Economic & Business Cycles, Measures, & Indicators

Question 1

Helps auditors better interpret client information (example: why sales and earnings changed)

Answer 1

Economics

Question 2

The study of economy as a whole - examines national income, unemployment, inflation, etc.

Answer 2

Macroeconomics

Question 3

Total market value of all final goods and services produced within the borders of a nation

Answer 3

GDP

Question 4

Characterized by rising economic activity and growth above the long-term growth trend. Firms profits are likely to be rising, employment is rising, prices are rising:

Answer 4

Expansionary Phase

Question 5

Characterized by a high point of economic activity. Firms are likely to face capacity constraints and input shortages, leading to higher costs and higher price levels:

Answer 5

Peak

Question 6

Characterized by falling economic activity and growth. Firm’s profits are likely to be falling

Answer 6

Contractionary phase

Question 7

Characterized by the low point of economic activity. Firms profits are likely to be at their lowest levels. Significant excess production capacity, leading firms to reduce workforce and cut costs

Answer 7

Trough

Question 8

Characterized by economic activity beginning to increase and return to its long-term growth trend. Firms profits typically begin to stabilize as the demand for goods and services begin to rise

Answer 8

Recover phase

Question 9

Occurs when the economy experienced negative real economic growth for two consecutive quarters.

Answer 9

Recession

Question 10

A very severe recession where many firms will not only incur loss, but go out of business

Answer 10

Depression

Question 11

Predict the economic activity before the fact

Answer 11

Leading indicators

Question 12

Indicators that happen free the face that can confirm or dispute previous economic forecasts

Answer 12

Lagging indicators

Question 13

Indicators that happen at the same time of economic activity

Answer 13

Coincident indicators

Question 14

Characteristic of this market:
No individual firm can influence market price
Large number of supplies, small firms, homogeneous products
No barriers to entry
Perfectly elastic demand, profits are zero in long run, normal rate of return

Answer 14

Perfect competition

Question 15

Strategic plans include maintaining the market share and responsiveness of the sales price to market conditions:

Answer 15

Perfect competition market

Question 16

Characteristics for this market:
Many small firms selling different products
Few barriers to entry
Firms have some influence over price, highly elastic downward sloping demand curve
In the long run, no economic profits

Answer 16

Monopolistic competition

Question 17

Strategic plans may include maintaining the market share and also include a plan for enhanced product differentiation and allocation of resources

Answer 17

Monopolistic competition

Question 18

Characteristics include:
Few large firms selling differentiated products
Significant barriers to entry
Firms have control over price
Kinked demand curve because firms can match price cuts but ignore price increases
Economic profits are positive in the long run

Answer 18

Oligopoly

Question 19

Strategic plans focus on market share and call for the proper amount of advertising and ways to properly adapt to price changes

Answer 19

Oligopoly

Question 20

Characteristics of this market:
Single firm with unique product
Insurmountable barriers to entry
Set the price
Demand is in elastic (vertical)
Economic profits are positive in the long ru

Answer 20

Monopoly

Question 21

Strategic plans will likely ignore market share and focus on profitability from production levels that maximize profits

Answer 21

Monopoly

Question 22

Regardless of the market, the firm will operate best when:

Answer 22

Marginal revenues = marginal costs

Question 23

Governments use of government spending and taxation to influence the economy:

Answer 23

Fiscal policy

Question 24

Fiscal policy can be used in what two parts of the business cycle?

Answer 24

Contraction or expansion

Question 25

Used by nations central bank (federal reserve) to affect the money supply, interest rates, and credit available in the economy. Designed to promote stable prices, maximum employment, moderate interest rates, and long term economic growth:

Answer 25

Monetary policy

Question 26

Monetary policy can be used in what two parts of the business cycle?

Answer 26

Expansionary - if money supply goes up, interest rates go down, demand goes up, and GDP goes up
Contractionary - if money supply goes down, interest rates go up, demand goes down, and prices go down

Question 27

When interest rates are low, what happens?

Answer 27

Consumers will buy on credit, therefore demand goes up and GDP goes up

Question 28

Three ways to control the money supply under the monetary policy:

Answer 28

Open market operations
Discount rates
Required reserve ratio

Question 29

Buying government securities does what to the money supply?

Selling government securities does what to the money supply?

Answer 29

Buying = money supply up, interest rates down, demand up
Selling = money supply down, interest rates up, demand down

Question 30

An increase in the discount rate (the interest rate the federal reserve charges its member banks) does what to the money supply? What does a decrease in the discount rate do?

Answer 30

Increase = money supply down, interest rates up, demand down (reduced inflation)
Decrease = money supply up, interest rates down, demand up

Question 31

An increase in the required reserve ratio (how much money a bank is required to hold in its vault or on deposit with the federal reserve) does what to the money supply? A decrease in the required reserve ratio does what?

Answer 31

Increase = money supply down, interest rates up, demand down (decreases inflation)
Decrease = money supply up, interest rates down, demand up

Question 32

Put in place to protect domestic industries by reducing foreign competition which is referred as protectionism:

Answer 32

Trade controls

Question 33

Laws that protect trade and national security by prohibiting the unlicensed export of certain information or commodities:

Answer 33

Export controls

Question 34

Taxes on imports that increase the price of foreign goods making them less competitive to domestic goods

Answer 34

Tariffs

Question 35

Limits the quantity of goods that can be imported over a period of time. These help protect the domestic industry.

Answer 35

Quotas

Question 36

Prohibit the importing or exporting of certain goods from a specific country:

Answer 36

Embargo

Question 37

Selling goods below fair market value and below the prices that domestic producers charge is called:

Answer 37

Dumping