Economics Flashcards
Utility defined
the perception that something will satisfy a need or desire
Marginal utility
concept that value increases for each unit of consumption up to a point at which the value begins decreasing for each additional unit consumed
Austrian school of thought
Government intervention may cause a boom and bust cycle.
Keynesian economic theory suggests
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.
Keynesian Theory of Business Cycles
In the event of lower aggregate demand, lower wages
result in lower spending, hence affecting demand further.
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Very low-interest rates would not stimulate the
economy because confidence would be too low.
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The government should intervene in a crisis, running a
deficit.
Milton Friedman believe in
letting free markets operate with minimal intervention from the government and that small,
incremental expansion of the money supply was optimal.
Monetarism advocates for
a steady increase in the money supply and a limited role of government.
Elasticity
is the sensitivity of the change in quantity for a given change in
the price of a good.
Subsititute
It is a good that has a positive cross-price elasticity.
Compliment
It is a good that has a negative cross price elasticity
Supply side policy goal
To create an environment in which workers and owners of capital have the maximum incentive and ability to produce and develop
goods.
Supply side policy focuses on
how tax policy can be used to improve incentives to work and invest.
Velocity of money defined
The speed or rate at which money passes through a system; the number of times money is spent
during a specified unit of time
Velocity of money calculation
velocity = value x price/money supply
Central Bank goal
may include controlling inflation, stabilizing the local currency, and maintaining full employment
Central bank activities
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
The gold standard
Monetary system where the economic unit of trade (e.g., local currency) is based on or linked to gold.
The gold standard ramifications
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.
The gold standard potential benefits
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.
The gold standard correlation
the value of gold and the U.S. dollar typically have an inverse relationship
Potential drawbacks of gold standard
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.
Open Market Operations
are the purchases and sales of government bonds from and to commercial banks or market makers.
Repurchase Rate
(repo rate) is the rate at which the central bank agrees to buy or sell bonds to commercial banks through a repurchase agreement.
Discount Rate
is the rate at which member banks
borrow from the central bank.
Federal Funds Rate
is the rate on interbank lending on
overnight borrowing or reserves.
Reserve requirement
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.
Real Rates
rates and returns that have been adjusted for the impact of inflation
Nominal Rate
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
Keynesians believe
that fiscal policy is effective in affecting
aggregate demand.
Monetarists believe
that fiscal policy effectiveness is only
temporary.
Expansionary fiscal policy means
Increase spending
Contractionary fiscal policy means
Increase taxes
Defensive Industries would include
food producers and processors,
pharmaceutical firms, and
public utilities
Cyclical Industries would include
producers of consumer durables (e.g. autos) and capital goods (i.e. goods used by other firms to produce their own products.)
Hyperinflation
is an extremely fast increase in the aggregate price level.
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It generally occurs when government spending is not backed with tax revenues and the money supply is increased (or
unlimited).
Consumer price index
(CPI) is used to track inflation within a given economy.
PRODUCER PRICE INDEX
(PPI), also known as the wholesale
price index (WPI), tracks inflation in prices of goods and services to
domestic producers.
Deflation
is a sustained decrease in the aggregate price level (negative
inflation rate).
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The purchasing power of money increases.
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The liability of the borrower increases if the loan has fixed monetary
terms.
Reflation
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
Stagflation
a condition in which economic output is low or declining and prices (inflation) are going up
Deflation
is a decline in the inflation rate.
Leading Economic Indicators
Average weekly hours
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Average weekly initial claims
for unemployment insurance
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Manufacturers’ new orders for
consumer goods and materials
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Vendor performance, slower
deliveries diffusion index
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Manufacturers’ new orders for
nondefense capital goods
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Building permits for new
private housing units
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S&P 500 Index
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Money supply, real M2
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Interest rate spread between
10 year Treasury yields and
the federal funds rate
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Index of Consumer
Expectations
Coincident Economic Indicators
Aggregate real personal
income
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Employees on nonfarm
payrolls
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Industrial Production Index
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Manufacturing and trade sales
Lagging Economic Indicators
Average duration of
unemployment
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Inventory to sales ratio
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Change in unit labor costs
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Average bank prime lending
rate
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Commercial and industrial
loans outstanding
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Ratio of consumer installment
debt to income
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Change in consumer price
index for services
Producer Price Index
a measure of the average change in the price in goods and services received by domestic producers;
Consumer Price Index
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.
Absolute Advantage
Lowest cost producer of a good
Comparative Advantage
Best producer of a good
International Monetary Fund
Ensuring stability of the exchange rate system
Ensuring the stability of the international payments system
The World Bank
Fighting poverty in developing countries
Encouraging environmentally sound economic growth
World Trade Organization
Providing the legal and institutional foundation for the multinational trading system
The World Bank was established by
the Bretton Woods agreement
Spot Exchange Rate
is an exchange rate for an
immediate delivery (that is, exchange) of currencies
Forward Exchange Rates
is an exchange rate for the exchange of currencies at some specified, future point in time.
Currency Peg Defined
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”
Currency Peg Application
currency pegs are meant to create confidence and stability which should in turn simplify and expand trade
Mark to market value for forward contracts is the profit or loss that
value for forward contracts is the profit or loss that would result from closing out a position at current market prices.
Special Drawing Rights Defined
supplementary foreign exchange reserve assets created and
managed by the International Monetary Fund (IMF)
Special Drawing Rights Application
SDRs are not currency but rather represent a claim to a currency and are intended to increase liquidity by
supplementing currency reserves
The core sentiment in Keynesian Theory
A stimulative monetary policy
Net exports are studied in
macroeconomics
CAPM is considered a version of
APT, but utilizes standardized data
The excess return of a treasury bond over the risk free rate since the 1950s has been
1-1.5%
What are good investments during Cyclical markets
Consumer staples
Between 1982 and 2000, the US markets were in a
Secular bull market
International capital flow was greatest between United States and Europe
prior to the great depression
A significant increase in price to earnings ratio in the US stocks may indicate
Extreme equity valuations
What was the main driver for Eurpean countries to qualify for the Euro
Curbing inflation
A consultant is reviewing the role of central banks and their positions on curbing prices. In the United States, he may conclude that
The price of goods is a concern and dictates policy
P/E ratios and trading activity as inputs to a proprietary forecast model. She is most likely wanting to produce a
fundamental factor models
Interest rates in developed countries and emerging markets are considered to be
correlated
The longest secular bull market in the US histor began in
1950
The end of a secular bear market is typically marked by
indifference
What has helped keep interest rates low in the United States
Globalization
Alternative investments displayed what type of correlation with the stock market during the early 2000s
negative
Raw descriptors such as market returns and interest rates are variables used in what
Macroeconomic factor models
Macroeconomic factor models measures include
interest rates, realized returns, inflation and GDP
At the early part of the millennium, private equity corrleated highly with
Large US stocks; Russell 1000
Who is credit with found the study of macroecon
John Keynes
Areas that macroeconomic focuses on include
GDP
Unemployment
Net Exports
National Income
Price Levels
International Trade
Macroeconomic is also commonly known as
top down approach
Microeconomic primarily focuses on what
forces that drive price levels within the segments of an economy
Areas that microeconomics concentrate include
supply and demand
Price level changes
Consumer behavior
Labor markets
Production at the company level
A yield spread is what
the difference between yields on differing debt instruments
Large the spread between bonds tends to mean
more risk
The lower the spread between bonds tends to mean
less risk
Widening spreads typlically implies
to positive yield curves which correlates to periods of economic expansion
A flat yield curve can be considered
transitory as the curve moves from normal to inverted
The velocity of money is
simply how often a dollar exchanges hands
How is velocity of money measured
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
