# CFA Econ.txt

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 Author: Anonymous ID: 165548 Filename: CFA Econ.txt Updated: 2012-08-10 10:43:16 Tags: CFA Econ Folders: Description: CFA Econ Show Answers:

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1. Elasticity of Demand
• Price elasticity of demand =
• % Change =
• < 1 = inelastic
• 1 = unit elastic
• > 1 = elastic
2. Cross Elasticity
• Cross elasticity =
• >|.5| implies strong correlation
• Positive implies substitute, negative implies compliment
3. Income elasticity
• income elasticity =
• < 0 = inferior good
• 0<>1 = normal good
• >1 = superior good
4. Elasticity of Supply
elasticity of supply =
5. Four-firm concentration ratio
• Total industry sales made by four largest firms
• below 40% is a fairly competitive market
• greater than 60% indicates oligopoly
6. Herfindahl-Hirschman Index (HHI)
• sum the squared percentage market shares (numbers, not decimals) of the 50 largest firms in an industry (or all if there are less than 50)
• low in a highly competitive industry
• 1000 - 1800 is moderately competitive
• >1800 is not competitive
• max is 10,000 (100^2)
7. Total Product of Labor, Marginal Product, Average Product
• Total Product = total output per unit time
• Marginal Product = TP'
• Average Product = TP/L
8. Implicit Costs
• Opportunity cost to a firm of using its own capital
• Opportunity cost of the time and financial resources of the firm's owners
the ability to produce a good at a lower cost that it can be bought
10. Quota
• Restricts the supply of imported goods
• Benefits domestic producers
11. Quota vs Tariff
Quotas are more harmful because under a quota, the domestic government does not receive any benefit, only domestic producers (and some foreign producers due to higher prices). The foreign producers receive the revenue transfer that would go to the government under a tariff
12. Output Gap
Difference between real and potential GDP
13. Real exchange rate
real exchange rate = nominal exchange rate * domestic price / foreign price
14. Fixed exchange rate regimes, intermediate regimes, flexible regimes
• Fixed regimes: currency unions, dollarized regimes, currency boards, conventional currency pegs
• Intermediate regimes: horizontal bands, crawling pegs, crawling bands
• Flexible regimes: managed and independent floats
15. Vickrey Auction
highest bidder wins, but pays second highest bid as the price
16. Short-run supply curve is the sum of ___
quantities at each price along the marginal cost curves for all firms in a given industry
17. Giffen and Velben goods
• Giffen: inferior goods, demand decreases as price decreases
• Velben: demand increases for these as price increases
• Both have upward sloping demand curves at some point
18. Exchange rate notation - JPY:USD
JPY:USD = USD/JPY
19. Crowding out effect
increasing government spending increases rates, which deters private investment. This is the opposite of the intended effect
20. Sustainable growth rate
sum of the growth rates of productivity and labor force
21. Potential real GDP < actual real GDP indicates
inflation
22. Federal funds rate vs discount rate
• Federal funds rate: rate at which banks borrow from each other
• Discount rate: rate at which banks borrow from the Fed
23. External costs, external benefits
• Externalities are effect a business has on others or the environment (cost would be pollution, benefit would be a scenic garden).
• Since the producer of these costs and/or benefits does not realize them, there is an over-allocation of resources to activities that have external costs and an under-allocation of resources to the opposite
24. Common value auction, private value auction
• Common value auction: item being bid on provides the same benefit to all (mineral rights). Associated with winner's curse - the person who wins has probably overshot the value
• Private value auction: item has different value to different people, and each will only bid what it's worth to them (antique automobile)
25. 3 Factors affecting elasticity of demand
• 1: availability of substitute goods (directly related)
• 2: proportion's of consumers' budgets spent on the good (directly related)
• 3: time since the price change (directly related)
26. Economic profit calculation
when MR=MC=P, economic profit = TR - TC
27. tax incidence
• relative tax each economic actor in the market pays (producers, consumers)
• depends on the shape of the supply/demand curves
28. conditions for price discrimination
• downward sloping demand curve
• two customer groups with different price elasticities for the product
• customer groups cannot trade the product
29. MR vs MRP
• MR: additional revenue from making one more unit
• MRP: additional revenue resulting in one more unit of input
• Example: worker can make 2 units if he works 1 more hour. price is \$15 per unit. MR = 15, MRP = 30
30. Components of Investment
• Investment is money spent on fixed assets and inventory
• Sources: governemnt saving, national saving, foreign borrowing
31. What factors can move the LM curve?
• Money Supply and Price
• LM = M/P
32. Factors that affect the sustainable growth rate
• supply of natural resources
• supply of physical capital
• supply or productivity of labor
33. Neutral rate, Policy rate
• monetary neutral rate = real gdp growth + inflation target
• if policy rate > neutral rate: contractionary
• if policy rate < neutral rate: expantionary
34. "if maintains a balanced budget, then tax increase will"
maintains means spending must also increase, which will increase real GDP since spending multiplier > tax multiplier
35. full employment, zero unemployment
• Full employment: natural level of employment, there will always be some unemployment
• Zero unemployment: not the same as full employment, this has a literal interpretation
36. Core inflation
• does not include food and energy (inelastic demands)
• better measure of change in prices
37. liquidity trap
• Demand for money is highly inelastic, so expanding the money supply does not affect rates (people are protective of their money
• Usually associated with deflation
GDP deflator, CPI
Chained priced index, Laspeyres index
• Fixed basket = CPI = Laspeyres index
• Variable basket = GDP deflator = Chained price index
39. Phillip's equation
• current unemployment = natural unemployment + a*(P - Pe)
• a = positive constant
• P = actual price level
• Pe = expected price level
• trade surplus => more exporting than importing, ^ in X
• trade surplus is the same as current account surplus
41. Anti-dumping restrictions
firms cannot sell mass volumes at a low price just to drive out competition, then raise prices to earn abnormal profits
42. free trade area vs customs union vs common market
• free trade area: member nations remove barriers to import/export among themselves (NAFTA)
• common market: like customs union, but also removes all barriers to movement of labor and capital among members (Australia and New Zealand)
43. Heckshner-Olin model vs Ricardian model
• Ricardian: only considers labor
• H-O: considers labor and capital
44. forward points
• change in exchange rates presented in basis points
• if 6 month forward rate points are -75 and current rate is 1.3500, then future rate will be 1.3425
45. J-curve
currency depreciation will initially increase a trade deficit (short run), the decrease it (long run)
46. indirect currency quote
foreign/domestic
47. marshall-lerner condition vs absorption approach
marshall-lerner: elasticities approach to the balance of trade. trade deficit is more likely to be narrowed by devaluing a nation's currency if demand for imports and exports are both more elastic

absorption approach: saving and investment approach to the balance of trade. Says that national saving must increase relative to domestic investment for

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