Chapters 4 and 5 Flashcards
What is known as the process of understanding the financial choices that people make.
Economics
Two branches of microeconomics
microeconomics and macroeconomics
individual markets of goods and services, looking at how businesses decide what to produce and who to produce it for, and how individuals and households decide what to buy, is known as
Microeconomics
Which branch of economics focuses on broader issues such as employment levels, interest rates, inflation, recessions, government spending, and the overall health of the economy
Macroeconomics
Three broad group that interact in the economy include
- Consumers
- Businesses
- Governments
value of all goods and services produced in a country in a given time period, usually a quarter or year is known as?
gross domestic product
GDP
Three approaches to measuring GDP
- expenditure approach
- income approach
- production approach
value of all goods and services produced in that year in that year’s prices.
Nominal GDP
dollar value of all goods and services valued at prices in some base year
Real GDP
Growth in GDP results from
- Technological advances
- population growth
- Improvements in training, education and skills.
5 phases of business cycle
- expansion
- peak
- contraction
- trough
- recovery
Most important leading indicators
housing starts, manufacturers’ new orders, commodity prices, average hours worked per week, stock prices and the money supply
most important coincident indicators:
personal income, GDP, industrial production and retail sales
most important lagging indicators:
unemployment, inflation, labor costs, private sector plant and equipment spending, and business loans and interest on such borrowing
identification of recessions by statistics Canada
depth : decline must be of a substantial depth
duration : must last more than a couple of months
diffusion : must be a feature of the whole economy
canadian labor market
- Those who are unable to work - psychiatric hospitals and correctional facilities
- Those who are not working by choice - full time students, homemakers, retirees and discouraged workers
- the labor force - who are working and people who are not working but are actively looking for work.
labor market indicators
participation rate
unemployment rate
particiapation rate
labor force / working age population x 100
unemployment rate
not working but actively looking for work / labor x 100
people could be working part-time (instead
of full-time) or are in jobs that do not make good use of their
skills
underemployed
Types of unemployment
- Cyclical
- seasonal
- frictional
- structural
which type of unemployment tied directly to the business cycle- high during recessionary conditions, lower during periods of expansion
cyclical unemployment
which type of unemployment is when Some industries operate only during part of the year – for example, the agriculture industry
seasonal unemployment
what is known as a result of normal labor turnover. Part of a
normal, healthy economy
Frictional unemployment
when workers are unable to find jobs
because they lack the necessary skills, do not live where
the jobs are available, or choose not to work at that
wage rate.
structural unemployment
what is known as One of the most important financial variables affecting securities markets
Interest rates
Determinants of interest rates
demand and supply
default risk
foreign interest rates and the exchange rate
central bank credibility
inflation
when the interest rate
charged on borrowed funds is less than zero
Negative interest rate
Defined as the use of government’s power to tax and spend to
pursue social goals such as full employment and long-term
sustained economic growth
Fiscal Policy
designed to preserve the value of the
Canadian dollar by keeping inflation low, stable, and
predictable
Monetary policy
Bank of Canada is the ultimate source of liquidity and is referred to as the lender of last resort
The Canadian financial system
designs, prints, and distributes
Canadian bank notes
physical currency
managing he government’s
accounts and government’s foreign currency reserves
fund management
managing he government’s
accounts and government’s foreign currency reserves
funds management
Advantages of monetary policy
The effect on the
economy may be more
immediate
* The initiative (e.g., lower
or higher interest rates)
can be reversed once the
objective is achieved
* It is independent of
political considerations
Advantages of fiscal policy
Government spending can
be targeted to specific
regions
* Tax cuts and increased
benefits are popular
* Consumers can more
easily understand and
experience the impact
Disadvantages of monetary policy
It can be difficult to target
a specific region
* Lowering interest rates
may not have any impact
if the consumer doesn’t
feel confident enough to
spend
* If interest rates are
already too low, lowering
them even more may have
no impact
disadvantages of fiscal policy
Tax increases and
government spending cuts
are unpopular
* There are challenges in
stopping a project one it
has been implemented,
even if the initiative is no
longer necessary
* Higher government
spending can raise debt
levels and lead to a great
proportion of revenue
going towards interest
payments
