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CFP Course Prep 1 > Economic Concepts > Flashcards

Economic Concepts Flashcards

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1
Q

__is the study of the entire economy in terms of the total amount of goods and services produced, total income earned, the level of employment and the general behavior of prices.

A

Macroeconomics

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2
Q

__ is the study of individual economic decisions and their aggregate consequences. Understanding ___ topics regarding equilibrium price can help you understand the reasons behind how goods and services are priced. It can help in making investment decisions as well.

A

Microeconomics

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3
Q

An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.

A

Law of Supply

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4
Q

Changes in the ___ of a good or service supplied by the producers result in a move along the supply curve.

A

Quantity

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5
Q

When changes in supply occur due to factors other than price, this results in a shift of the supply curve. what are the factors.

A

New Technology
Market Expectations or Conditions
Changes to the Number of Producers
Changes in Input Prices
Changes in Prices of Related Goods or Services

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6
Q

Movement along the supply curve happened when ___ changes

A

Price

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7
Q

____ is the amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

A

Quantity demanded

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8
Q

The relationship between quantity demanded and price is either ____, or _____.

A

negative or inverse

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9
Q

When price rises, quantity demanded falls, and when price falls, quantity demanded rises. This negative relationship between price and quantity demanded is referred to as the _____

A

Law of demand

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10
Q

Changes in demand refer to a shift of the demand curve. Other Factors other than price are:

A

Changes in income levels
Changes in consumer preferences
Change in expectations
Changes to number of consumers in the market
Changes in prices of related goods and services

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11
Q

is the point where the supply curve intersects the demand curve of a good or service. It is the price where there is no tendency for change.

A

Equilibrium price

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12
Q

At any moment, one of the three conditions prevails in every market. what are the 3 conditions?

A

Excess Demand
Excess Supply
Equilibrium

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13
Q

The quantity demanded exceeds the quantity supplied at the current price.

A

Excess demand

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14
Q

What is the result of Excess Demand

A

it would result in a increase in price

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15
Q

The quantity supplied exceeds the quantity demanded at the current price.

A

Excess Supply

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16
Q

What is the result of Excess Supply

A

results in a price decrease

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17
Q

__ is a measure of a buyer’s responsiveness or sensitivity to change in price.

A

Price Elasticity of Demand (PED)

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18
Q

If a good or service is ___ such as a luxury item, then quantity demanded is affected by a change in price.

A

elastic

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19
Q

If the good or service is ___ then changes in price have little to no effect on quantity demanded.

A

inelastic

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20
Q

Determining factors of PED:

A

Availability of substitutes
Relevance to budget
Time

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21
Q

Main tools to implement fiscal policy is-

A

is government spending and taxation.

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22
Q

Goals of Fiscal policy are …

A

High employment, Sustainable Growth, stable prices

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23
Q

_____ is the point where planned aggregate expenditure is equal to national income (output).

A

The equilibrium output

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24
Q

_____ is the sum total of consumption, corporate capital investments, net exports, and government spending.

A

Gross Domestic Product (GDP) or aggregate output

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25
Q

If a Government policy is fiscal and expansionary an example would be

A

The government is investing infrastructure program

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26
Q

If a Government policy is monetary and contractionary an example would be

A

an increase in income taxes

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27
Q

The government uses spending policy to ____ the equilibrium level of national output.

A

Increase

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28
Q

An increase in government spending has the same impact on the equilibrium level of output and income as an increase in ____

A

planned investment

Y (output)= C+G+I

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29
Q

A decrease in taxes would lead to an ____ in disposable, or after-tax, income. This leads to an ____ in consumption.

A

increase
increase

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30
Q

When taxes are cut, there is ___ impact on spending.

A

no direct

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31
Q

_____ occurs when a change in government spending is balanced by a change in taxes so as not to create any deficit.

A

Balanced Budget

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32
Q

Government spending has an ____ effect, while tax increases have a ____ effect on the economy.

A

immediate
delayed

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33
Q

The effect of an increase in government spending with an equal increase in taxes to maintain a balanced budget is as follows:

A

First, government spending increases. The effect is direct, immediate and positive.
Then the government also collects more taxes. Which is negative.
The final impact of a tax increase on aggregate expenditure depends on how households respond to it.

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34
Q

_____ refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions.

A

Fiscal Policy

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35
Q

What are the Economic Influences on Fiscal Policy?

A
  1. Tax revenues depend on the state of the economy.
  2. Some government expenditures depend on the state of the economy.
  3. Automatic stabilizers
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36
Q

_____ controls the supply of money and influences bank lending and interest rates. It can be used to slow down inflation or stimulate the economy.

A

Monetary policy

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37
Q

The Fed controls the money supply which is comprised of ….

A

checkable deposits, transactional money and broad money

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38
Q

____ is the value of all currency held outside of bank vaults and the value of all demand deposits, traveler’s checks, and other checkable deposits.

A

Transaction money (M1)

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39
Q

_____ is M1 plus savings accounts or money market accounts. Savings and money market accounts include assets that can be converted quickly to M1 for use in transactions (e.g., money market mutual funds with check writing privileges).

A

Broad money

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40
Q

Who controls the money supply?

A

The Fed

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41
Q

A shift in the supply of money results in

A

a lower equilibrium price, therefore making its worth decrease compared to the currencies of other countries.

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42
Q

___ is the central bank of the United States which all US banks are part of.

A

The Federal Reserve Bank (the Fed)

Only banks have accounts with the Fed

“bankers bank”

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43
Q

The three ways the Fed can influence economic activity is by….

A
  1. Setting short-term interest rates (discount rates and fed funds targets for inter-bank loans).
  2. Buying and or selling treasury securities to increase/decrease money supply.
  3. Setting member bank reserve requirements to increase/decrease funds available for loans.
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44
Q

How does the Fed influence the business cycle and stimulates or restrict economic activity?

A

uses the reserve requirement to control banking activity by increasing or reducing bank reserves at will.

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45
Q

The reserve requirement is…

A

the amount of total deposits that the Fed requires its members to keep with the Federal Reserve at the end of the business day.

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46
Q

A higher reserve requirement means banks will have less to loan which results in…

A

banks having less money available to loan means there is a lower money supply

The money supply can increase by a lower reserve requirement.

47
Q

____ is the interest rate banks pay the Fed. The Fed periodically sets the ______ which regulates the flow of money into the economy.

A

The discount rate

discount rate

48
Q

Changes in the discount rate will lead to changes in the cost of _____ in general.

A

borrowing

lower discount rate means lower interest rates

49
Q

The Fed directly controls the discount rate which in turn influences the ___ and the ____

A

Federal funds rate (banks and banks)
Prime rate (banks and people)

50
Q

_____ describe the Fed’s buying and selling of government securities

A

Open Market Operations

51
Q

What is the Fed’s preferred method of controlling the money supply?

A

Open Market Operations

52
Q

When the Fed wants to use open market operations to increase the money supply, it will ____ US Treasury and government securities from security dealers.

A

Buy

53
Q

If the Fed wants to decrease the money supply, it will ___ its treasury securities holdings.

A

Sell

54
Q

______ refers to the Fed decreasing the money supply in an effort to restrain the economy to slow down inflation

A

Tight monetary policies

55
Q

_____ refers to the Fed’s attempt to stimulate the economy by expanding the money supply.

A

Easy monetary policies

56
Q

What is used to measure annual increases in overall inflation?

A

The Consumer Price Index

57
Q

What is the primary job of the Federal Reserve?

A

To control inflation

58
Q

_____ can be used to determine the health of the U.S. economy.

A

Economic indicators

59
Q

______ Indicators tend to rise and fall in advance of the economy:

A

Leading indicators

60
Q

Below are examples of what type of economic indicator?

Average weekly hours of production workers (manufacturing)
Initial claims for unemployment insurance
Manufacturers’ new orders
Percentage of companies reporting slower deliveries
New orders of non-defense capital goods
New private housing starts
Yield curve
S&P 500
Money supply (M2) growth rate
Index of consumer expectation

A

Leading indicators

61
Q

____ Indicators tend to change at the same time as the economy

A

Coincident indicators

62
Q

Below are examples of what type of economic indicator?

Employees on non-agricultural payrolls
Personal income less transfer payments
Industrial production
Manufacturing and trade sales

A

Coincident indicators

63
Q

___ Indicators tend to follow or lag economic performance:

A

Lagging indicators

64
Q

Below are examples of what type of economic indicator?

Average duration of unemployment
Ratio of trade inventories to sales
Change in index of labor cost per unit of output
Average prime rate
Commercial and industrial loans outstanding
Ratio of consumer installment credit outstanding to personal income
Change in Consumer Price Index (CPI)

A

Lagging indicators

65
Q

____ measures the total market value of a country’s income and output of goods and services produced by all the people and companies in the U.S.

A

Gross Domestic Product (GDP)

A statistic measured quarterly

66
Q

GDP is important because it…

A
  • Indicates if the economy is growing more rapidly or more slowly compared to other quarters or past years.
  • Determines which sectors of the economy are growing and which ones are declining.
  • Compares the size and growth rate of economies in countries throughout the world.
67
Q

Real GDP Includes…

A

-Market value of all final goods and services produced within a country.
-Income of foreigners working in the United States.
-Profits that foreign companies earn in the United States.

68
Q

GDP Excludes….

A

-Imports, to avoid the impact of exchange rates and trade policies.
-The effects of inflation.
-Intermediate goods (goods that could be counted, both when they are purchased as inputs and when they are sold as final products).
-All transactions in which money or goods change hands but in which no new goods and services are produced.
-The income of U.S. citizens working abroad.
-Profits earned by U.S. companies in foreign countries.

69
Q

____ measures the number of people unemployed as a percentage of the labor force.

A

The unemployment rate

*To be counted as unemployed, a person must be out of a job and actively looking for work.

70
Q

Employment falls when the economy experiences a ____. When firms cut back on production, they need fewer workers and people get laid off.

A

Downturn

*Employment tends to fall when aggregate output falls and rise when aggregate output rises.

70
Q

____ refers to the short-term fluctuations of an economy.

A

The business cycle

70
Q

The period from a trough (lowest point) to a peak is called ___

A

an expansion or a boom

70
Q

The period from a peak to a trough is called __

A

a contraction or slump

71
Q

What influences business cycles?

A

Supply and demand influence these cycles.

72
Q

What happens during an expansion?

A

output (production), income, profits, and employment grow

Which causes demand to increase

72
Q

What happens when demand exceeds supply at current prices?

A

inflation occurs, and prices are bid up.

73
Q

A contraction or slump occurs

A

when output, income, profits, and employment fall due to decreased demand

74
Q

If GDP exhibits negative growth for ______, the economy is considered to be in a recession.

A

two consecutive quarters

75
Q

Output per worker ____ in a recession because firms hold excess labor during slumps. Conversely, output per worker ___ during an expansion because firms put the excess labor back to work.

A

falls
rises

76
Q

_____ is defined as worker output per hour. It is the amount of output produced by an average worker in one hour.

A

labor productivity

77
Q

_____ is the general rise in the prices of goods and services.

A

Inflation

78
Q

Prices and income DO or DO NOT increase at the same rate during inflationary periods?

A

do not

79
Q

_____ in the business cycle often, but not always, seem to encourage inflation. _____ counteract inflation.

A

Upturns

Recessions

80
Q

_____ is the result of excessive spending financed by credit markets and bank loans. Keeping inflation low has long been a priority of the Fed.

A

Inflation

81
Q

____ is a decrease in the overall price level. It occurs when many prices decrease simultaneously.

A

Deflation

82
Q

____ occurs when the rate of inflation decreases and prices are still rising but at a slower rate.

A

Disinflation

83
Q

___ is a period of a rapid increase in the overall price level.

A

Hyperinflation

84
Q

_____ results in declining prices, slow economic growth, and high unemployment.

A

Stagnation

85
Q

In business cycles, the economy generally alternates between ____ and ____

A

stagnation and inflation

86
Q

___ signifies a period of high inflation combined with slow or stagnant economic growth (i.e. high unemployment.)

A

Stagflation

87
Q

When stagflation occurs, the economy is ____ yet prices continue to rise.

A

When stagflation occurs, the economy is contracting, yet prices continue to rise

88
Q

Causes of Inflation

A

Sustained inflation
Demand-pull inflation
Cost-push or supply-side inflation
Expected inflation

89
Q

_____ occurs when the overall price level continues to rise over a fairly long period of time. Most economists believe that sustained inflation can occur only if the Fed continuously increases the money supply.

A

Sustained Inflation

90
Q

______ Inflation is initiated by an increase in aggregate demand. As demand shifts higher while supply remains the same, the equilibrium price will increase.

A

Demand-pull

91
Q

______ Inflation is initiated by an increase in costs. An increase in costs may also lead to stagflation - when the economy is experiencing inflation during a time of contraction.

A

Cost-push or supply-side

92
Q

_____ is “built into the system” as a result of expectations. If prices have been rising and people form their expectations from this past behavior, firms may continue raising prices even if demand is slowing.

A

Expected inflation

93
Q

____ represents a measure of the average change in prices of goods and services over a period of time.

A

The Consumer Price Index (CPI)

94
Q

Fluctuations in the CPI show the course of ____ since it compares relative price changes over time.

A

inflation

95
Q

____ is used as the basis for adjusting Social Security payments, determining cost-of-living increases in pensions and wages, and indexing tax-rate tables.

A

The Consumer Price Index (CPI)

96
Q

Inflation that is higher than expected benefits ____

A

debtors

97
Q

Inflation that is lower than expected benefits ____

A

creditors

98
Q

____ gives an indication of the market’s expectation of the future direction of interest rates.

A

A yield curve

*This provides an estimate of the current term structure of interest rates and changes daily as yields-to-maturity fluctuate.

99
Q

Yield Curve shows the ___ (on the vertical axis) and ____ (on the horizontal axis) as of a particular date.

A

Yields
Maturity

100
Q

The slope of the yield curve indicates the relationship between ____

A

short-term and long-term interest rates

101
Q

There are 3 typical shapes to the curve:

A

Flat
Downward Sloping (inverted and or negative)= meaning short term interest rates are higher than long term interest rates. A downward sloping yield curve indicates that expectations are that interest rates will decrease in the future. During the time of recessions, the Fed may decrease interest rates in order to stimulate the economy.
Upward sloping (normal and or positive= short rates are lower than long term rates

102
Q

______ sloping yield curve means that short term interest rates are higher than long term interest rates.

A

Downward

103
Q

______ sloping yield curve means that short rates are lower than long term rates

A

Upward

104
Q

A downward sloping yield curve indicates that____

A

interest rates will decrease in the future.

105
Q

What are the 3 theories that determine the shape of the yield curve?

A

The horizon premium theory
The market segmentation theory
The expectations theory

106
Q

____ asserts that long-term yields are the average of the short-term yields expected to prevail during the period before a bond matures

A

The expectations theory

107
Q

The _____ theory holds that the yield curve shape is based on the supply and demand of each unique segment, rather than future interest rate expectations.

A

The market segmentation theory

108
Q

The horizon premium theory asserts that

A

on average, investors pay a price premium for bonds with short-term maturities. This is to avoid the greater interest rate and price risks of bonds with longer maturities. Due to this premium, long-term bond yields are typically higher than short-term bond yields. Thus, an upward sloping yield curve is considered normal.

109
Q

_____ increase in the price of one will cause an increase in demand for
the other.

A

Substitutes

For example, if the price of oil, gas, or propane suddenly rose
sharply, the demand for firewood would most likely increase.

110
Q

______ are products that are usually consumed jointly. They are related
such that a decrease in the price of one will cause an increase in the demand
for the other.

A

Complements

For example, when jelly goes on sale, peanut butter will most
likely increase.

CFP Course Prep 1 (15 decks)

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