WGU C211 Global Business – OA Exam

Suppose that the United States imposes a tariff on avocados imported from Mexico. What impact will this have on the price paid for avocados by United States citizens? - ANS-- The price will increase. Which of the following is a consequence of a country imposing a tariff on imported goods? - ANS-- The demand for foreign produced goods decreases. Suppose that the United States imposes a tariff on salt. What impact might this tariff have on the price for domestic consumers? - ANS-- Consumers will pay a higher price. Applying a tariff to coconuts will have the following effect: - ANS-- Increase the domestic price of coconuts. Which of the following is NOT a restriction to trade? - ANS-- Free trade areas. What is the significant difference between an import quota and a tariff? - ANS-- A tariff raises revenue for the government and an import quota creates surplus for those who obtain licenses to import. Suppose that the price of a good increases (all else held constant). Which of the following would happen along with the change in price? - ANS-- Consumer surplus would decrease. Suppose that Bob goes to the market and is willing to pay $500 for a new chainsaw. Bob is able to find the chainsaw for only $400. Which of the following follows from Bob's circumstance? - ANS-- His consumer surplus is $100. Which statement is true of consumer surplus? - ANS-- Consumer surplus represents value to buyers in excess of the price paid for the product. Which statement is true? - ANS-- Total surplus is the sum of consumer and producer surplus and is graphically represented as the area between the supply and demand curves up to the equilibrium quantity. Suppose that Bob lives in the United States, but has been working in Mexico for the last 5 years. Where is the value of Bob's production counted during the last 5 years? - ANS-- U.S. GNP and Mexico's GDP. Which of the following statements describes gross domestic product (GDP)? - ANS-- GDP is the most used measure of a country's economic wellbeing. Which of the following is an investment included in the gross domestic product (GDP) measure? - ANS-- Spending on new residential construction. Gross Domestic Product (GDP) measures which of the following? - ANS-- Market value of final goods and services produced within a country in a given period of time. Which item is NOT part of GDP? - ANS-- Purchasing a used hairdryer. What is the key distinction between real and nominal GDP? - ANS-- Real GDP measures production not affected by changes in prices while nominal GDP measures production measured at current prices. What is the change in total cost equal to in the marginal cost equation? - ANS-- Marginal cost multiplied by change in quantity. Fixed costs equal: - ANS-- Total costs minus variable costs Economic profit is distinct from accounting profit because: - ANS-- Economic profit incorporates both explicit and implicit costs. Total costs include: - ANS-- Variable costs plus fixed costs. Marginal costs consider: - ANS-- The increase in total cost arising from an extra unit of production. What response best describes the relationship between marginal costs and total costs? - ANS-- Whenever marginal cost is less than average total cost, average total cost is falling. Which statement is true about productivity? - ANS-- The value of marginal product of labor equals wage in a competitive firm. A production function expresses the relationship between: - ANS-- Quantity of resource inputs and product/service outputs. Opportunity costs include: - ANS-- The income the entrepreneur could have earned working for an employer. Economists and decision makers study and then make decisions or judgments based on (select best answer): - ANS-- Marginal analysis. The primary reason that the marginal cost curve declines and then increases is: - ANS-- Firms experience increasing marginal product, then diminishing marginal product. Which of the following statements is accurate? - ANS-- Marginal costs eventually rise with the quantity of output. Consider the following example: A perfectly competitive firm finds that at current production levels marginal cost is greater than marginal revenue. What action should this firm take in order to pursue the maximization of profit? - ANS-- Decrease the target output. A competitive firm is characterized by: - ANS-- Trading of identical products. Competitive firms experience marginal revenue that is: - ANS-- Equal to price. In the short-run, a competitive firm would continue to produce under the following circumstance: - ANS-- Total revenue exceeds total variable costs. What fundamental shape does a demand curve take in a competitive market? - ANS-- Horizontal. For a perfectly competitive firm which condition is true? - ANS-- The demand curve is the same as the marginal revenue curve. Which condition is true for perfectly competitive firms in the long-run? - ANS-- They will exit the market if total revenue is less than total costs. Which statement is true concerning marginal costs? - ANS-- Marginal costs typically decline and then increase with the quantity of output. What rule is used by perfectly competitive firms to determine shut-down in the shortrun? - ANS-- Price is less than average variable costs. What is true of perfectly competitive firms in the long-run? - ANS-- Economic profits will not be achievable. What two market structures have common profit characteristics in the long run? - ANS-- Perfect competition and monopolistic competition. Consider the structure/shape of the demand curve for the various firm types. In what way does a monopoly's demand curve differ from a perfectly competitive firm's demand curve? - ANS-- The monopoly's demand curve is downward sloping and the competitive firm's demand curve is horizontal. Monopolistic firms seek to maximize profit. What condition allows them to achieve this goal? - ANS-- When marginal revenue equals marginal cost. In pursuing the maximization of profit, monopolies set price at a point that is: - ANS-- Above marginal cost. Consider demand for the various firm types. How does a monopoly's demand curve compare to the demand curve for a perfectly competitive firm? - ANS-- It is less elastic. A monopoly's demand curve is: - ANS-- The same as the market demand curve. What is a key characteristic of the demand curve for a monopoly? - ANS-- It is the same as the market demand curve. Which condition is NOT true of monopolies? - ANS-- They are welfare optimizing. What is a key characteristic of a monopoly? - ANS-- One seller. What is the profit maximizing condition for a monopolist? - ANS-- Marginal revenue equals marginal cost. What statement is true about a monopolist's price? - ANS-- Price is above marginal cost. Monopolistic competition is characterized by: - ANS-- Ease of market entry and exit. An incentive to advertise exists for monopolistically competitive firms because: - ANS-- The products they sell are differentiated. Monopolistic competition is characterized by: - ANS-- Many firms selling differentiated products. How does a monopolistically competitive firm achieve some degree of control over its price? - ANS-- Advertising and a differentiated product. In the long-run, how do monopolistically competitive firms garner economic profits? - ANS-- They earn zero economic profits in the long-run. What is true of a monopolistically competitive firm's demand curve? - ANS-- It is less elastic than a perfectly competitive firm. What is the primary goal of a firm in monopolistic competition? - ANS-- Profit maximization. Consider the choice that an oligopolistic firm has to either compete or to cooperate, collude and form a cartel with the only other existing firm in the market. What do game theory and the prisoner's dilemma teach regarding this firm's choice? - ANS-- It is difficult to maintain cooperation. Consider the prisoner's dilemma example. In what way are an oligopoly and the prisoner's dilemma similar in nature? - ANS-- Both depict the difficulty of maintaining cooperative agreements. Why is studying the prisoner's dilemma applicable to business? - ANS-- It demonstrates the value of mapping out a potential strategy given the actions of rivals. Think of the way in which the prisoner's dilemma is resolved. In what way does selfinterest influence each prisoner's decision in the prisoner's dilemma? - ANS-- Both prisoners will likely confess. How do self-interest and rivalry in an oligopoly affect each firm's market decisions? - ANS-- Collusion will fail and self-interest will prevail in the long-run. In the prisoner's dilemma, what is the likely outcome? - ANS-- Both prisoners will confess. What can we learn from game theory and the prisoner's dilemma about oligopolies? - ANS-- Strategy is affected by rivalries. What is International Business? - ANS-- a business (firm) that engages in international (cross-border) economic activities What is International Business - ANS-- the action of doing business abroad What is Global Business? - ANS-- business around the globe What to activities does Global Business include? - ANS-- international (cross-border) activities covered by traditional IB books; domestic business activities Base of the pyramid - ANS-- making less than $2,000 a year. BRIC - ANS-- Brazil, Russia, India, and China Emerging economies (emerging markets) - ANS-- countries that are starting to emerge as new players in the world economy. Foreign direct investment (FDI) - ANS-- direct investment in, control, and management of value-added activities in other countries. Gross domestic product (GDP) - ANS-- A nation's total output of goods and services Gross national product (GNP) - ANS-- GDP plus income from nonresident sources abroad Multinational enterprise (MNE) - ANS-- a firm that engages in foreign direct investment by directly investing in, controlling, and managing value-added activities in other countries. Purchasing power parity (PPP) - ANS-- an adjustment to reflect the differences in cost of living in various countries. Reverse innovation - ANS-- an innovation that is adopted first in emerging economies and then diffused around the world What two views determines the success and failure of firms around the globe? - ANS-- the institution-based view; the resource-based view Scenario planning - ANS-- Planning for multiple high or low risk scenarios. Semiglobalization - ANS-- avoids total isolation and total globalization and calls for more than one-way for doing business around the globe Balance of trade - ANS-- the aggregation of buying (importing) and selling (exporting) by both sides leads to the country-level trade surplus or deficit Why do nations trade? - ANS-- some firms in one nation generate valuable, unique, and hard-to-imitate exports that firms in other nations find it beneficial to import; "rules of the game," different laws and regulations governing international trade aim to share gains from trade. Balance of trade - ANS-- The aggregation of buying (importing) and selling (exporting) by both sides leads to the country-level trade surplus or deficit. Classical theories include - ANS-- (1) mercantilism, (2) absolute advantage, and (3) comparative advantage Modern theories include - ANS-- product life cycles, strategic trade, and "diamond." Classical Trade theories include - ANS-- Modern theories include (1) product life cycles, (2) strategic trade, and (3) "diamond." Absolute advantage - ANS-- being more efficient than anyone else in the production of any good or service Comparative advantage - ANS-- the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. Factor endowments: - ANS-- the extent to which different countries possess various factors such as labor, land, and technology Factor endowment theory (or Heckscher-Ohlin theory) - ANS-- the proposition that nations will develop comparative advantage based on their locally abundant factors. First-mover advantages - ANS-- advantages that first entrants enjoy and do not share with late entrants. Free trade - ANS-- the idea that free market forces should determine how much to trade with little (or no) government intervention. Mercantilism - ANS-- Classical trade theory that viewed international trade as a zero-sum game. Modern trade theories - ANS-- the major theories typically studied consist of product life cycle, strategic trade, and national competitive advantage Opportunity cost - ANS-- given the alternatives, the cost of pursuing one activity at the expense of another activity. Product life cycle theory - ANS-- An economic theory that accounts for changes in the patterns of trade over time Resource mobility - ANS-- the assumption that a resource removed from one industry can be moved to anothert Strategic trade policy - ANS-- economic policies that provide companies a strategic advantage through government subsidies. Subsidy - ANS-- Government payments to domestic firms. Theory of Absolute Advantage (Adam Smith) - ANS-- the economic advantage one nation enjoys that is absolutely superior to other nations. Theory of comparative advantage - ANS-- the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. Theory of Mercantilism - ANS-- the belief that held that the wealth of the world (measured in gold and silver) was fixed and that a nation that exported more and imported less would enjoy the net inflows of gold and silver and thus become richer. Theory of national competitive advantage of industries (or diamond theory) - ANS-- The theory that the competitive advantage of certain industries in different nations depends on four aspects that form a "diamond." Net impact of various tariffs and NTBs - ANS-- the whole nation is worse off while certain special interest groups (such as certain industries, firms, and regions) benefit. What do economic arguments against free trade center on? - ANS-- protectionism and infant industries What do political arguments against free trade focus on? - ANS-- national security, consumer protection, foreign policy, and environmental and social responsibility. Administrative policy - ANS-- bureaucratic rules that make it harder to import foreign goods Antidumping duty - ANS-- costs levied on imports that have been "dumped" (selling below costs to "unfairly" drive domestic firms out of business). Deadweight cost - ANS-- net losses that occur in an economy as the result of tariffs Import quota - ANS-- restrictions on the quantity of imports for specific period of time Import tariff - ANS-- a tax imposed on imports Local content requirements - ANS-- a tax imposed on imports Nontariff barrier (NTB) - ANS-- laws, selective enforcement of laws, government purchasing policies and other means used intended to place products and investments of companies based in other countries at a competitive disadvantage compared to local companies. Resource mobility - ANS-- assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry. Trade embargo - ANS-- politically motivated trade sanctions against foreign countries to signal displeasure. Voluntary export restraint: - ANS-- a superficial policy to show that exporting countries voluntarily agree to restrict their exports. What is FDI? - ANS-- directly investing in activities that control and manage value creation in other countries What are MNE's - ANS-- firms that engage in FDI Downstream vertical FDI - ANS-- expanding through the stages of production and distribution toward distribution. FDI flow - ANS-- the amount of FDI moving in a given period (usually a year) in a certain direction. FDI inflow - ANS-- inbound FDI moving into a country in a year. FDI outflow - ANS-- outbound FDI moving out of a country in a year. FDI stock and flow trends - ANS-- total accumulation of inbound FDI in a country or outbound FDI from a country Foreign Direct Investment (FDI) - ANS-- directly investing in activities that control and manage value creation in other countries. Foreign portfolio investment (FPI) - ANS-- investment in a portfolio of foreign securities such as stocks and bonds that do not entail the active management of foreign assets. Horizontal FDI - ANS-- when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. Management control rights - ANS-- the rights to appoint key managers and establish control mechanisms. Vertical FDI - ANS-- a firm through FDI moves upstream or downstream in different value chain stages in a host country Internalization - ANS-- Internalization Contagion (imitation) effect - ANS-- Local rivals, after observing foreign technology, may recognize its feasibility and strive to imitate it. Demonstration effect(sometimes also called the contagion or imitation) - ANS-- local rivals, after observing technology, may recognize its feasibility and strive to imitate it. Free market - ANS-- FDI, unrestricted by government intervention, will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services. Pragmatic Nationalism - ANS-- views FDI as having both pros and cons and only approving FDI when its benefits outweigh costs. Radical view - ANS-- treats FDI as an instrument of imperialism and as a vehicle for exploitation of domestic resources, industries, and people by foreign capitalists and firms. Technology spillover - ANS-- foreign technology diffused domestically that benefits domestic firms and industries. Expropriation - ANS-- confiscating foreign assets. Obsolescing bargain - ANS-- the deal struck by MNEs and host governments which change their requirements after the initial FDI entry. Sunk costs - ANS-- the MNE has already invested substantial sums of resources and often has to accommodate some new demands. Sovereign wealth fund: - ANS-- A state owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets. What do industries primed for collusion tend to have? - ANS-- a smaller number of rivals, a price leader, homogeneous products, high entry barriers, and high market commonality (mutual forbearance). Antitrust laws - ANS-- laws that attempt to curtail anticompetitive business practices. Capacity to punish - ANS-- A firm that has sufficient resources to deter and combat defection. Cartel - ANS-- an entity that engages in output and price-fixing involving multiple competitors. Collusion - ANS-- collective attempts between competing firms to reduce competition. Competitive Dynamics - ANS-- the actions and responses undertaken by competing firms. Competition policy - ANS-- determines the institutional mix of competition and cooperation that gives rise to the market system. Competitor analysis - ANS-- the process of anticipating a rivals' actions in order to both revise a firm's plan and prepare to deal with rivals' responses. Concentration ratio - ANS-- the percentage of total industry sales accounted for by the top four, eight, or twenty firms. Cross-market retaliation - ANS-- the ability of a firm to expand in a competitor's market if the competitor attacks in its original market. Explicit collusion - ANS-- the result of firms directly negotiating output and pricing and dividing markets. Game theory - ANS-- a branch of mathematics that studies the interactions between two competing parties. Market commonality - ANS-- the overlap between two rivals' markets. Multimarket competition - ANS-- when firms engage the same rivals in multiple markets. Mutual forbearance - ANS-- an act of strategic deterrence in which multimarket firms respect their rivals' spheres of influence in certain markets, and their rivals reciprocate, leading to tacit collusion. Price leader - ANS-- a firm that has a dominant market share and sets "acceptable" prices and margins in the industry. Prisoners' dilemma - ANS-- a type of game in which the outcome depends on two parties deciding whether to cooperate or to defect. Tacit collusion - ANS-- the result of firms indirectly coordinating actions by signaling their intention to reduce output and maintain pricing above competitive levels. Trust - ANS-- another name for a cartel because members have to trust each other to honor agreements. Antitrust policy - ANS-- government policies designed to combat monopolies and cartels. Antidumping laws - ANS-- laws intended to protect domestic firms from predatory pricing by foreign competitors. Collusive price setting - ANS-- Collusive price setting Competition policy - ANS-- the way in which a company determines the institutional mix of competition and cooperation, which gives rise to the market system. Dumping - ANS-- an attempt by an exporter to monopolize a market by selling below cost abroad, and then raising prices to eliminate a competitor. Predatory pricing - ANS-- an attempt to monopolize a market by setting prices below cost and intending to raise prices to cover losses in the long run after eliminating rivals. Resource similarity - ANS-- the extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those of the focal firm. three main types of attacks - ANS-- thrust, feint, and gambit What are counterattacks are driven by - ANS-- awareness, motivation, and capability Attack - ANS-- an initial set of actions to gain competitive advantage. Counterattack - ANS-- A set of actions in response to an attack. Feint - ANS-- a firm's attack on a focal arena important to a competitor but not the attacker's true target area. Gambit - ANS-- to withdraw from a low-value market to attract rivals to divert resources into it and then to capture a high-value market. Thrust - ANS-- the classic frontal attack with brute forces. Blue Ocean Strategy - ANS-- Blue Ocean Strategy Contender strategy - ANS-- this strategy centers on a firm engaging in rapid learning and then expanding overseas. Defender strategy - ANS-- leveraging local assets in areas in which MNEs are weak. Dodger strategy - ANS-- this strategy centers on cooperating through joint ventures (JVs) with MNEs and sell-offs to MNEs. Extender strategy - ANS-- this strategy centers on leveraging homegrown competencies abroad. Balance of payments - ANS-- a country's international transaction statement. Bandwagon effect - ANS-- the result of investors moving as a herd in the same direction at the same time. Capital flight - ANS-- a phenomenon in which a large number of individuals and companies exchange domestic currencies for a foreign currency. Clean (or free) float - ANS-- a pure market solution to determine exchange rates. Dirty (or managed) float - ANS-- the common practice of determining exchange rates through selective government intervention. fixed rate policy - ANS-- fixing the exchange rate of a currency relative to other currencies. foreign exchange rate - ANS-- the price of one currency in terms of another. Floating (or flexible) exchange rate policy - ANS-- the willingness of a government to let the demand and supply conditions determine exchange rates. International Monetary Fund (IMF) - ANS-- an international organization of 185 member countries that was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment. Peg - ANS-- a stabilizing policy of linking a developing country's currency to a key currency. Purchasing power parity - ANS-- a theory that suggests that in the absence of trade barriers (such as tariffs), the price for identical products sold in different countries must be the same. Target exchange rates (or crawling band) - ANS-- a limited policy of intervention, occurring only when the exchange rate moves out of the specified upper or lower bounds. Bretton Woods system - ANS-- a system in which all currencies were pegged at a fixed rate to the U.S. dollar.() Gold standard - ANS-- a system in which the value of most major currencies was maintained by fixing their prices in terms of gold, which served as the Common denominator.() Post-Bretton Woods system - ANS-- a system of flexible exchange rate regimes with no official common denominator. (1973-present). Quota - ANS-- the financial contribution, capacity to borrow, and voting power of IMF member countries that is based broadly on its relative size in the global economy. Bid rate - ANS-- the price offered to buy a currency. Currency hedging - ANS-- a transaction that protects traders and investors from exposure to the fluctuations of the spot rate. Currency risks - ANS-- the fluctuations of the foreign exchange market. Currency swap - ANS-- a foreign exchange transaction in which one currency is converted into another in Time 1, with an agreement to revert it back to the original currency at a specific Time 2 in the future. Foreign exchange market - ANS-- a market where individuals, firms, governments, and banks buy and sell foreign currencies. Forward discount - ANS-- when the forward rate of one currency relative to another currency is higher than the spot rate. Forward premium - ANS-- when the forward rate of one currency relative to another currency is lower than the spot rate. Forward transaction - ANS-- a foreign exchange transaction in which participants buy and sell currencies now for future delivery, typically in 30, 90, or 180 days, after the date of the transaction. Moral hazard - ANS-- refers to recklessness when people and organizations (including governments) do not have to face the full consequences of their actions. Offer rate - ANS-- the price offered to sell a currency. Spot transaction - ANS-- the classic single-shot exchange of one currency for another. Spread - ANS-- the difference between the offered price and the bid price. Strategic hedging - ANS-- spreading out activities in a number of countries in different currency zones to offset the currency losses in certain regions through gains in other regions. Currency board - ANS-- a monetary authority that issues notes and coins convertible into a key foreign currency at a fixed exchange rate. key functions of institutions - ANS-- reduce uncertainty, curtail transaction costs, and combat opportunism Cognitive pillar - ANS-- the internalized, taken-for-granted values and beliefs that guide individual and firm behavior. Formal institutions - ANS-- laws, regulations, and rules. informal institutions - ANS-- norms, cultures, and ethics Institutional framework - ANS-- made up of formal and informal institutions governing individual and firm behavior. Institution-based view - ANS-- requires firms to constantly monitor, decode, and adapt to the changing rules of the game to survive and prosper. Institutions - ANS-- "the rules of the game." Institutional transitions - ANS-- fundamental and comprehensive changes introduced to the formal and informal rules that affect firms as players. Normative pillar - ANS-- how the values, beliefs, and actions of other relevant players—collectively known as norms —influence the behavior of local individuals and firms. Regulatory pillar - ANS-- coercive power of governments. Institutional transitions - ANS-- "fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect organizations as players." Opportunism - ANS-- defined as self-interest seeking. Transaction costs - ANS-- defined as costs associated with economic transactions—or more broadly, costs of doing business. What is an institution based view of Global Business? - ANS-- Proposition 1: Managers and firms rationally pursue their interests and make choices within formal and informal institutional constraints in a given institutional framework. Proposition 2: When formal constraints are unclear or fail, informal constraints will play a larger role. Communist totalitarianism - ANS-- centers on a communist party. Democracy - ANS-- political system in which citizens elect representatives to govern the country on their behalf. Political risk - ANS-- risk associated with political changes that may negatively impact domestic and foreign firms. Political system - ANS-- refers to the rules of the game on how a country is governed politically. Right-wing totalitarianism - ANS-- characterized by its intense hatred of communism. Theocratic totalitarianism - ANS-- the monopolization of political power in the hands of one religious party or group. Totalitarianism (dictatorship) - ANS-- defined as a political system in which one person or party exercises absolute political control over the population. Tribal Totalitarianism - ANS-- one tribe or ethnic group (which may or may not be the majority of the population) monopolizing political power and oppressing other tribes or ethnic groups. Political Risk - ANS-- risk associated with political changes that may negatively impact domestic and foreign firms. Civil Law - ANS-- uses comprehensive statutes and codes as a primary means to form legal judgments. Common law - ANS-- shaped by precedents and traditions from previous judicial decisions. Copyrights - ANS-- the exclusive legal rights of authors and publishers to publish and disseminate their work. Intellectual property - ANS-- intangible property that results from intellectual activity (such as books, videos, and websites). Intellectual property rights (IPRs) - ANS-- rights associated with the ownership of intellectual property. IPRs primarily include rights associated with (1) patents, (2) copyrights, and (3) trademarks. Legal system - ANS-- the rules of the game on how a country's laws are enacted and enforced. Patents - ANS-- legal rights awarded by government authorities to inventors of new products or processes, who are given exclusive rights to derive income from such inventions through activities such as manufacturing, licensing, or selling. Piracy - ANS-- The unauthorized use of IPRs is widespread, ranging from unauthorized sharing of music files to deliberate counterfeiting of branded products. Property rights - ANS-- The legal rights to use an economic property (resource) and to derive income and benefits from it. Theocratic law - ANS-- A legal system based on religious teachings. Trademarks - ANS-- the exclusive legal rights of firms to use specific names, brands, and designs to differentiate their products from others. Command economy . - ANS-- Under this system, all factors of production should be government or state-owned and controlled, and all supply, demand, and pricing are planned by the government. Economic system - ANS-- the rules of the game on how a country is governed economically. Market economy - ANS-- system characterized by the "invisible hand" of market forces: government takes a hands-off approach known as the laissez faire. Mixed economy - ANS-- an economic system that has elements of both a market economy and a command economy State-owned enterprises (SOEs)—firms that are at least 10% owned by the state. - ANS-- irms that are at least 10% owned by the state. A Sovereign wealth fund (SWF) is - ANS-- a state owned investment fund. That does the market transition debate pertains to - ANS-- how to make the transitions work in a most effective and least disruptive way. Moral hazard - ANS-- recklessness when people and organizations (including firms and governments) do not have to face the full consequences of their actions. Path dependency - ANS-- the present choices of countries (as well as firms and individuals) are constrained by the choices made previously. Washington Consensus - ANS-- view centered on the unquestioned belief in the superiority of private ownership over state ownership in economic policymaking that is often spearheaded by two Washington-based international organizations: the International Monetary Fund and the World Bank. What is the aggregation of importing and exporting that leads to the county-level trade surplus or deficit? - ANS-- Balance of Trade What are the critical features of the product life cycle? - ANS-- New: In the first stage, production of a new product (such as a TV) that commands a price premium will concentrate in the United States, which exports to other developed nations. Maturing: In the second, maturing stage, demand and ability to produce grow in other developed nations (such as Australia and Italy), so it is now worthwhile to produce there. Standardized: In the third stage, the previously new product is standardized (or commoditized). Thus, much production will now move to low-cost developing nations, which export to developed nations. What is strategic trade theory? - ANS-- strategic intervention by governments in certain industries can enhance their odds for international success. Strategic Trade Policy - ANS-- Government policy that provides companies a strategic advantage in international trade through subsidies and other supports. What determines the supply and demand of foreign exchange? - ANS-- Relative price differences & PPP, Interest rates and monetary supply, A country's rate of inflation, Productivity and balance of payments Floating rate - ANS-- A government policy to let supply-and-demand conditions determine exchange rates. Fixed rate - ANS-- A government policy to set the exchange rate of a currency relative to other currencies. Benefits of a peg policy - ANS-- stabilizes the import and export prices for developing countries, many countries with high inflation have pegged their currencies to the dollar in order to restrain domestic inflation Strategic hedging - ANS-- spreading out activities in a number of countries in different currency zones to offset the currency losses in certain regions through gains in other regions Currency Hedging - ANS-- A transaction that protects traders and investors from exposure to the fluctuations of the spot rate. How do institutions reduce uncertainty? - ANS-- By signaling which conduct is legitimate and which is not. institution-based view - ANS-- focuses on the dynamic interaction between institutions and firms, and considers firm behaviors as the outcome of such an interaction Common law - ANS-- shaped by precedents and traditions from previous judicial decisions. What is an indifference curve? - ANS-- curve that shows consumption bundles that give the consumer the same level of satisfaction. What are the properties of an indifference curve? - ANS-- Higher indifference curves are preferred to lower ones, Indifference curves are downward sloping, Indifference curves do not cross, Indifference curves are bowed inward What does the slope of an indifference curve reflect? - ANS-- the rate at which the consumer is willing to substitute one good for the other What is the marginal rate of substitution? - ANS-- the rate at which the consumer is willing to trade off one good for the other. What is a budget constraint show? - ANS-- combinations of goods the consumer can afford given her income and the prices of the goods. Income Effect - ANS-- the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve What two graphical elements are needed in order to determine a consumer's optimal point of consumption? - ANS-- the consumer's budget constraint, consumer's preferences When does the the slope of the indifference curve equals the slope of the budget constraint. - ANS-- consumer's optimal point of consumption How is marginal cost derived? - ANS-- Marginal Cost = Change in Total Cost / Change in Quantity Total cost is made up of what? - ANS-- Variable Costs and Fixed Costs How does a firm determine to shut down in the short-run? - ANS-- the firm shuts down if the revenue that it would earn from producing is less than its variable costs of production. What is a price taker? - ANS-- Firms that take or accept the market price and have no ability to influence that price How does a price taker maximize profit? - ANS-- a firm chooses a quantity of output such that marginal revenue equals marginal cost What type of firms are price takers? - ANS-- competitive firms How is the demand curve for a perfectly competitive firm distinct from the demand curve for a monopolistic market? - ANS-- Because competitive firms face horizontal demand curves, Because a monopoly firm faces the downward-sloping market demand curve How does a monopoly maximizes profit - ANS-- choosing the quantity at which marginal revenue equals marginal cost expansionary fiscal policy - ANS-- Increase government spending and lower taxes Goals of Expansionary Fiscal Policy - ANS-- Lower recession and unemployment, increase aggregate demand Results of Expansionary Fiscal Policy - ANS-- Increase money supply ,increase aggregate demand Contractionary Fiscal Policy - ANS-- Reduce spending and raise taxes Goals of Contractionary Fiscal Policy - ANS-- Lower inflation and lower aggregate demand Results of Contractionary Fiscal Policy - ANS-- Lower money supply and lower aggregate demand Automatic Stabilizers - ANS-- As real GDP expands when the economy is booming, personal income and corporate income increase. Income tax and corporate tax also increase. Fiscal Policy Problems - ANS-- Timing, political considerations, crowding out effect Crowding-out effect - ANS-- when the government finances its spending by selling bonds in what is known as public borrowing. This borrowing will crowd out private investment due to an increase in interest rates. Interest Rates - ANS-- The price paid for the use of money What determines interest rates - ANS-- money supply, money demand Who determines the supply of money? - ANS-- The Fed An increase in the interest rate - ANS-- raises the cost of holding money, reduces the quantity of money demanded Equilibrium in the money market - ANS-- Quantity of money demanded exactly balances the quantity of money supplied Tools of Monetary Policy - ANS-- Open market operations (OMOs), reserve ratio, discount rate The Fed purchases bonds and securities - ANS-- Money Supply Increases The Fed sells bonds and securities. - ANS-- Money Supply Decreases The reserve ratio - ANS-- The amount of money banks set aside Reserve ratio goes down - ANS-- Money Supply Goes Up Reserve ratio goes up - ANS-- Money supply goes down Discount Rate - ANS-- The interest rate the Fed charges banks on short term loans Discount rate goes down - ANS-- Banks' borrowing & lending↑ → MS↑ Discount rate goes up - ANS-- Banks' borrowing & lending↓ → MS↓ Expansionary Monetary Policy - ANS-- Open market purchases, reduction in reserve requirements and reduction in the discount rate Contractionary Monetary Policy - ANS-- Open market sales, increase reserve requirements and increase the discount rate The Federal Funds Rate - ANS-- The interest rate banks charge one another for overnight loans. What determines the The Federal Funds Rate - ANS-- Money demand and money supply Total demand for money curve - ANS-- downward sloping Supply of money - ANS-- Vertical line What is the financial environment in which exchange rates and payments for goods and services are conducted? - ANS-- International monetary system What is the easiest method for nonfinancial companies use to handle currency fluctuations? - ANS-- Currency diversification What are two polar types of economies? - ANS-- Centrally planned, market In addition to encouraging efficiency, why might a government intervene in a market? - ANS-- To promote equality Which condition applies when a firm decides to temporarily shut down? - ANS-- Average variable costs are above the price What will happen to the market price and quantity in the short run if there is an increase in market demand in a perfectly competitive market? - ANS-- The equilibrium price will increase, and the equilibrium quantity will increase. Which fiscal policy would be most effective at raising consumer spending and expanding aggregate demand? - ANS-- enacting a permanent income tax cut What effect does implementing a new tariff have on the government that implements it? - ANS-- Tax revenue increases