What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain
Market risk refers to economywide risk created by variations in output. Firms in general have lower sales and profits when output falls. Because all firms are likely to suffer through the downturn, market risk cannot be eliminated by diversification. Firm specific risk is specific to firms or industries and not the entire economy. Since some changes will be good for one industry and bad for another, diversification can reduce firm-specific risk but not market risk.
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All individuals and firms in a country must gain from trade in order for it to be beneficial to the nation
Indicate whether the statement is true or false
If the public takes funds from currency in circulation and deposits them into their checking accounts, the:
a. M1 and M2 money multipliers fall. b. M1 and M2 money multipliers rise. c. M1 and M2 money multipliers do not change. d. M1 money multiplier rises, and the M2 money multiplier falls. e. M1 money multiplier falls, and the M2 money multiplier rises.
The economy’s capacity to produce is defined in such a way that
a) output cannot exceed capacity b) the growth of potential GDP corresponds to the economy’s long run trend c) the economy is always operating at its current potential d) there is always a degree of slack or inefficiency in production, so output is always below capacity e) when workers work overtime, capacity expands
When the production possibilities curve has shifted outward, what has happened?
a. Efficiency has dropped significantly. b. Workers are being underutilized. c. Scarcity has increased. d. Factors of production have changed.