1 General Economics Flashcards
Which law indicates that supply for an economic product will vary directly with its price?
1.30
The law of supply
Phases of the business cycle
1.30
- Expansion
- Peak
- Contraction
- Trough
GDP & unemployment during an Expansion
1.30
- increasing GDP
- decreasing unemployment rate
GDP & unemployment during a Contraction
1.30
- decreasing GDP
- increasing unemployment
Recession
1.30
Two consecutive quarters of negative GDP growth
(not every contraction is a recession)
Features early in an expansion
(credit, profits, policy, sales)
1.30
- GDP & employment rebounding
- Credit begins to grow
- Profits grow rapidly
- Policy is still stimulative
- Sales improve, inventories low
Features of mid-expansionary phase
1.30
- Growth peaking
- Credit growth strong
- profit growth peaks
- Policy neutral
- Inventories & sales grow; equilibrium reached
Features of late expansionary phase
1.30
- growth moderating
- credit tightens
- earnings under pressure
- Policy contractionary
- inventories grow; sales growth falls
Features of the contraction
1.30
- falling activity
- credit dries up
- profits decline
- policy eases
- inventories & sales fall
Formula for GDP & Real GDP
Y = C + I + G + (X - M)
or Y = C + I + G + NE
GDP = Consumer Spending + Invmt by Industry + Gov Spending + Net Exports
(i.e., Exports – Imports)
Real GDP excludes inflation
Includes income of foreigner workers & firms in the US, excludes Americans abroad.
Price Elasticity
How much demand changes in response to changes in price
In theory, all items are elastic over the long-term
Is gasoline elastic? Why?
Gasoline is inelastic because its quantity changes little in response to price.
How complements (complementary goods) affect supply & demand
1.38
If the price of one decreases, then demand for the other increases
How substitutes affects supply & demand
1.38
If the price of one increases, then demand for the other increases
What is marginal utility?
The additional benefit (utility) derived from consumption of an additional unit of a good
Law of Demand
1.40
The law that states that demand for an economic product will vary inversely with its price.
Fiscal Policy
- Who controls?
- Components?
1.42
Congress controls it.
Tools:
1. Taxation
2. Expenditures
3. Debt management
What fiscal policies stimulate the economy?
1.42
- Lowering taxes
- Increasing spending (eye roll)
- Deficit spending
Three tools of the Fed
1.46
- Discount rate (at which member banks borrow money from the Fed)
- Reserve requirements
- Open market activity
Mandates of the Fed
1.46
Dual mandate:
1. Low unemployment (employment-maxing)
2. Low inflation (“stabilize prices”, CPI)
Also:
- Maintain sustainable long-term growth as measured by GDP (per BIF)
- Maintain financial system stability
- Regulate & supervise banks
- Facilitate payment systems (eg, Fedwire)
What contractionary actions can the Fed take?
1.46
- Increase discount rate
- Increase reserve requirement
- Sell securities on the market
Utility Stocks vs Economic Cycles?
Expansion: Underperform
Peak: Underperform
Contraction: Outperform
Trough: Outperform
Considered a defensive stock. Fixed/regulated/inelastic pricing means they suffer from inflation and can’t pass inflation to consumers.
