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BEC Flashcards > Economic Concepts & Analysis > Flashcards

Economic Concepts & Analysis Flashcards

1
Q

How does a price increase affect supply?

A

When the prices of an item increases supply increases- because more sellers are willing to sell.

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2
Q

What is a supply curve shift?

A

When supply changes due to something other than price.

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3
Q

What are the characteristics of a positive supply curve shift (shift right)?

A

Supply increases at each price point

Higher Equilibrium GDP

Number of sellers increases - market can get flooded

Examples: Government subsidies or technology improvements that decrease costs for suppliers

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4
Q

What are the characteristics of a negative supply curve shift (shift left)?

A

Supply decreases at each price point

Lower Equilibrium GDP

Cost of producing item increases

Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market

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5
Q

How does price affect the demand for an item?

A

When the prices of an item increases- demand for it decreases.

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6
Q

What is a Demand Curve Shift?

A

When demand changes due to something other than price.

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7
Q

What is a Positive Demand Curve Shift (Shift Right)?

A

When demand increases at each price point

Price of substitutes go up - price of beef rises- so people buy more chicken

Future price increase is expected - War in Middle East- people go out and buy gas

Market expands - i.e. people get new free health care plan- demand at clinic rises

Expansion - more spending increases equilibrium GDP

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8
Q

What is a Negative Demand Curve Shift (Shift Left)?

A

Demand decreases at each price point.

Price of complement goes up - price of beef goes up- less demand for ketchup

Boycott - Company commits social blunder- consumers boycott

Consumer income rises - Demand for inferior goods drops as people have more money to spend

Consumer tastes change

Contraction - less spending decreases equilibrium GDP

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9
Q

What is the Marginal Propensity to Consume?

A

How much you spend when your income increases

Calculate: Change in Spending / Change in Income

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10
Q

What is the Marginal Propensity to Save?

A

How much you save when income increases

Calculate: Change in Savings / Change in Income

Also equals 1 - Marginal Propensity to Consume

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11
Q

How is the multiplier effect calculated?

A

(1 / 1-MPC) x Change in Spending

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12
Q

How does increased spending by consumers and the government affect the demand curve?

A

As spending by consumers or the government increases- the demand curve increases (shifts right).

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13
Q

How does spending change due to the multiplier effect?

A

The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect.

One consumer spends money- which:
*Increases the income of a business
*Increases the income of a vendor
*Increases income of employees
*Increases tax revenue

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14
Q

How is Price Elasticity of Demand calculated?

A

% Change in Quantity Demand / % Change in Price

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15
Q

Under elastic demand- how does price affect revenues?

A

Price increases- Revenue decreases

Price decreases- Revenue increases

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16
Q

What conditions would indicate Elastic Demand?

A

Many substitutes (luxury items)
Considered elastic if elasticity is greater than 1
10% drop in demand / 8% increase in price : 1.25 (Elastic)

Price increases- Revenue decreases
Price decreases- Revenue increases

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17
Q

How does revenue react to price under Inelastic Demand?

A

Price increases- Revenue increases

Price decreases- Revenue decreases

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18
Q

What conditions would indicate Inelastic Demand?

A

Few substitutes (groceries- gasoline)
Considered inelastic if coefficient of elasticity is less than 1
5% drop in demand / 10% increase in price : .5 (inelastic)

Price increases- Revenue increases
Price decreases- Revenue decreases

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19
Q

What is Unitary Demand?

A

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1

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20
Q

How is Income Elasticity of Demand calculated?

A

% Change Quantity Demanded / % Change in Income

Normal goods greater than 1 (demand increases more than income)

Inferior goods less than 1 (demand increases less than income)

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21
Q

What conditions occur under periods of inflation?

A

Interest rates increase
Reduced demand for loans
Reduced demand for houses- autos- etc.
Value of bonds and fixed income securities decrease
Inferior good demand to increase
Foreign goods more affordable than domestic
Demand for domestic goods decrease

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22
Q

What happens under Demand-Pull inflation?

A

Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases

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23
Q

What happens under Cost-Push inflation?

A

Overall production costs increase
Supply decreases (shifts left)
Market equilibrium price increases

Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase

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24
Q

What is the Equilibrium Price?

A

The price where Quantity Supplied : Quantity Demanded

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25
Q

What is Optimal Production?

A

When Marginal Revenue : Marginal Cost

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26
Q

What is the result of a Price Floor?

A

Causes a surplus if above equilibrium price.

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27
Q

What is GDP (Gross Domestic Product)?

A

The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests

Included: Foreign company has US Factory

Not included: US company has foreign factory

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28
Q

What is included under the income approach for calculating GDP?

A

Sole Proprietor and Corp Income
Passive Income
Taxes
Employee Salaries
Foreign Income Adjustments
Depreciation

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29
Q

What is included under the Expenditure Approach for calculating GDP?

A

Individual Consumption

Private Investment

Government Purchases

Net Exports

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30
Q

What is Nominal GDP?

A

Measures goods/services in current prices.

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31
Q

For what is a GDP Deflator used?

A

Used to convert GDP to Real GDP

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32
Q

What is Real GDP?

A

Nominal GDP / GDP Deflator x 100

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33
Q

What is Gross National Product (GNP)?

A

Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included

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34
Q

What is the Consumer Price Index (CPI)? How is it applied?

A

Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 1.0

((CPI Current - CPI Last) / CPI Last) * 100

35
Q

How is disposable income calculated?

A

Personal Income - Personal Taxes

36
Q

How is Return to Scale calculated?

A

% Increase in output / % Increase in input

Greater than 1 : Increasing returns to scale

Less than 1 : Decreasing returns to scale

37
Q

When is the economy in Recession?

A

When GDP growth is negative for two consecutive quarters.

38
Q

What is a Depression?

A

A prolonged- severe recession with high unemployment rates

No requisite period of time for the economy to officially be in a depression

39
Q

What are the stages of the Economic Cycle?

A

Peak (highest)
Recession (decreasing)
Trough (lowest)
Recover (increasing)
Expansion (higher again)

40
Q

What are leading indicators?

A

Conditions that occur before a recession or before a recovery

Example: Stock Market or New Housing Starts

41
Q

What are lagging indicators?

A

Conditions that occur after a recession or after a recovery

Examples: Prime Interest Rates- Unemployment

42
Q

What are coincident indicators?

A

Conditions that occur during a recession or during a recovery

Example: Manufacturing output

43
Q

Which people are included in the calculation of unemployment?

A

Only people looking for jobs

44
Q

What is Cyclical Unemployment?

A

GDP doesn’t grow fast enough to employ all people who are looking for work

Example: People are unemployed in 2010 because there aren’t enough jobs available due to the economy

45
Q

What is Frictional Unemployment?

A

People are changing jobs or entering the work force. This is a normal aspect of full employment.

Example: A recent college graduate is looking for a job

46
Q

What is Structural Unemployment?

A

A worker’s job skills do not match those necessary to get a job so they need education or training

Example: A construction worker wants to work in an office- so they quit their job and get computer training

47
Q

How does inflation relate to unemployment?

A

High Unemployment : Low Inflation (Vice Versa)

48
Q

What is the Discount Rate?

A

The rate a bank pays to borrow from the Fed.

49
Q

What is the Prime Rate?

A

The rate a bank charges their best customers on short-term borrowings.

50
Q

What is the Real Interest Rate?

A

Inflation-adjusted interest rate

51
Q

What is the Nominal Rate?

A

Rate that uses current prices

52
Q

What is the Risk-Free Rate?

A

Rate for a loan with 100% certainty of payback.

Usually results in a lower rate.

US Treasuries are an example.

53
Q

What is included in the M1 money supply?

A

Currency- Coins- and Deposits

54
Q

What is included in the M2 money supply?

A

Highly liquid assets other than currency- coins or deposits

55
Q

What is Deficit Spending?

A

Increased spending levels without increased tax revenue.

Lower taxes without decrease in spending

Gamble that the multiplier effect will take over and boost economy

56
Q

How can the Fed control the money supply?

A

By buying and selling the government’s securities.

57
Q

How does the Fed control economy-wide interest rates?

A

By adjusting the discount rate charged to banks

58
Q

What is a Tariff?

A

A tax on imported goods

59
Q

What is a quota?

A

A limit on the number of goods that can be imported

60
Q

How do international trade restrictions affect domestic producers?

A

They are good for domestic producers.

Demand curve shifts right

Fewer substitutes

They can charge higher prices

61
Q

How to international trade restrictions affect foreign producers?

A

They are bad for foreign producers

Demand curve shifts left

Fewer buyers

They must charge lower prices

62
Q

How do international trade restrictions affect foreign consumers?

A

They are good for foreign consumers

Supply curve shifts right

Goods purchased at lower prices in the foreign markets

63
Q

How do international trade restrictions affect domestic consumers?

A

They are bad for domestic consumers

Supply curve shifts left

Fewer goods bought due to higher prices

64
Q

What is Accounting Cost?

A

Explicit (Actual) cost of operating a business

Implicit costs are opportunity costs

65
Q

What is Accounting Profit?

A

Revenue - Accounting Cost

66
Q

What is Economic Cost?

A

Explicit + Implicit Cost

67
Q

What is Economic Profit?

A

Revenue - Economic Cost

68
Q

Define Market Risk

A

The risk that a sluggish economy will affect the value of a debt instrument

69
Q

Define Sector Risk

A

The risk that an event in the investment’s business sector will harm the investment

For example- the banking sector is sluggish- so even stocks of healthy banks suffer

70
Q

Define Credit/Default Risk

A

The risk that a debtor will be unable to make loan payments or pay back the principal

71
Q

Define Interest Rate Risk

A

The risk that a change in interest rates will adversely affect the value of the note

Example: Bond is for 10% but prevailing market rate is now 12%. If bondholder wants to sell it- they will have to sell it at a discount.

72
Q

What does Standard Deviation measure?

A

It measures the volatility of an investment.

73
Q

What is Systematic Risk?

A

Risk that impacts the entire market and can’t be avoided or reduced through diversification

Example: Wars

74
Q

What is Unsystematic Risk?

A

Relates to a particular industry or company

Example: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest

75
Q

What does Beta measure?

A

Beta measures how volatile the investment is relative to the rest of the market.

In other words- how quickly (and in what amount) does the value of the stock change when the market sways?

76
Q

What is Variance?

A

It compares volatility of an investment to the market average.

Factors include both Systematic and Unsystematic Risk.

77
Q

What is a Derivative?

A

An asset whose value is DERIVED from the value of another asset.

Derivatives are measured at Fair Value.

78
Q

How is an Option used?

A

Gives the buyer the option to buy or sell a financial derivative at a certain price

Traders use them to speculate where they think the price will be at a certain point and make a profit

Hedgers use them to offset risk

79
Q

What is a Future?

A

A Forward Contract with a future value.

They are sold and traded on the futures market.

80
Q

What is an Interest Rate Swap?

A

Forward Contract to swap payment agreements

They are highly liquid and often valued using the Zero-Coupon method.

Example: Steve pays Sally a fixed payment with a fixed interest rate. Sally pays Steve a variable payment tied to a benchmark such as LIBOR

81
Q

What is Legal Risk?

A

Risk that a law or regulation will void the derivative

82
Q

What is a Fair Value Hedge?

A

Hedge that protects against the value of an asset or liability changing.

Changes in value are reported in earnings.

83
Q

What is a Cash Flow Hedge?

A

A hedge that protects against a set of future cash flows changing.

Changes in value are reported in OCI.

84
Q

What is a Foreign Currency Hedge?

A

A hedge that protects against the value of a foreign currency changing.

For example- a foreign currency hedge might be used to protect against the following: If you have receivables denominated in a foreign currency and that currency dips in value - your receivables are worth less than before.

BEC Flashcards (6 decks)

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