B.11 Economic Concepts Flashcards
1
Q
What drives the price of gasoline up or down?
A
Supply and demand dynamics
Changes in production, consumer preferences, and external factors can influence gasoline prices.
2
Q
What is the law of supply?
A
An increase in market price leads to an increase in quantity supplied, and a decrease in market price leads to a decrease in quantity supplied.
3
Q
What is quantity supplied?
A
The amount of a product a firm is willing and able to offer for sale at a particular price during a given time period.
4
Q
List factors that can lead to a shift of the supply curve.
A
- New Technology
- Market Expectations or Conditions
- Changes to the Number of Producers
- Changes in Input Prices
- Changes in Prices of Related Goods or Services
5
Q
What is the law of demand?
A
The relationship between quantity demanded and price is negative; as price rises, quantity demanded falls, and vice versa.
6
Q
What is quantity demanded?
A
The amount of a product that a household would buy in a given period if it could buy all it wanted at the current market price.
7
Q
What can cause a shift in the demand curve?
A
- Changes in income levels
- Changes in consumer preferences
- Changes in expectations
- Changes to number of consumers in the market
- Changes in prices of related goods and services
8
Q
What is equilibrium price?
A
The price where the supply curve intersects the demand curve, resulting in no tendency for change.
9
Q
What happens at excess demand?
A
The quantity demanded exceeds the quantity supplied at the current price, resulting in an increase in price.
10
Q
What happens at excess supply?
A
The quantity supplied exceeds the quantity demanded at the current price, resulting in a decrease in price.
11
Q
Define price elasticity of demand.
A
A measure of a buyer’s responsiveness to changes in price.
12
Q
What factors determine price elasticity of demand?
A
- Availability of substitutes
- Relevance to budget
- Time
13
Q
What is macroeconomics?
A
The study of the entire economy in terms of total goods and services produced, total income earned, level of employment, and general behavior of prices.
14
Q
What is microeconomics?
A
The study of individual economic decisions and their aggregate consequences.
15
Q
What does ‘ceteris paribus’ mean?
A
All else equal; an assumption that other variables remain constant.
16
Q
What is fiscal policy?
A
Government policies regarding purchases of goods and services, taxes, and transfer of funds to influence the economy.
17
Q
What are the components of fiscal policy covered in this module?
A
- Equilibrium Output
- Government Spending
- Taxation
- Balanced Budget
- Economic Influences on Fiscal Policy
18
Q
What is equilibrium output?
A
A measure of the economy looking at the aggregate output.
19
Q
True or False: A change in quantity demanded is a movement along the demand curve.
A
True.
20
Q
Fill in the blank: The price elasticity of demand formula is the ratio of the percentage change in _______ to the percentage change in price of that good.
A
quantity demanded
21
Q
What is the effect of maintaining a balanced budget?
A
It influences government spending and taxation policies.
22
Q
What is equilibrium output?
A
The sum total of consumption, corporate capital investments, net exports, and government spending, also known as real Gross Domestic Product (GDP).
23
Q
How does the government use spending policy?
A
To increase the equilibrium level of national output.
24
Q
What happens when government spending exceeds taxes collected?
A
The government runs a deficit.
25
What is the relationship between increased government spending and output?
Increased government spending has the same impact on equilibrium output as an increase in planned investment.
26
What is the effect of a decrease in taxes on disposable income?
It leads to an increase in disposable income.
27
What is a balanced budget?
A situation where government spending is balanced by changes in taxes, resulting in no deficit.
28
What fiscal action can the government take during a recession?
Spend more and tax less to spur economic activity.
29
What are automatic stabilizers?
Revenue and expenditure items in the federal budget that automatically change with the state of the economy.
30
What is the Federal Reserve Bank also known as?
The Fed.
31
What are the two most common types of money supply?
* Transaction money (M1)
* Broad money (M2)
32
What is the required reserve ratio?
The amount of total deposits that the Fed requires its members to keep with the Federal Reserve.
33
What is the discount rate?
The interest rate banks pay to borrow money from the Federal Reserve.
34
What is the impact of increasing the discount rate?
It raises the cost of borrowing, discouraging banks from borrowing.
35
What does the Federal Reserve control in the economy?
The money supply and interest rates.
36
What is the effect of a decrease in the required reserve ratio?
It allows banks to make more loans, increasing the money supply.
37
What is the role of the Federal Reserve in managing the economy?
To promote high employment, sustainable economic growth, and stable prices.
38
Fill in the blank: A decrease in taxes leads to an increase in _______.
[disposable income]
39
True or False: Government spending has an immediate effect on the economy.
True.
40
What happens when the government increases spending and taxes by the same amount?
The budget deficit does not change.
41
How do economic conditions influence government spending?
They affect tax revenues, unemployment benefits, inflation, and interest expenses.
42
What is the impact of taxation increases on consumption?
They cause a reduction in consumption expenditures and output.
43
What is the main function of the Federal Reserve regarding banks?
To clear inter-bank payments and regulate the banking system.
44
What is the discount rate?
The interest rate that banks pay the Fed to borrow
## Footnote
Changes in the discount rate will lead to changes in the cost of borrowing in general.
45
How does an increase in the discount rate affect borrowing?
It increases the cost of borrowing, discouraging banks from borrowing
## Footnote
This can lead to higher mortgage rates and other borrowing costs for consumers.
46
What happens when the Fed decreases the discount rate?
The cost of borrowing becomes cheaper
## Footnote
This encourages firms and individuals to finance large expenditures.
47
What is the federal funds rate?
The interest rate banks charge each other for overnight loans
## Footnote
It is targeted by the Fed and affects overall lending rates.
48
What triggers a credit crunch?
Banks are unwilling to lend to one another or charge higher interest rates
## Footnote
This can occur due to uncertainties in the market.
49
What was a significant cause of the 2008 credit crisis?
The housing bubble burst followed by the sub-prime mortgage crisis
## Footnote
Homeowners defaulted on unsuitable mortgages, impacting banks and securities.
50
What actions did the Federal Reserve take during the 2008 crisis?
Lending banks cash and Treasuries, slashing interest rates, boosting consumer loans
## Footnote
These measures aimed to restore confidence in the banking system.
51
What is the prime rate?
The lending rate banks extend to their most favored customers
## Footnote
It is influenced by the discount rate set by the Fed.
52
What are open market operations?
The buying and selling of government securities by the Fed
## Footnote
This tool is used to expand or contract the amount of reserves in the banking system.
53
How does the Fed increase the money supply through open market operations?
By buying US Treasury and government securities from dealers
## Footnote
This increases the money supply in the private sector.
54
What happens when the Fed sells treasury securities?
The money supply decreases
## Footnote
This is because the Fed debits the accounts of the security dealers' banks.
55
What is tight monetary policy?
The Fed decreases the money supply to restrain the economy and slow inflation
## Footnote
This involves selling securities and raising interest rates.
56
What is easy monetary policy?
The Fed expands the money supply to stimulate the economy
## Footnote
This involves buying securities and lowering interest rates.
57
How does inflation impact the economy?
Rising interest rates can lead to slower economic growth and greater volatility
## Footnote
The Fed uses the Consumer Price Index (CPI) to measure inflation.
58
What is Gross Domestic Product (GDP)?
A statistic that measures the total market value of a country’s income and output of goods and services
## Footnote
It is measured quarterly.
59
What does real GDP include?
Market value of all final goods and services produced within a country
## Footnote
It excludes imports and the effects of inflation.
60
What is the unemployment rate?
The percentage of the labor force that is unemployed and actively looking for work
## Footnote
It does not include those who are not looking for work.
61
What is a leading economic indicator?
Statistics that tend to rise and fall in advance of the economy
## Footnote
Examples include average weekly hours of production workers and initial claims for unemployment insurance.
62
What is a coincident economic indicator?
Statistics that change at the same time as the economy
## Footnote
Examples include employees on non-agricultural payrolls and personal income.
63
What is a lagging economic indicator?
Statistics that follow or lag economic performance
## Footnote
Examples include the average duration of unemployment and the change in the Consumer Price Index (CPI).
64
What is the average annual growth rate of the U.S. GDP between 1900 and 2000?
3.4%
## Footnote
This average includes periods of prosperity and recession.
65
What do short-term or cyclical growth trends show?
Peaks and valleys of businesses
66
What is the business cycle?
Short-term fluctuations of an economy influenced by supply and demand
67
What is the period from a trough to a peak in the business cycle called?
Expansion or boom
68
What happens during a contraction in the business cycle?
Output and employment fall
69
What defines a recession in terms of GDP?
Negative growth for two consecutive quarters
70
What typically happens during an expansion phase?
Output, income, profits, and employment grow
71
What is a consequence of rising inflation during an expansion?
Increased prices due to demand exceeding supply
72
What is the result of overexpansion in the economy?
Excess production and potential economic contraction
73
What is productivity defined as?
Worker output per hour
74
How does productivity fluctuate during the business cycle?
Rises during expansions and falls during contractions
75
How many recessions have occurred in the U.S. since World War II, and what is their average duration?
Twelve recessions lasting an average of ten months
76
What is the most severe recession mentioned in the text?
The Great Recession from December 2007 to June 2009
77
What is an important tactic for financial planners during economic instability?
Building sufficient emergency savings funds
78
What does inflation refer to?
The general rise in the prices of goods and services
79
What happens to purchasing power during periods of high inflation?
It erodes
80
What is stagflation?
High inflation combined with slow or stagnant economic growth
81
What causes sustained inflation?
Continuous increase in the money supply by the Fed
82
What type of inflation is initiated by an increase in aggregate demand?
Demand-pull inflation
83
What is the Consumer Price Index (CPI)?
A measure of the average change in prices of goods and services over time
84
What does the CPI not represent?
A cost-of-living index
85
What are the costs of inflation for individuals on fixed income?
Reduced purchasing power
86
How does unanticipated inflation affect debtors and creditors?
Higher than expected inflation benefits debtors; lower than expected benefits creditors
87
What does the yield curve indicate?
Market's expectation of the future direction of interest rates
88
What are the three typical shapes of the yield curve?
Upward-sloping, downward-sloping, flat
89
What does the horizon premium theory assert?
Investors pay a price premium for short-term bonds to avoid greater risks of long-term bonds
90
What is a characteristic of long-term investments compared to short-term investments?
Long-term investments are generally considered riskier
91
What is disinflation?
A decrease in the rate of inflation while prices are still rising
92
What happens during hyperinflation?
Rapid increase in the overall price level
93
What is the last time the U.S. experienced deflation?
The Great Depression
94
What happens during stagnation?
Declining prices, slow economic growth, and high unemployment
95
What is the horizon premium theory?
It points to the fact that short-term securities are subject to more frequent fluctuations and a greater degree of reinvestment risks due to their maturity timeline.
96
Why do short-term securities have added transaction costs?
Due to greater turnover.
97
How can the added interest rate risk of long-term bonds be managed?
Through diversification.
98
What does the expectations theory assert about long-term yields?
They are the average of the short-term yields expected to prevail during the period before a bond matures.
99
If investors expect rates to rise in the future, what shape will the yield curve take?
It will slope upward.
100
What shape will the yield curve take if investors expect rates to remain unchanged?
It will be horizontal.
101
What shape will the yield curve take if investors expect rates to fall?
It will slope downward.
102
What is the market segmentation theory?
It asserts that the yield curve is composed of independent maturity segments where lenders and borrowers confine themselves based on various factors.
103
What are some reasons for the market segmentation theory?
* Regulation limits types of investments
* Cost of maintaining information leads to specialization
* Institutional investors hedge liabilities with assets of equivalent maturity
* Individual preferences may be independent of theories
104
What does the yield curve show?
The yields-to-maturity for Treasury securities of various maturities as of a particular date.
105
What indicates a general increase in prices?
Inflation.
106
What is Gross Domestic Product (GDP)?
The total market value of all final goods and services produced within a given period by factors of production within a country.
107
What does the employment rate reflect?
The percent of the labor force that is actively employed.
108
What do business cycles represent?
The short-term fluctuations of the economy.
109
What happens to productivity as the business cycle reaches a peak?
Productivity will decrease.
110
What happens to productivity as the business cycle reaches a trough?
Productivity will increase.
111
How can economic indicators aid investment professionals?
They help forecast economic activity and adapt investment strategies.
112
What are fiscal policies?
Government adjustments to its budget to affect changes to aggregate output or income.
113
What are monetary policies?
Actions by the Federal Reserve Bank to influence the money supply.
114
What is the implication for investors during economic downturns?
To have a portion of their portfolio prepared to hedge market downturns.
115
True or False: The expectations theory suggests the yield curve is based on future interest rate expectations.
True.
116
Fill in the blank: The Beige Book is a report published by each _______ eight times per year.
Federal Reserve Bank.
117
What do economic indicators help professionals predict?
The direction of the market in the business cycle.
118
What is the law of supply and demand?
The price of goods and services is driven by their supply and demand.
119
What does inflation indicate about the economy?
Expansions in business cycles cause inflation.
