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CIMA > Economics > Flashcards

Economics Flashcards

1
Q

Utility defined

A

the perception that something will satisfy a need or desire

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2
Q

Marginal utility

A

concept that value increases for each unit of consumption up to a point at which the value begins decreasing for each additional unit consumed

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3
Q

Austrian school of thought

A

Government intervention may cause a boom and bust cycle.

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4
Q

Keynesian economic theory suggests

A

Keynesian economics theory suggests that 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. Government intervention is necessary to correct these short-run inefficiencies.

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5
Q

Keynesian Theory of Business Cycles

A

In the event of lower aggregate demand, lower wages
result in lower spending, hence affecting demand further.
*
Very low-interest rates would not stimulate the
economy because confidence would be too low.
*
The government should intervene in a crisis, running a
deficit.

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6
Q

Milton Friedman believe in

A

letting free markets operate with minimal intervention from the government and that small,
incremental expansion of the money supply was optimal.

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7
Q

Monetarism advocates for

A

a steady increase in the money supply and a limited role of government.

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8
Q

Elasticity

A

is the sensitivity of the change in quantity for a given change in
the price of a good.

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9
Q

Subsititute

A

It is a good that has a positive cross-price elasticity.

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10
Q

Compliment

A

It is a good that has a negative cross price elasticity

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11
Q

Supply side policy goal

A

To create an environment in which workers and owners of capital have the maximum incentive and ability to produce and develop
goods.

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12
Q

Supply side policy focuses on

A

how tax policy can be used to improve incentives to work and invest.

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13
Q

Velocity of money defined

A

The speed or rate at which money passes through a system; the number of times money is spent
during a specified unit of time

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14
Q

Velocity of money calculation

A

velocity = value x price/money supply

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15
Q

Central Bank goal

A

may include controlling inflation, stabilizing the local currency, and maintaining full employment

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16
Q

Central bank activities

A

may include issuing currency, regulating credit, bank oversight, and serving the banking needs of the government, act as lender of last resort, and manage exchange reserves

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17
Q

The gold standard

A

Monetary system where the economic unit of trade (e.g., local currency) is based on or linked to gold.

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18
Q

The gold standard ramifications

A

In theory, requiring gold reserves to back up or guarantee paper currency should help manage inflation. Assuming that the amount of gold available is fixed, this can have a deflationary effect.

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19
Q

The gold standard potential benefits

A

Stabilizes prices; can reduce uncertainty in trade; acts as a check and balance in keeping
governments from creating units of their currency at will, a system such as the gold standard can help prevent dishonest governments from manipulating economies and financial systems.

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20
Q

The gold standard correlation

A

the value of gold and the U.S. dollar typically have an inverse relationship

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21
Q

Potential drawbacks of gold standard

A

Applying a gold standard system is not convenient, is not very flexible, and may not be sufficiently scalable; it can create large short-term swings in value and price; such a standard can also be manipulated or controlled through war and other means.

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22
Q

Open Market Operations

A

are the purchases and sales of government bonds from and to commercial banks or market makers.

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23
Q

Repurchase Rate

A

(repo rate) is the rate at which the central bank agrees to buy or sell bonds to commercial banks through a repurchase agreement.

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24
Q

Discount Rate

A

is the rate at which member banks
borrow from the central bank.

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25
Q

Federal Funds Rate

A

is the rate on interbank lending on
overnight borrowing or reserves.

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26
Q

Reserve requirement

A

Is a requirement by the central bank that banks keep a specified percentage of their deposits on hand, which thus affects the supply of money.

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27
Q

Real Rates

A

rates and returns that have been adjusted for the impact of inflation

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28
Q

Nominal Rate

A

a stated or reported rate that does not consider compounding within the annual period; a rate of
interest that has not been adjusted for the impact of inflation

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29
Q

Keynesians believe

A

that fiscal policy is effective in affecting
aggregate demand.

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30
Q

Monetarists believe

A

that fiscal policy effectiveness is only
temporary.

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31
Q

Expansionary fiscal policy means

A

Increase spending

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32
Q

Contractionary fiscal policy means

A

Increase taxes

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33
Q

Defensive Industries would include

A

food producers and processors,
pharmaceutical firms, and
public utilities

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34
Q

Cyclical Industries would include

A

producers of consumer durables (e.g. autos) and capital goods (i.e. goods used by other firms to produce their own products.)

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35
Q

Hyperinflation

A

is an extremely fast increase in the aggregate price level.
–
It generally occurs when government spending is not backed with tax revenues and the money supply is increased (or
unlimited).

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36
Q

Consumer price index

A

(CPI) is used to track inflation within a given economy.

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37
Q

PRODUCER PRICE INDEX

A

(PPI), also known as the wholesale
price index (WPI), tracks inflation in prices of goods and services to
domestic producers.

38
Q

Deflation

A

is a sustained decrease in the aggregate price level (negative
inflation rate).
–
The purchasing power of money increases.
–
The liability of the borrower increases if the loan has fixed monetary
terms.

39
Q

Reflation

A

a condition in which prices begin rising again; a term used to describe monetary or fiscal policy designed to raise output and counter the effects of falling prices or deflation; often occurs after an economic contraction and fall in
financial markets

40
Q

Stagflation

A

a condition in which economic output is low or declining and prices (inflation) are going up

41
Q

Deflation

A

is a decline in the inflation rate.

42
Q

Leading Economic Indicators

A

Average weekly hours
*
Average weekly initial claims
for unemployment insurance
*
Manufacturers’ new orders for
consumer goods and materials
*
Vendor performance, slower
deliveries diffusion index
*
Manufacturers’ new orders for
nondefense capital goods
*
Building permits for new
private housing units
*
S&P 500 Index
*
Money supply, real M2
*
Interest rate spread between
10 year Treasury yields and
the federal funds rate
*
Index of Consumer
Expectations

43
Q

Coincident Economic Indicators

A

Aggregate real personal
income
*
Employees on nonfarm
payrolls
*
Industrial Production Index
*
Manufacturing and trade sales

44
Q

Lagging Economic Indicators

A

Average duration of
unemployment
*
Inventory to sales ratio
*
Change in unit labor costs
*
Average bank prime lending
rate
*
Commercial and industrial
loans outstanding
*
Ratio of consumer installment
debt to income
*
Change in consumer price
index for services

45
Q

Producer Price Index

A

a measure of the average change in the price in goods and services received by domestic producers;

46
Q

Consumer Price Index

A

a broad measure of inflation; measures prices by taking a weighted average of a basket of
consumer goods and services, including food, medical care, transportation, energy, etc.

47
Q

Absolute Advantage

A

Lowest cost producer of a good

48
Q

Comparative Advantage

A

Best producer of a good

49
Q

International Monetary Fund

A

Ensuring stability of the exchange rate system

Ensuring the stability of the international payments system

50
Q

The World Bank

A

Fighting poverty in developing countries

Encouraging environmentally sound economic growth

51
Q

World Trade Organization

A

Providing the legal and institutional foundation for the multinational trading system

52
Q

The World Bank was established by

A

the Bretton Woods agreement

53
Q

Spot Exchange Rate

A

is an exchange rate for an
immediate delivery (that is, exchange) of currencies

54
Q

Forward Exchange Rates

A

is an exchange rate for the exchange of currencies at some specified, future point in time.

55
Q

Currency Peg Defined

A

policy set by government or central banks to fix the price of its
domestic currency to the currency of another country

also known as the “fixed exchange rate” or “pegged exchange
rate”

56
Q

Currency Peg Application

A

currency pegs are meant to create confidence and stability which should in turn simplify and expand trade

57
Q

Mark to market value for forward contracts is the profit or loss that

A

value for forward contracts is the profit or loss that would result from closing out a position at current market prices.

58
Q

Special Drawing Rights Defined

A

supplementary foreign exchange reserve assets created and
managed by the International Monetary Fund (IMF)

59
Q

Special Drawing Rights Application

A

SDRs are not currency but rather represent a claim to a currency and are intended to increase liquidity by
supplementing currency reserves

60
Q

The core sentiment in Keynesian Theory

A

A stimulative monetary policy

61
Q

Net exports are studied in

A

macroeconomics

62
Q

CAPM is considered a version of

A

APT, but utilizes standardized data

63
Q

The excess return of a treasury bond over the risk free rate since the 1950s has been

A

1-1.5%

64
Q

What are good investments during Cyclical markets

A

Consumer staples

65
Q

Between 1982 and 2000, the US markets were in a

A

Secular bull market

66
Q

International capital flow was greatest between United States and Europe

A

prior to the great depression

67
Q

A significant increase in price to earnings ratio in the US stocks may indicate

A

Extreme equity valuations

68
Q

What was the main driver for Eurpean countries to qualify for the Euro

A

Curbing inflation

69
Q

A consultant is reviewing the role of central banks and their positions on curbing prices. In the United States, he may conclude that

A

The price of goods is a concern and dictates policy

70
Q

P/E ratios and trading activity as inputs to a proprietary forecast model. She is most likely wanting to produce a

A

fundamental factor models

71
Q

Interest rates in developed countries and emerging markets are considered to be

A

correlated

72
Q

The longest secular bull market in the US histor began in

A

1950

73
Q

The end of a secular bear market is typically marked by

A

indifference

74
Q

What has helped keep interest rates low in the United States

A

Globalization

75
Q

Alternative investments displayed what type of correlation with the stock market during the early 2000s

A

negative

76
Q

Raw descriptors such as market returns and interest rates are variables used in what

A

Macroeconomic factor models

77
Q

Macroeconomic factor models measures include

A

interest rates, realized returns, inflation and GDP

78
Q

At the early part of the millennium, private equity corrleated highly with

A

Large US stocks; Russell 1000

79
Q

Who is credit with found the study of macroecon

A

John Keynes

80
Q

Areas that macroeconomic focuses on include

A

GDP
Unemployment
Net Exports
National Income
Price Levels
International Trade

81
Q

Macroeconomic is also commonly known as

A

top down approach

82
Q

Microeconomic primarily focuses on what

A

forces that drive price levels within the segments of an economy

83
Q

Areas that microeconomics concentrate include

A

supply and demand
Price level changes
Consumer behavior
Labor markets
Production at the company level

84
Q

A yield spread is what

A

the difference between yields on differing debt instruments

85
Q

Large the spread between bonds tends to mean

A

more risk

86
Q

The lower the spread between bonds tends to mean

A

less risk

87
Q

Widening spreads typlically implies

A

to positive yield curves which correlates to periods of economic expansion

88
Q

A flat yield curve can be considered

A

transitory as the curve moves from normal to inverted

89
Q

The velocity of money is

A

simply how often a dollar exchanges hands

90
Q

How is velocity of money measured

A

as a ratio of GNP to the total money supply of a given country. It is a relection on how robust an economy made be and is a factor in inflation

91
Q
A

CIMA (22 decks)

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