Chapter 6 Economic Measurements and Conditions Flashcards
What are Monopolistic Market?
Where most of the market is controlled by just one company
What is Oligopolistic Markets?
Where a few companies control the market share in a market segment
What is GDP?
National output of goods and services in one year
- Only within the U.S.
- by subtracting the rate of inflation
What is Gross National Product (GNP)?
The value of what is produced by a country’s citizen regardless of where they reside
- includes goods and services outside the nations boundaries
What is depression?
a decline in real GDP for 6 consecutive quarters, or 18 months
What is Recession?
Begins when there are 2 consecutive quarters or 6 months of declining real GDP
What is Inflation?
General rise in the level of prices
- More money than products
What are the two measures of Inflation?
Consumer price Index & Producer Price Index
What effects does Inflation have on Interest Rates on Bond Markets?
The slightest change in interest rate affects long term bondholder the most because of the long period of time
- Inflation Risk / Purchasing power risk
What happens when interest rates increase?
Bond prices fall and yields increase
What happens when interest rates fall?
Bond prices will rise and yield will decrease
What is a Yield Curve?
a plot of interest rates of bonds of the same quality from lowest to highest available maturity
What is a positive Yield Curve ?
Upward and outward sloping curve
- Bondholders are willing to pay a higher coupon to get money from the bond for a longer period
What is a Negative Yield Curve?
Represents shorter maturities having higher yields than longer maturities
[Short bonds give better returns than bonds with longer maturities]
What does the Consumer Price Index do?
Measures the change in consumer prices of a fixed basket of goods and services
[Measures how the prices changes for a product or service ]
What does the Producer Price Index measure?
Measures the change in producer or whole pries in manufacturing
[Measure the price difference in producing a product]
What is Deflation?
Decrease in general level of prices
More supply of goods and services than prices.
[The opposite of inflation. When prices in general go down. More products than money]
What is Elasticity?
Is the way demand for a product changes as a result of price.
[How demand of a product is affected by price ]
What is the Business Cycle?
1) Expansion
2) Peak
3) Contraction
4) Trough
What is a Leading Indicator?
It shows where the economy is headed
Ex: Stock market, housing, and money supply
What are Coincident Indicators.
They are indicators that show what’s currently affecting the economic situation
EX: Personal Income, GDP, Industrial Production
What are Lagging Indicators?
Indicators that take effect after the economy has changed
EX: Avg employment duration, reported corporate profits, average prime rates
[These indicators confirm the state the economy was in]
What is Cyclical in the Business Cycle?
It follows the business cycle
Whats Countercyclical?
It moves in the opposite direction of the business cycle
What are Cyclical stocks?
When the economy is doing well the stocks will also perform well
Ex: Furniture and clothing, Automobile manufacturing, and construction
What are Countercyclical Stocks?
When the stock market declines investors will choose to invest in bonds for safer options like gold or precious metal.
What are Defensive Stocks?
These stocks remain stable regardless of the economic condition.
Ex: food, utilities, healthcare
What are Growth Stocks?
Stocks earnings that are expected to grow at an above avg rate
What is the Monetarist Theory?
Federal reserve controls the economic growth by either putting money into the economy or taking it out
What is the Keynesian Theory?
The output of the economy is influenced by total spending in the economy
What is the Supply Side theory?
Reduced taxes and no government spending allows the economy to progress on its own pace
What is the Efficient Market Hypothesis?
It is impossible to beat the market, that it reflects all relevant information.
What are index funds?
Open / closed end funds that invest in the same securities that are held by a major index
- Have low transaction cost and management fees
What is Monetary Policy?
Where the Federal Reserve maintains the stability of the financial system
What is Easy Money?
When the FED increases money supply
- Easier to get loans and rates are lower
What is Tight money Supply?
When the FED decreases the money supply
- Harder to get loans and borrowing rates are higher
What is Open Market Operations?
Influences the money supply by buying and selling government securities in the open market to select group of banks and primary dealers
What is a repurchase Agreement?
Its short term borrowing that uses government securities as collateral
Buy securities from bank = easing effect on money supply
What is Reserve Requirement?
The percentage of cash that must be retained in a banks vault
Reserve requirement falls = interest falls = Increase money supply
What is discount Rate?
The rate when FED gives loans to banks for borrowing.
Lower discount rate = more lending money to customers
What is Margin Requirement?
FED has the power to increase and decrease the margin requirements
Low margining req = low interest rate
What is moral Suasion?
When market is influenced through speeches, announcements, or statements by FED officials
What are the Federal Reserve tools?
D.O.R.M.M
D. iscount Rate
O. pen Market Operation
R. eserve Requirement
M. argin Requirement
M. oral Suasion
What is Federal Income Taxation?
Income that is taxed annually. More tax revenue for federal government
How does Federal Spending have an impact on the economy?
Raise taxes and reduce spending to slow the economy
Lower taxes and increase spending to stimulate the economy
What is the Interbank Market?
Trading between large banks in major international financial centers
- Not regulated by SEC
What is Currency Exchange Rate?
It how other countries value another countries currency. Where one currency can be exchanged for another (Spot Rate)
What does a strong U.S dollar do?
Imports less costly
Exports are expensive
More profits for importers
What does a weak U.S. Dollar do?
Imports are expensive
Exports are cheaper
More profits for exporters
What is the Balance of Payments?
It is the flow of money between other countries
What is the balance of Trade?
The difference between the value of a countries imports and exports of merchandises
What is form 10k?
Audited ANNUAL financial Statements filed with the SEC within 60 days
What is form 10Q?
Audited QUARTERLY financial statements filed with the SEC within 40 days
What is form 8k?
Significant event reported within 4 days
What is Strong Form?
All information (Private or Public) is reflected in stock prices
What is Semi-Strong Form?
Public information is reflected in stock prices, individuals with inside information can be the market
What is Weak form?
In-depth analysis can beat the market
What happens when inflation rates fall?
Interest falls when inflation rate falls = bond prices to rise
