
www.edupristine.com
Answer 22
C.
Characteristics of a perfectly competitive market are a) many firms in the market b)undifferentiated products c) no entry barriers d) no first mover advantage e) informationsymmetry
This files has expired at 30-Jun-13
Question 23
8/13/2019 CC-Economics Revised
76/79
www.edupristine.com
Question 23
The Laffer curve shows that an increase in the tax rate:
A. Will not change total tax revenue.
B. Will increase total tax revenue.
C. Can either increase or decrease total tax revenue
This files has expired at 30-Jun-13
Answer 23
8/13/2019 CC-Economics Revised
77/79
www.edupristine.com
Answer 23
C.
The correct answer is Can either increase or decrease total tax revenue.
The Laffer curve shows that at Sow tax rates an increase in rates will increase total taxrevenue, bur beyond some rate, further increases will actually decrease total taxrevenue.
This files has expired at 30-Jun-13
Question 24
8/13/2019 CC-Economics Revised
78/79
www.edupristine.com
Question 24
Which of the following would be counted as frictional unemployment?
A. Due to the negative growth of GDP, Smith was laid off.
B. Johnson was fired from his job after he got into an argument with his foreman, andhas not sought a new job.
C. Although there were jobs available, Jones was unable to find an employer with anopening.
This files has expired at 30-Jun-13
Answer 24
8/13/2019 CC-Economics Revised
79/79
Answer 24
C.
The correct answer is Although there were jobs available, Jones was unable to find anemployer with an opening.
One of the causes of frictional unemployment is that information regarding prospectiveemployees and employers is costly and sometimes hard to find. The other cause offrictional unemployment is that both employees and employers may spend some timelooking for information that will match them up.
This files has expired at 30-Jun-13
Top Related