Chapter 1: Financial & Economic Concepts Flashcards
Finance
Any transaction where money or money-like instruments is exchanged for another money or money-like instrument.
Dividen
After-tax payment that may be made by a corporation to a stockholder.
Prime Interest Rates
The rate of interest banks charge their best business customers.
Market Economy
Within the confines of the market, all individuals can achieve their own objectives in a free-enterprise system.
Market
Any organized effort which buyers & sellers freely exchange goods & services.
What are the 3 primary participants in financial market?
- individual house holds
- businesses
- government
What are the 4 scarce resources of typical concern?
- natural resources (minerals, land & wildlife - have not been modified by human activity)
- human resources (mental & physical talents of people LABOR)
- capital resources (economic & financial)
- entrepreneurial resources (combine land, labor & capital resources to produce goods/services)
Economical Capital
Items that people manufacture by combining natural and human resources.
Financial Capital
Dollar-value claim on economic capital, and may include several types of assets (cash, accounts receivable, stocks & bonds).
Opportunity Costs
The highest value surrendered when a decision to invest is made. A market transaction where the buyer & seller believe they obtained the best use of their scarce resources.
Gross Income
The total money received from all sources during a year & is subject to government taxes (wages, tips, interest earned, rental income & profits)
Progressive Taxes
Tax on income. Take a larger percentage of income as that income increases.
Regressive Taxes
Sales tax. Take a higher percentage of income as that income decreases.
Proportional Taxes
Tax on Social Security and Medicare. Regardless of income, the percentage paid stays the same
What is the law of supply?
As the payment for, or price, of an item increases, the quality of the item supplied to the market will also increase, ceteris paribus.
What is the law of demand?
As the price of an item decreases, people will demand a larger quantity of that item, ceteris paribus.
What is the Federal Reserve?
It is the central bank of the United States.
What are the 3 primary tools of the Feds?
- open market operations
- bank reserve requirements
- discount rate
What are the 5 major factors that affect market interest rates?
- supply of money
- demand for money
- federal reserve monetary policy
- inflation
- risk
Risk
The probability that an expected outcome will occur, and the variability in that expected outcome.
Systematic Risk
Associated with economic, political & sociology changes that affect all participants on an equal basis.
Unsystematic Risk
Unique to an individual, firm or industry. It is often based on management capabilities, industry competition, vendor reliability & microeconomic variables.
True or False:
Finance is any transaction where money is exchanged for goods and services
False
True or False:
A market economy is one where all goods and services are exchanged free.
False
True or False:
A dividend is an after tax payment that must be made by all stock companies to the stockholders each year.
False
True or False:
An athlete making $7,000,000 pays 6.2% on the full $7,000,000 in Social Security Taxes.
False
Social Security is capped at a max income of $110,100
True or False:
In order to increase the money supply, the Fed will sell government securities.
False
True or False:
As the price of an item increases, the quantity of the item provided to the market place will increase, ceteris paribus.
True.
What percentage of Medicare is taxed on income?
1.45%, with no upper limit
What percentage of Social Security is taxed on income?
6.2% with a wage capped at $110,100
