Chapter 8

Question 1

What is fiscal policy?

Answer 1

Spending and taxing actions to stabilize/spur growth

Question 2

What is monetary policy?

Answer 2

CB changing money supply to influence economic activity by influencing the demand for goods and services

Question 3

What is a business cycle?

Answer 3

Recurring patterns of recession and recovery

Question 4

What makes earnings sensitive to business cycles?

Answer 4

Sensitivity of sales of the firm’s product
Fixed costs and leverage - do not vary
- fixed costs contribute to higher profitability when sales are high but lower productivity when sales are low
Operating leverage
- proportion of fixed operating costs as a % of total cost
- greater operating leverage results in greater swings in profits
Financial leverage
- proportion of fixed financing costs as a % of costs
- greater financial leverage in greater swings