Economics Flashcards
name the purpose/goal of the following orgs
International Monetary Fund (IMF):
The World Bank:
The World Trade Organization (WTO):
U.S. Federal Reserve Board:
International Monetary Fund (IMF): ensure stability of exchange rate system and ensure stability of international payments system
The World Bank: fight poverty of developing countries and encourage environmentally sound economic growth
The World Trade Organization (WTO): provide legal and institutional foundation for the multinational trading system
U.S. Federal Reserve Board: stabilize prices and maximize employment
If the economy is shrinking, firms with low operating leverage will experience ______ in profits than firms with high operating leverage
smaller decreases
As sales decrease, firms, with high operating leverage, spread these fixed costs over fewer units and thus decrease profits. In other words, revenue is going down while fixed expenses do not decrease, and as a result profit decrease. So, the reverse is true, in that companies who have lower operating leverage (more variable costs) will see less impact on their bottom line as their variable expenses should decrease as revenue decreases.
Supply-side economists wishing to stimulate the economy are most likely to recommend:
1) a decrease in the money supply.
2) a decrease in the tax rate.
3) a decrease in production output.
4) an increase in the real interest rate.
2) Supply-siders argue that lowering tax rates stimulates investment.
Which of the following combinations will result in a sharply increasing yield curve?
1) Increasing future expected short rates and constant liquidity premiums
2) Increasing future expected short rates and increasing liquidity premiums
3) Decreasing future expected short rates and increasing liquidity premiums
4) Constant future expected short rates and increasing liquidity premiums
2) Increasing future expected short rates and increasing liquidity premiums
Classical economics theory
Free hand of the market; supply/demand will act accordingly
Adam Smith
Cannot explain prolonged depressions as in theory these should self-correct
Utility
the perception that something will satisfy a demand.
“preference” for one good over another
Marginal Utility
concept that values increase for each unit of consumption UP TO A POINT at which value begins decreasing for each additional unit consumed
“ice cream theory”
Austrian School of Econ Thought
gov’t intervention may cause a boom/bust cycle
similar to neoclassical (supply/demand drives pricing)
Keynesian Economics
Macroeconomics & Business Cycles
Refuted neoclassical
In the short-run, economic productivity is highly impacted by aggregate demand (spending) and this demand is not equal to the capacity of an economy.
Especially in times of recession, the economy is influenced by myriad factors that can cause economic and financial disruptions. Hence, government intervention is necessary to correct these short-run inefficiencies.
Milton Friedman
Friedman ultimately opposed Keynesian theories, supported
monetarism and opposed the creation of the Federal
Reserve. Friedman believed in letting free markets operate
with minimal intervention from the government and that small,
incremental expansion of the money supply was optimal.
Monetarism
Monetarists contend that inflation is a function of how much money a government prints.
* Advocate for a steady increase in the money supply and a limited role of government.
* Those following the monetarist school of thought object to the Keynesian approach because Keynesian theory
– does not consider the role of the money supply.
– is not logical in light of utility-maximizing market participants.
– ignores the long-term cost of government intervention.
– does not consider the unpredictability of the timing of fiscal policy changes on the economy.
Elasticity
the measurement of how
demand changes based on incremental changes in price
Price Elasticity of Demand = % change in quantity demanded /
the % change in price
Scenario A: The price of a financial product rises by 12% and the change in
demand rises by 10%. The price elasticity of demand is 0.83.
Fiscal vs. Monetary Policy
- Fiscal policy –the government’s spending
and taxing actions - Monetary policy –manipulation of the
money supply (Fed)
country’s central bank
intended to accomplish its core objectives to maximize
employment, promote stable growth and acceptable levels of
inflation.
Central banks enact monetary policy by controlling the money
supply through open market operations, setting the discount rate
and reserve requirements.
Supply-Side Policies
- Goal: To create an environment in which workers
and owners of capital have the maximum
incentive and ability to produce and develop
goods. - Supply-siders focus on how tax policy can be
used to improve incentives to work and invest.
Expansionary v. Contractionary fiscal policy
Expansionary fiscal policy (e.g., tax reduction, government spending on
infrastructure and capital projects, etc.) is often used to encourage growth
and risk-taking.
Contractionary fiscal policy (e.g., tax increases, government budget cuts,
etc.) is often used to slow down growth to avoid excess inflation or
bubbles.
Yield Spreads
the difference in yield percentage between two
debt instruments or categories of debt
spreads typically
widen during
periods of
uncertainty and fear
Yield Curves
- a “normal” yield curve is upward sloping due to higher yields for longer maturities
- information on expected future short-term rates can be implied from the yield curve
- expectations of a rise in short-term rates and an increase in the liquidity premium are examples of situations likely leading to an increase in the yield curve
- a flat or inverted yield curve may indicate a recession is forthcoming (there is historical evidence to support this theory, but recession is not a certain outcome)
Business Cycle: Cyclical vs. Defensive Industries
Cyclical have higher betas; they react heavily to business cycles (car industry)
Defensive has little sensitivity to business cycles; lower betas (Pharma, food producers)
Inflation
A condition in which prices are rising and
purchasing power is falling over time.
Deflation
A condition in which prices are falling. (DEcreasing prices)
Typically happens with a contraction in money
supply and/or credit.
Reflation
A condition in which prices begin rising again.
Typically happens after economic contraction
and/or a decline in the financial markets. (REaching higher prices)
Stagflation (3)
When prices (inflation) are rising, economic growth is
slowing or decreasing, and unemployment is high
Disinflation
A decrease in the rate of rising prices (inflation). It
describes a slowing in the rate of growth (DISengaging from inflation, slowing down)
Leading Econ Indicators
Consumer confidence
Managers purchasing index
Bond yields
Money supply
Housing permits and starts
Coincident Economic Indicators
Personal income
Industrial production
Manufacturing sales
Lagging Economic Indicators
Unemployment
Quantity of loans
Consumer Price Index (CPI)
Consumer credit outstanding vs. personal income
Ratio of inventories to sales
Comparative vs Absolute Advantage
Comparative advantage is the ability or capacity one has in producing goods or services for a lower opportunity cost compared to one’s competitor.
Absolute advantage is the ability or capacity one has in producing more goods or services (e.g., more effectively) compared to one’s competitor.
