Chapter 14- Economics And Analytics 15-20 Pages Flashcards
Economics
The study of supply and demand and how it affects the prices of goods
Business Cycles
Always start with Expansion when putting order of business cycle
- Expansions- Periods of increased business activity throughout the economy. Expansions end when a peak is hit
2, Peak
- Contractions- When business activity declines.
Short contractions= Recessions
Long contractions= depressions
Bottom of a contraction is a trough - Trough
US commerce department definition of contractions and depressions
Contraction- 6 month period or more of decline is real output of goods and services (GDP)
Depression- 6 quarter period or more, in which unemployment rates are greater than 15%
Expansion characteristics
Increased demand for goods and services
Increases in industrial production
Rising stock prices
Rising property value
Increase in GDP
Downturn characteristics
Rising number of bankruptcies and bond defaults
Higher consumer debt
Falling stock prices
Rising inventories
Decreasing GDP
Gross domestic product
Nations annual economic output of services and goods
Includes personal consumption, gov spend, gross private invest, foreign invest, net exports
Consumer price index
Measures rate of increase or decrease in broad range of consumer prices
Computed monthly
Uses constant dollar calculation to account for inflation
Allows economist to compare the actual purchasing power of the dollars rather than dollars themselves
Inflation
General increases in price
Mild inflation can stimulate growth, high inflation reduces buying power
Higher inflation drives up interest rates on fixed income, while decreases lower bond yield
Low inflation- drives up interest rates of fixed income securities, and bond prices down. Positive for business
Periods of high inflation are bad for business
Always some amount of inflation in a growing economy
Deflation
Occurs during severe recessions, when unemployment is rising
Stagflation
Combination of inflation and high unemployment (stagnation)
Leading indicators
Money Supply (M2) Building permits Average weekly claims for unemployment New orders for consumer goods Machine tool orders Changes in inventories of durable goods Changes in sensitive material prices Stock prices Changes in business and consumer borrowing
Positive change indicate growing economy
Negative forecast a recession
Coincident indicators
Vary directly and simultaneously with business cycle
Number of hours worked Employment levels Non agricultural employment Personal income Industrial production Manufacturing and trade sales GDP
Lagging indicators
Factors that change after the economy has begun a new trend but serve as confirmation
Corporate profits Average duration of unemployment Labor cost per unit of output Ratio of inventories to sales Commercial and industrial loans outstanding Credit to personal income
Keynesian Theory
Active government is vital to health of economy
Demand for goods drive employment and prices
Government should manipulate economy to drive it upwards
Gov reduces taxes to increase private sector spending
Monetarist theory
Milton Friedman is originator
Money supply is major determinant of price levels
Moderately increasing money supply leads to price stability, which allows business to plan and invest
Controlled by Federal Reserve Board
Supply Side Economics
Government should allow market forces to move freely
Laffer argues that as tax rates increase less people will be incentived to work
If taxes were 100%, no one would work
Three categories of money (M1, 2 and 3)
M1- Currency in circulation and checking accounts. Money used for ordinary purchases. Largest and most liquid
M2- adds time deposits (less than $100,000) that are fairly easy to convert. Includes savings accounts, money market funds…
M3- Adds time deposits over 100k and repurchase agreements past one day
Federal Reserve Board
12 regional fed banks and hundreds of banks nation wide
Controls monetary policy and implements policies including:
- acting as agent to US Treasury
- Regulating US money supply
- Setting reserve requirements
- supervising printing of money
- Clearing fund transfers
Three policy tools
- Open market ops (buy/sell gov securities)
- Changes in discount rate (bank loans)
- changes in reserve requirements
Open-market operations
Federal Open Market Committee meets to direct government open market operations
Buying securities- increases supply of money in banking system, which in turn increases bank reserves and loans issued by banks
Selling tightens or contracts the money supply
Less drastic compared to Reserve requirements, but more frequently used
Discount Rate
Discount Rate is the Rate in which the fed charges its members for short term loans
The charge between banks is called the federal funds rate
Fed funds rate fluctuates daily and is most volatile interest rate
Generally an overnight rate for funds exceeding $1MM
Higher rate usually indicates a shortage of funds to lend
Though interbank lending interest rates move more with policy change, long term bonds typically move more than short term under same conditions
Reserve requirement
Commercial banks must deposit a certain percentage of depositor money with Fed Reserve
All money deposited are known as federal funds
Increasing the reserve requirement, tightens the money available and increases interest rates
Most drastic mover of money supply
Fiscal policy
Government budget decisions
Includes:
Federal spending
Money raised through taxes and
Federal budget deficits or surpluses
Based on assumption gov can control l unemployment and inflation by adjusting demand (keynsian idea)
Inefficient due to politics in short term economic problems
Disintermediation
Flow of Money from low yielding savings accounts to a high yielding investment in the marketplace without bank acting as middleman
Occurs when money supply tightens
Balance of payments
Flow of money between US and international countries
Deficit occurs when higher interest rates can be found abroad because money flows to high interest rates
Largest component is balance of trade
Debits are imports and indicates spending abroad
Credits are exports and is foreign spending domestically
Value of dollar effect balance of payments
Technical analysis
Attempt to predict direction of prices on basis of historic price and trading volume patterns
Market trading volume
Substantial above normal movement indicates a pattern or trend
Significant jump in volume signals trend beginning
Market bredth
Number of advances and declines over the course of a day
Regardless of daily performance the market is bearish if there were more declines
Advance/decline line is graph that displays
