decline is that the purchasing power of the consumer has increased. This is known as the real income effect of the price change. Substitution Effect as a result of the price decline, the rational consumer can increase his or her satisfaction or utility by purchasing more of the good whose price has declined and less of the substitutes. This is known as the substitution effect of the price change. durable goods Goods that yield benefits to the owner over a number of future time periods. price elasticity of demand The ratio of the percentage change in quantity demanded to the percentage change in price, assuming that all other factors influencing demand remain unchanged. Also called own price elasticity. marginal revenue The change in total revenue that results from a one-unit change in quantity demanded. income elasticity The ratio of the percentage change in quantity demanded to the percentage change in income, assuming that all other factors influencing demand remain unchanged. cross price elasticity The ratio of the percentage change in the quantity demanded of Good A to the percentage change in the price of Good B, assuming that all other factors influencing demand remain unchanged. Positive: the two products are referred to as substitutes for each other. The higher the cross price elasticity, the closer the substitute relationship. Negative: complementary. heteroscedasticity about the regression line, error terms do not have constant variance. MC=MR
Measurement error random errors in measuring an explanatory variable or the dependent variable. autocorrelation An econometric problem characterized by the existence of a significant pattern in the successive values of the error terms in a linear regression model. multicollinearity a high degree of correlation among explanatory variables in a regression equation. is the mean prediction error, which is to measure the difference between predicted value and actual data. Y t+1 = Y t + w(Y t − Y t ) Foreign exchange risk exposures are of three types: transaction risk exposure, translation risk exposure, and operating risk exposure. transaction risk exposure A change in cash flows resulting from contractual commitments to pay in or receive foreign currency. translation risk exposure An accounting adjustment in the home currency value of foreign assets or liabilities. operating risk exposure A change in cash flows from foreign or domestic sales resulting from currency fluctuations. sterilized interventions Central bank transactions in the foreign exchange market accompanied by equal
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- Spring '14