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BEC > 5 Macroeconomics & Globalization > Flashcards

5 Macroeconomics & Globalization Flashcards

1
Q

What is a recession (contraction)?

A

A period during which real GDP falls and unemployment rises.

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2
Q

What is a trough?

A

When economic activity reaches its lowest point.

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3
Q

What is a recovery (expansion)?

A

When output and employment rise. Eventually, the price level also rises.

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4
Q

What are possible causes of recessions or troughs?

A
  • when consumer confidence declines
  • a miscalculation in fiscal or monetary policy by the government
  • a major default triggers a cascade of confidences leading to reduced lending and consumption
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5
Q

What is a leading economic indicator?

A

A forecast of future economic trends.

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6
Q

What are some examples of leading economic indicators?

A
  • the average workweek for production workers
  • new orders for consumer goods & materials
  • stock prices
  • new orders for nondefense capital goods
  • building permits for houses
  • the money supply
  • index of consumer indications
  • the spread between short-term and long-term interest rates
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7
Q

What are two leading economic indicators in which a change in either suggest a future change in real GDP in the opposite direction?

A
  1. initial claims for unemployment insurance - because more people out of work indicates slowing business activity
  2. vendor performance - because vendors have slack time and are carrying high levels of inventory
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8
Q

What is a lagging indicator?

A

An indicator that changes after the change in economic activity has occurred.

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9
Q

What are examples of lagging indicators?

A
  • average duration of employment
  • commercial and industrial loans outstanding
  • average prime rate charged by the banks
  • change in the consumer price index for services
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10
Q

What is a coincident indicator?

A

An indicator that changes at the same time as the change in the economic activity.

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11
Q

What are examples of coincident indicators?

A
  • industrial production
  • manufacturing and trade sales
  • personal income minus transfer payments
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12
Q

What is inflation?

A

A sustained increase in the general level of prices. The reported rate of inflation is therefore an average of the increase across all prices in the economy.

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13
Q

What is a price index?

A

A measure of the price of a market basket of goods and services in one year compared with the price in a designated base year. By definition, the index for the base year is 100.

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14
Q

What is the calculation for rate of inflation?

A

Current-year price index - prior-year price index / prior-year price index

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15
Q

What is the consumer price index (CPI)?

A

It is the most common price index for adjusting nominal GDP. It measures changes in the general price level by a pricing of items on a typical urban household shopping list.

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16
Q

What is the calculation for consumer price index (CPI)?

A

(cost of market basket in current year / cost of market basket in base year) x 100

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17
Q

How are monetary amounts compared considering inflation?

A

To compare two monetary amounts in constant dollars, they must be deflated using the appropriate price index. The difference then must be divided by the prior period’s amount.

Ex - (2021 amount / 2021 CPI) - (2022 amount / 2022 CPI) = an increase or decrease adjusted for inflation

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18
Q

What is real vs nominal income?

A

Nominal income is money received by a consumer as wages, interest, rent, and profits. Real income is the purchasing power of the income received. Ex - nominal income is a salary of $64,000, due to inflation real income may be only $59,000 as that is the purchasing power of the income received.

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19
Q

What happens when the rate of increase in nominal income is less than the inflation rate? Ex - you get a 4% raise but inflation has risen by 6%

A

Real income decreases

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20
Q

What are the macroeconomic effects of inflation?

A
  • unexpected inflation can cause economic chaos

- the efficiency of economic relationships relies on stable pricing

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21
Q

What are the principal effects of inflation on financial reporting?

A

inflation affects inventory, COGS, and equipment and depreciation

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22
Q

What affect does inflation have on an LIFO inventory accounting system?

A

In a period of rapidly rising prices, LIFO increases COGS and decreases operating income, thereby decreasing income tax liability.

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23
Q

What affect does inflation have on an FIFO inventory accounting system?

A

In a period of rising prices COGS consists of lower inventory costs, thereby increasing operating income and increasing income tax liability.

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24
Q

What affect does inflation have on depreciation expense?

A

The depreciable base of a long-lived asset is its historical cost. During a period of rising prices, depreciation expense is lower at historical cost than if it were stated in terms of replacement cost. Reported operating income is higher in the current period, but replacing such assets as they are retired is more expensive.

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25
Q

What are the two types of inflation?

A

Demand-pull inflation and cost-push inflation

26
Q

What is demand-pull inflation?

A

Inflation caused by an excess of demand over supply

27
Q

What is cost-push inflation?

A

Inflation caused by increased per-unit production costs that are passed on to consumers as higher prices. Increases in materials costs are the principal cause, particularly when they occur suddenly in the form of a supply shock.

28
Q

What is deflation?

A

Deflation is a sustained decrease in the general price level. It is caused by conditions that are opposite of those causing demand-pull and cost-push inflation.

29
Q

What is the calculation for unemployment rate?

A

(number of unemployed / size of labor force ) x 100

30
Q

The unemployment denominator, labor force, excludes which individuals?

A
  • under the age of 16
  • incarcerated or institutionalized
  • homemakers, full-time students, and retirees
  • discourage workers - workers who are unemployed and able to work but are not actively seeking work
31
Q

The labor force makes no distinction between?

A

full and part-time workers, they are considered equally employed

32
Q

Unemployment statistics can be distorted by?

A
  • workers who falsely claim to be seeking work

- those unemployed in the underground economy (cash-only basis workers)

33
Q

What are the three types of unemployment?

A
  1. frictional unemployment
  2. structural unemployment
  3. cyclical unemployment
34
Q

What is frictional unemployment?

A

The amount of unemployment caused by the normal workings of the labor market. This includes:

  • those moving to another location
  • stopping work temporarily to obtain further education and training
  • those who are between jobs
35
Q

What is structural unemployment?

A

This results when the composition of the workforce does not match the need. It can be a result of changes in consumer demand or technology or the available jobs are not in the location where unemployed workers live.

36
Q

What is cyclical unemployment?

A

It is likely to occur in the recession phase of he business cycle. It is directly related to the level of an economy’s output. It is also called deficient-demand unemployment. As consumers spend less, firms reduce production and lay off workers.

37
Q

What does the natural rate of unemployment consist of?

A

Frictional and structural employment combined, cyclical unemployment is omitted.

38
Q

What do economists consider full employment?

A

When the economy is at the natural rate of unemployment, thus full employment is not “100% employment”. The rate varies over time because of demographic and institutional changes in the economy.

39
Q

What is the economic cost of unemployment?

A

The lost value to the economy. The goods not produced and services not provided by idle workers can never be regained.

40
Q

What are the social costs of unemployment?

A
  • loss of skills
  • personal and family stress
  • violence and other crime
  • social upheaval
41
Q

What is the Phillips Curve?

A

The inverse relationship between inflation and unemployment. When the unemployment rate is low, firms have to pay higher wages to attract workers, thereby increasing labor costs and product prices. Thus the higher the unemployment rate the lower the inflation. The Phillips curve applies only in the short-term. In the long-term inflationary policies do not decrease unemployment.

42
Q

What is fiscal policy?

A

The use of taxation and expenditures to reach macroeconomic objectives

43
Q

What is a discretionary fiscal policy?

A

A policy that involves spending that is under control of individuals within the government, such as contracting for new weapons systems.

44
Q

What is a nondiscretionary fiscal policy?

A

A fiscal policy enacted in law. Ex - Social Security must be made regardless of the consequence or source of funding because Congress has made it a legal requirement.

45
Q

What are three tools of fiscal policy used by the government?

A
  1. tax policy
  2. government spending (highway maintenance, military buildup, etc.)
  3. transfer payments (welfare, food stamps, unemployment comp, etc.)
46
Q

What is the multiplier effect?

A

This occurs because each dollar spent by a consumer in the economy becomes another consumer’s income, and so forth.

47
Q

What is marginal propensity to consume (MPC)?

A

The increase in the consumption for every additional dollar consumers receive in income.

48
Q

If a recessionary gap exists what type of fiscal policies will the government adopt?

A

Expansionary policies - decreasing taxes, increased transfer payments - giving consumers more disposable income. Government can increase its spending, increasing demand for goods and services from the private sector. Federal deficit increases under expansionary policies.

49
Q

If an inflationary gap exists what type of fiscal policies will the government adopt?

A

Contractionary policies - to reduce aggregate demand. Taxes can be increased and transfer payments can be decreased - giving consumers less disposable income. Government can decrease its spending reducing demand for good and services from the private sector. Federal deficit decreased under contractionary policies.

50
Q

What is an inflationary gap?

A

The amount by which the economy’s aggregate expenditures at the full-employment GDP exceed those necessary to achieve full-employment GDP

51
Q

What are the two determinants of the interest rate on a loan?

A
  1. overall economic conditions as reflected in the prime rate, which is the rate to the most credit-worthy customers
  2. the creditworthiness of the borrower
52
Q

What is a nominal interest rate?

A

The rate stated on the loan

53
Q

What is the real interest rate?

A

The nominal rate minus the rate of inflation that the lender expects over the life of the loan.

54
Q

What is the velocity of money?

A

The number of times each unit of currency is used to purchase a final product in a given period.

55
Q

What is the velocity of money calculation?

A

nominal GDP / money supply

56
Q

What is fractional reserve banking?

A

The practice of prohibiting banks from lending all the money they receive on deposit. The required reserve ratio is the percentage of each dollar deposited that a bank is required to either keep in its vault or deposit with the Federal Reserve Bank in its district. The minimum that must be held by law is required reserves.

57
Q

What are the Fed’s three tools of monetary policy?

A
  1. open-market operations
  2. the required reserve ratio
  3. the discount rate (equals the rate charged by the Fed on loans to member banks)
58
Q

What is the federal funds rate?

A

The rate banks charge each other for overnight loans

59
Q

The required amount of deposits investors must put into a brokerage account before purchasing securities is called?

A

The margin requirements

60
Q

When does productivity of a resource increase?

A
  • the makeup or components of good change such that the final good is produced more efficiently.
  • technical improvements are made in those combining resources
  • technical improvements are made in the resource itself.
61
Q

What is the substitution effect?

A

When the price of a resource that can substitute for another resource decreases, the demand for the second resource decreases.

BEC (16 decks)

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