12 - Economics Concepts Flashcards
How is the expansion phase of the business/economic life cycle characterized? 6
- Increasing GDP
- Increasing Inflation
- Increasing Interest Rates
- Decreasing Unemployment
- Consumer demand is rising
- Consumer credit is rising
What investments should be made during the expansion phase?
Short-duration bonds and equities
How is the peak of the business/economic life cycle characterized? 4
- GDP is at its highest
- Interest rates are peaking
- Inflation is peaking
- Unemployment is at its lowest level
What investments should be made at the peak?
- Since interest rates are increasing to cut off inflation, bonds, preferred stocks, and other high-duration or fixed income assets should be sold.
- Equities and hard assets, such as gold and real estate, tend to perform well in the environment.
What are the characteristics of a contraction/recession? 4
- GDP slowing/decreasing
- Inflation decreasing
- Interest rates decreasing
- Unemployment rate is rising
What investments should be made during a contraction/recession?
Equities and hard assets should be sold and reinvested into short-term cash and bonds until the market settles out.
What are the characteristics of a trough? 4
- GDP bottoms out
- Inflation at lowest level
- Interest rates at lowest level
- Unemployment peaking
What investments should be made during a trough?
High duration bonds will tend to perform well as bond yields drop and interest rates continue to fall. Stock purchases late in the cycle should be considered if valuations seem appropriate.
Which of the following statements concerning supply and/or demand is/are true?
(1) If demand increases and supply simultaneously decreases, equilibrium price will rise.
(2) There is an inverse relationship between price and quantity demanded.
(3) If demand decreases and supply simultaneously increases, equilibrium price will fall.
(4) If demand decreases and supply remains constant, equilibrium price will rise.
A. (1), (2), and (3) only B. (1) and (3) only C. (2) and (4) only D. (4) only E. (1), (2), (3), and (4)
A is the answer. (1) is correct because a shift in the demand curve upward and to the right, especially when coupled with a decrease in the supply curve upward to the left, will cause the equilibrium price to rise. (2) is correct because as the price rises, the quantity demanded falls, and as the price falls, the quantity demanded rises. (3) is correct because if the demand curve shifts downward to the left, indicating a decrease in demand, the equilibrium price will fall. This will be especially true if, at the same time, the supply curve shifts downward to the right, indicating an increase in supply. (4) is incorrect because if demand decreases, while supply remains constant, the equilibrium price will fall.
Does the selling of dollar-denominated assets by foreign investors suggest that interest rates might fall or might rise?
Might Rise
Does the decreasing of US government deficits suggest that interest rates might fall or might rise?
Might fall
Does the decreasing rates of inflation suggest that interest rates might fall or might rise?
Might fall
Does the weak credit demand by the private sector of the US economy suggest that interest rates might fall or might rise?
Might fall
What does GNP measure?
The amount of goods and services produced domestically and by US workers in foreign countries.
What does GDP measure?
The amount of goods and services produced in the US
