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1 If the revenue, implicit costs and explicit costs of a firm are given by $100
1
If the revenue, implicit costs and explicit costs of a firm are given by $100.000, $30.000 and $50.000 respectively, what is the difference between the accounting profit of the firm and the economic profit of the firm?
- In its meeting on July, 2020 European Central Bank did not change the policy rate but made the following announcement:
“The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”
It is an example of which unconventional policy we discussed in class? Explain how does the policy works.
Expert Solution
1
Given : Revenue= $100.000
Implicit Costs= $30.000
Explicit Costs= $50.000
The main difference between accounting profit and economic profit is accounting profit does not include explicit costs i.e. a payment that is directly made in the production process such as rent, wages, cost of raw materials,etc. Economic profit include both explicit and implicit costs. Implicit Cost is the opportunity cost of the resources used in the production process but can be given up for next best alternative use.
Accounting Profit = Revenue - Implicit Cost
= $100.000-$30.000
= $70.000
Economic Profit = Revenue - Implict Cost- Explicit Cost
= $100.000-$30.000-$50.000
= $20.000
Difference between Accounting Profit and Economic Profit = $70.000-$20.000= $50.000=Explicit Cost
2
It is the example of achieving inflation rate target, by setting up the policy rates in the economy. So, the one policy is being used to achieve the objective of another policy. It is unconventional in nature. Here, key policy rates or interest rates are being kept at the same level, or lower level so that economy achieves the target inflation rate. Though, the interest rate target is different from the inflation rate target.
The policy works in a way that when policy rates or interest rate are maintained at the lower or at the same level, then it helps consumption to increase and investment spending also increases due to the lower cost of borrowing. It increases the aggregate demand and AD curve shifts to the right. It causes the price level to increase and inflation rate increases to converge with the 2% inflation rate target or just below 2%. So, inflation rate target is achieved now.
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