CFA- ECON
In an effort to influence the economy, a central bank conducted open market activities by selling government bonds. This action implies that the central bank is most likely attempting to: contract the economy by reducing bank reserves.
Selling government bonds results in a reduction of bank reserves and reduces their ability to lend, causing a decline in money growth through the multiplier mechanism and hence a contraction in the economy. central bank selling of bonds will reduce the money supply through its impact on bank reserves, which will result in a higher, not lower, interest rate.
The primary monetary policy goal of most major central banks is best characterized as: maintaining price stability.
The primary monetary policy goal of most major central banks is to maintain price stability.
concerning the sum-of-value-added method used to determine GDP based on expenditures
The sum-of-value-added method involves summing the value added (or income created) at each step in the production and distribution process. the sum-of-value-added method shows the same GDP value as the value of final output method.
If a strengthening economy leads discouraged workers to return to an active employment search, the number of unemployed people would, at least initially, most likely: increase.
The unemployed are defined as those who are actively seeking employment but are currently without a job. Discouraged workers are without a job but have given up searching for work and so are not classified as being unemployed. A strengthening economy will lead discouraged workers to once again actively search for work; they will be reclassified as unemployed, and at least initially, the number of unemployed people will increase and the unemployment rate will rise.
a liquidity trap
a liquidity trap is associated with occasions where the demand for money becomes infinitely elastic—that is, where the demand curve is horizontal and individuals are willing to hold additional money balances without any change in the interest rate—so that further injections of money into the economy will not serve to further lower interest rates or affect real activity. In this extreme circumstance, monetary policy can become completely ineffective.
Cost-push inflation
cost-push inflation is kicked off by either an increase in the money wage rate or an increase in the money prices of raw materials.
deflation - Deflationary trap (environment)
deflation is a pervasive and persistent fall in a general price index and is more difficult for conventional monetary policy to deal with than inflation. This is because once the monetary authority has cut nominal interest rates to zero to stimulate the economy, it cannot cut them any further. It is at this point that the economic conditions for a liquidity trap arise. Deflation raises the real value of debt, while the persistent fall in prices can encourage consumers to put off current consumption, leading to a fall in demand that leads to further deflationary pressure. Thus a deflationary "trap" can develop, which is characterized by weak consumption growth, falling prices, and increases in real debt levels.
Second-degree price discrimination involves using the quantity purchased as the basis for the pricing of a particular good.
second degree price discrimination :An electricity producer charges lower rates to its high-volume customers and higher rates to its low-volume customers.
Stagflation
stagflation occurs with a high level of unemployment and a slowdown in the economy, accompanied by high inflation: clearly not conditions of high capacity utilization.
concerning tthe value-of-final-output method used to determine GDP based on expenditures
the value-of-final-output method, not the sum-of-value-added method, is based on the final selling price consumers pay for products and services (the retailer's receipt from the final customer).
The unemployment rate is best described as the ratio of unemployed to: labor force.
unemployment rate is based on the labor force and the working age. The labor force is defined as the number of people who either have a job or are actively looking for a job.
If a central bank reduces the money supply, this move will most likely lead to a: rise in nominal interest rates and a decline in aggregate price level.
A reduction in the money supply (leftward shift) leads to an increase in nominal rates. Furthermore, on the basis of the quantity theory of money, a reduced money supply makes money more valuable (thus a higher interest rate), which reduces aggregate price levels.
If a government increases its spending on domestically produced goods by an amount that is financed by an equivalent increase in taxes, the aggregate demand will most likely: increase.
Aggregate demand rises when the government increases spending by the same amount as it raises taxes because the marginal propensity to spend out of disposable income is less than 1, and hence for every dollar less in disposable income, spending only falls by $c (where c is the marginal propensity to consume). Aggregate spending will fall less than the tax rise by a factor c. This additional output will, in turn, lead to further increases in income and output through the multiplier effect.
Given stable aggregate supply, which of the following changes in aggregate demand is most likely to cause economic expansion? An increase in capacity utilization
An increase in capacity utilization will cause an increase in aggregate demand through higher investment and will increase GDP (economic expansion). a decrease, not an increase, in corporate income tax will cause an increase in aggregate demand through higher investment and increase GDP (economic expansion). a decrease, not an increase, in exchange rate (foreign currency per unit domestic currency) will cause an increase in aggregate demand through higher exports with lower imports and increase GDP (economic expansion).
Which of the following will most likely cause the short-run aggregate supply (SRAS) curve to shift to the right? Increase in the supply of human capital
An increase in the supply of human capital will increase the resource base and cause the SRAS to shift to the right. NOTE: an increase in business taxes will increase the cost of production and cause a shift of the SRAS to the left. an increase in nominal wages will increase the cost of production and cause a shift of the SRAS to the left.
A firm in a market environment characterized by monopolistic competition is most likely to: have many competitors each following its own product differentiation strategy.
As the name implies, monopolistic competition is a hybrid market structure. The most distinctive factor in monopolistic competition is product differentiation. Although the market is made up of many firms that compose the product group, each producer attempts to distinguish its product from that of the others, and product differentiation is accomplished in a variety of ways.
A decrease in average weekly initial claims for unemployment is most likely indicative of: an economic recovery beginning.
Average weekly initial claims for unemployment insurance is a leading indicator of economic activity, and a decrease in it is an indication of rehiring at the start of a recovery. a decrease in average weekly initial claims for unemployment is a positive leading indicator, indicating that an upturn is coming, not that a peak has been hit.
Which of the following best describes a function of the International Bank for Reconstruction and Development? Providing low interest rate loans to developing countries
Closely affiliated with The World Bank Group, the International Bank for Reconstruction and Development (IBRD) provides low or no-interest loans and grants to developing countries that have unfavorable credit or no access to international credit markets.
Stagflation is best described as an economic situation involving high inflation and high: unemployment.
Declines in short-run aggregate supply bring about stagflation, an economic situation with a combination of high inflation and high unemployment. stagflation, an economic situation with a combination of high inflation and high unemployment, will put downward pressure on GDP growth (low economic growth).
Demand-pull inflation
Demand-pull inflation depends upon the relationship between actual and potential GDP and industrial capacity utilization. The higher the rate of capacity utilization or the closer actual GDP is to potential, the more likely an economy will suffer shortages, bottlenecks, and a general inability to satisfy demand, and hence, price increases. For example, inflation increases due to higher capacity utilization.
the characteristics of MONEY
For money to serve as a medium of exchange, economic agents must have a shared belief in its value and that it will retain its value. Without such shared beliefs, money would not be able to fulfill its role as a store of value, thereby jeopardizing its status as a medium of exchange. in its role as a unit of account, money drastically reduces the number of prices in an economy compared to a barter economy. In a barter economy, prices must be established for a good in terms of all other goods for which it might be exchanged. a high value (rather than low value) relative to its weight is a characteristic of money that enables it to serve as a medium of exchange. Money's high value relative to its weight offers the convenience of wealth portability in fulfilling a variety of transaction needs.
The elasticity of demand for a good is most likely greater when: the adjustment to a price change takes a longer time.
For most goods and services, the long-run demand is much more elastic than the short-run demand. For example, if gas prices rise, consumers cannot quickly change their mode of transportation but will likely do so in the longer run.
with respect to Giffen and Veblen goods
Giffen goods are "inferior," whereas Veblen goods are "high-status" goods. both Giffen goods and Veblen goods demonstrate the possibility of a positively sloping demand curve. The overwhelming nature of the highly negative income effect over the substitution effect is applicable to Giffen goods only. Veblen goods are highly valued, high-priced "status" goods; consumers may tend to buy more of a Veblen good if its price rises.
An increase in both aggregate demand and supply occurs, with aggregate supply increasing more than aggregate demand. The most likely result is a decrease in the: price level.
If both aggregate demand (AD) and aggregate supply (AS) increase, real GDP will increase, but the impact on inflation is not clear unless we know the magnitude of the changes because an increase in AD will increase the price level, but an increase in AS will decrease the price level. If AD increases more than AS, the price level will increase. If AS increases more than AD, as depicted in the graph, the price level will decline.
Over a given period, the price of a commodity falls by 5.0%, and the quantity demanded rises by 7.5%. The price elasticity of demand for the commodity is best described as: elastic.
If demand is elastic, a 1 percent reduction in price increases the quantity sold by more than 1 percent. Therefore, when demand is elastic, the magnitude (ignoring algebraic sign) of the coefficient is greater than one. In this case, price elasticity is: Edpx=%ΔQdx%ΔPx=7.5%−5.0%=−1.5
First-degree price discrimination is best described as pricing that allows producers to increase their economic profit while consumer surplus: is eliminated.
In first-degree price discrimination, the entire consumer surplus is captured by the producer; the consumer surplus falls to zero
a function of the IMF.
Lending foreign currencies on a temporary basis to address balance of payment issues
An increase in current prices will most likely: increase the GDP deflator.
Nominal GDP is defined as the value of goods and services measured at current prices. Real GDP is not affected by price increases, but nominal GDP and the GDP deflator increase with price increases: Real GDPcurrent year = Nominal GDPcurrent year × 100/GDP deflator Real GDPcurrent year = Pbase year × Qcurrent year
As a monetary policy tool, quantitative easing (QE) will most likely help revive an ailing economy in which of the following environments? Declining bank reserves and economic activity
Quantitative easing (QE) is an "unconventional" approach to monetary policy and is operationally similar to open market purchase operations but conducted on a much larger scale. The additional reserves created by central banks in a policy of quantitative easing can be used to buy any assets. The idea is that this additional reserve will kick-start lending, causing broad money growth to expand, which will eventually lead to an increase in real economic activity.
a function of the World Trade Organization.
Regulating cross-border trade relationships on a global scale
In the short run, a firm operating in a perfectly competitive market will most likely avoid shutdown if it is able to earn sufficient revenue to cover which of the following costs? Variable
Shutdown is defined as a situation in which the firm stops production but still confronts the payment of fixed costs in the short run. In the short run, a business can operate at a loss as long as it covers its variable costs even though it is not earning sufficient revenue to cover fixed costs. If variable costs cannot be covered in the short run (P < AVC), the firm will shut down operations and simply absorb the unavoidable fixed costs. marginal cost is the incremental cost of producing one more unit and can be calculated as either (Δtotal cost/Δ quantity) or (Δ total variable cost/Δquantity). in the short run, a business can operate at a loss as long as it covers variable costs even though it is not earning sufficient revenue to cover fixed costs.
The price index that best resolves the substitution bias is the: Fisher index.
The Fisher index is the geometric mean of the Laspeyres and Paasche indexes, and it will therefore display less of a substitution bias than the other two. Both the Laspeyres index and the Paasche index ignore the substitution effect whereby people may substitute higher priced goods or services with cheaper ones. The Laspeyres index uses the historical composition of a basket of goods, making it upward biased relative to the true inflation rate; the Paasche index uses the current composition of the basket with cheaper options replacing more expensive ones, making it downward biased relative to the true inflation rate.
If the domestic currency is trading at a forward premium, then relative to the interest rate of the domestic country, the interest rate in the foreign country is most likely: higher.
The currency with the higher (lower) interest rate will always trade at a discount (premium) in the forward market. The lower interest rate in the domestic country will be offset by the appreciation of the domestic country's currency over the investment horizon.
Money: provides a store of wealth, acts as a unit of account.
The functions of money include being a means of payment, acting as a medium of exchange, and acting as a unit of account. It does not require a double coincidence of wants, as barter does, because it is easily divisible and can act as a medium of exchange.
Assuming all other factors remain unchanged, which of the following changes would most likely cause a simultaneous increase in the participation ratio and a decrease in the unemployment rate -- An increase in the number of people included in the labor force
The participation ratio (or activity ratio) is the ratio of the number of people in the labor force to the total population of working-age people, and the unemployment rate is the ratio of the number of unemployed to the number of people in the labor force. The labor force is the numerator in the participation ratio, and the denominator is the unemployment rate. Therefore, assuming all else remains unchanged, an increase in the number of people included in the labor force would cause the participation ratio to increase and unemployment rate to decrease. NOTES: although a decrease in the total number of unemployed people would decrease the unemployment rate, this would not have a direct effect on the participation rate. although a decrease in the total population of working age people would increase the participation rate if the size of the labor force remained unchanged, this would have no direct effect on the unemployment rate.
