Economic Factors

Question 1

Business cycle

Answer 1

recurring pattern of four phases of economic activity

Question 2

business cycle - expansion (growth/recovery)

Answer 2

characterized by an increase in business activity, production, demand and employment
money is borrowed to further expansion causing interest rates to rise

Question 3

business cycle - peak

Answer 3

characterized by demand rising over supply for goods and services resulting in inflation
with rise of prices, demand slows

Question 4

business cycle - contraction (decline/recession)

Answer 4

decreased demand results in increasing unemployment which futhers the decrease in demand. inflation will typically slow and then deflate

Question 5

business cycle - trough

Answer 5

bottom of the economic decline

eventually, decreased prices stimulate demand and the economy will experience a period of recovery and expansion

Question 6

recession

Answer 6

when real GDP declines for two consecutive quarters

Question 7

depression

Answer 7

extended and severe decline in economic activity

Question 8

fiscal policy

Answer 8

adjustment of government spending through tax rates, interest rates, and government spending in order to control the economy
controlled by president and congress

Question 9

monetary policy

Answer 9

adjustment of supply of money and credit, which affects interest rates, in order to control the economy, inflation specifically
controlled by FRB

Question 10

Keynesian economic theory

Answer 10

states that economic intervention by government is necessary to sustain growth and stability
counter crises by increasing government deficit spending

Question 11

criticism of keynes

Answer 11

created long-term deficit spending and unintended consequences of government interference

Question 12

supply-side economics

Answer 12

stress reduced taxes and government to promote economic growth
smaller government requires less tax money and lower tax rates leave people with more money to spend and invest, stimulating economic activity

Question 13

Leading indicators

Answer 13

indicators that change before an upward or downward trend in the economy
used to predict trends in economic activity in the near future

Question 14

coincident indicators

Answer 14

change simultaneously with economic trends and mirror current state of economic activity

Question 15

lagging indicators

Answer 15

change after an upward or downward trend in the economy and confirm long-term trends in economic activity

Question 16

inflation

Answer 16

rate at which the general level of prices is rising and therefore, purchasing power is falling
occurs when demand for goods and services rises faster than the supply of goods and services

Question 17

deflation

Answer 17

rate at which the general level of prices is declining
exists when the supply for goods and services is greater than the demand for goods and services and therefore prices are lowered to account for limited demand

Question 18

stagflation

Answer 18

extended period where stagnation (slow economic growth and unemployment) is accompanied with inflation
relatively infrequent because high unemployment is usually characterized by low inflation or deflation and low unemployment is usually characterized by increasing inflation

Question 19

GDP

Answer 19

economic measure of the monetary value of all goods and services produced by labor and property within a country’s borders regardless of producer origin
used to gauge a nation’s economic health and standard of living
increases indicate economic growth and potential inflation

Question 20

3 Components of balance of payments

Answer 20

current account, capital account, financial account

Question 21

balance of payment - current account

Answer 21

flow of goods and services

Question 22

balance of payment - capital account

Answer 22

transfers of capital

Question 23

balance of payment - financial account

Answer 23

investment inflows and outflows

Question 24

inflation or purchasing-power risk

Answer 24

risk that the inflation rate will be higher than the interest rate that a bondholder receives over the life of the bond

Question 25

interest rate risk

Answer 25

inverse relationship between bond prices and interest rates
when interest rates drop then prices of stocks and bonds tend to rise and vice versa
bonds with longer maturities and lower coupons are more volatile in price than those with shorter maturities and larger coupon payments

Question 26

reinvestment risk

Answer 26

risk that future distributions of interest and principal will have to be reinvested at a lower rate or return

Question 27

financial risk

Answer 27

the uncertainty arising from the cap structure of the firm

Question 28

liquidity risk

Answer 28

liquidity is the ease of selling a security without incurring a significant price impact
liquidity is measured by the difference between the bid an dask price, and a large difference implies an illiquid market

Question 29

business risk

Answer 29

unique to the operations and markets in which each firm operates

Question 30

market risk

Answer 30

being in the market at the wrong time

Question 31

regulatory risk

Answer 31

risk that a change in laws, rules, or regulations will negatively affect an investment

Question 32

3 types of exposure to exchange rate risk

Answer 32

transaction exposure, translation exposure, economic exposure

Question 33

exposure to exchange rate risk - transaction exposure

Answer 33

risk surrounding the amount of domestic currency that will be received when transferring funds from a fogeign currency

Question 34

exposure to exchange rate risk - translation exposure

Answer 34

reporting risk for foreign divisions or assets when translated to the domestic currency for consolidated financials

Question 35

exposure to exchange rate risk - economic exposure

Answer 35

effect that exchange rate movements have on the competitiveness, exports, imports, and other economic impacts of the firm