Economics Flashcards
4 stages of the business cycle?
1) Expansion
2) Peak
3) Contraction
4) Trough
Longer, severe contraction is called?
A depression
Mid, short-term contractions are called?
A recession
What defines a recession?
When GDP declines for 6 months or more
What defines a depression?
GDP declines 18 months or more and unemployment is greater than 15%
Expansion is characterized by?
- Increased demand for goods and services
- Increases in industrial production
- Rising stock prices
- Rising property values
- Increasing GDP
Downturns characterized by?
- Rising bankruptcies and defaults
- High consumer debt
- Falling stock prices
- Rising inventories
- Decreasing GDP
What makes up GDP?
- Personal consumption
- Government spending
- Private investments
- Foreign investments
What is CPI?
Consumer price index.
- Measures general price changes. Food, housing, transport, medical care etc..
What does mild inflation do?
Encourage growth
What does high inflation do?
Reduces dollar buying power
Increased inflation?
- Drives up interest rates of fixed income securities»_space; drives down bond prices
What does rising interest rates and inflation mean for bond prices?
They will fall
Why do bond prices fall with inflation rises?
Becuase purchusing power drops»_space; there is less investor demand for the bonds
What does fed do when concerned about inflation rises?
Raise rates to slow economy down»_space; incentivise savings not spending
Bond rates go up with interest rates, why?
To incentivse people to put money into bonds, not keep in savings accounts?
Leading indicators reflect where an economy is going. What are some examples?
- Money supply
- Building permits
- New orders for goods
- Machine tool orders
- Stock prices
- Changes in borrowing
Coincident indicators - comfirm where economy is. What are examples?
- Number of hours worked
- Employment levels
- Personal income
- Sales
- GDP
Lagging indictaors - factors that change»_space; confirming a new trend
- Corporate profits
- Avg duration of employment
- Labour cost per unit of output
- Inventory to sales ratio
- Loans outstanding
What is fiscal policy?
Adjusting level of taxation and government spending
What do Keynesians believe?
Government intervention
What do Laffer and Supply-side believe?
The market should take over
Monetarist Theory?
Well-controlled, increasing money supply
Parts of the money supply are?
M1 - Currency in circulation and accounts etc
M2 - Savings less than 100,000
M3 - Savings more than 100,000
What are the 3 Federal Reserve Bank policy tools?
1) Open market operations (buying/ selling gov securities
2) Changes in discount rates (loans to banks)
3) Changes in reserve requirement
What does the Fed do when wants to loosen monitory supply?
Buys securities from banks»_space; banks receive credit»_space; make more loans
What is the discount rate?
The rate that the Fed lends to banks at
What is the Fiscal policy?
Government budget decisions
Areas of the Fiscal policy include:
- Federal spending
- Money raised through taxes
- Federal budget deficits or surplusses
What is disintermediation?
The flow of money from traditional low yielding accounts to higher yielding investments
Why does disintermediation occur?
When inflation rates are high but bank interest rates are stagnant (usually due to government control), and the bank depositors can get better returns by investing in mutual funds or in securities
Balance of Payments:
The flow of money between the US and other countries.
Largest comonent of balance of payments?
Balance of Trade
- Debit (Spending abroad) - Spensing, Investments, bank loans, foreign aid
- Credit (Foreign spending and investing in US)
Difference between Fiscal and Monitory policy?
Fiscal:
- Actions of congress and president
- Government spending and taxation
Monitory:
- Policy of the Fed
- Discount rate
- Reserves
- Open market operations (Buying/ selling gov securities)
FOMC purchases T-Bills. What will happen to interest rates and bond prices?
- Money supply increases»_space; Interest rates with rise
|»_space; bond prices will fall
How would increased foreign investment impact USD?
USD would rise
How would US investors buying Japanese securities would impact USD?
USD would fall
How would an increase Japan’s trade surplus would impact USD?
USD would fall (US consumers are buying more Jap products than Japs buying US products)
Disintermediation occurs when?
Money is tight and rates are high
Which is the narrowest index?
The DJA - 30 stocks
Cyclical vs. Defensive stocks/ industries
Cyclical - Highly correlated to the economic activity (cars, IT companies)
Defensive - Price has a very low correlation to the economic activity (Healthcare, Household, Personal Care)
Growth industries
IT, bioengineering. Retain earnings to invest in development. Don’t pay many dividends.
Balance Sheet equation
Assets = liabilities + shareholders equitiy
Balance Sheet - Assets:
- Current Assets - Cash, accounts receivable, inventory
- Fixed Assets - Physical assets that can be sold (property)
- Other Assets - Usually intangible, only of value to the company owning them
Balance Sheet - Liabilities:
- Current liabilities - Debt due for payment within next 12 months (acc payable, unpaid wages, accrued taxes)
- Long-term liabilities - Obligations due for payment after 12 months (mortgage, promissory notes)
Working Capital:
Current assets - current liabilities
When an investor converts bonds into common stock, what happens to the balance sheet?
Liabilities decrease and owners’ equity increases. But the balance sheet remains the same.
How is a balance sheet affected when a corporation declares a cash dividend?
- Current liabilities increase
- Total liabilities increase
- Net worth decreases
What are retained earnings?
Profits that a company has earned to date, less any dividends or other distributions paid to investors.
What is book value?
Theoretical liquidation value
Price to earnings (PE) Ratio =
Earnings per share (EPS)
Earnings per share (EPS) =
No. of common shares outstanding
Current Yield =
Market value per common share
Dividends per share =
No. of common shares outstanding
Book value per share =
Shares of common stock outstanding
What companies have either very high or very low PE ratios?
Speculative
What are liquidity ratios?
- Acid Test
- Current Ratio
- Quick Ratio
What is a capitalization ratio?
Debt to equity ratio
Which rate is the most volatile?
Federal funds rate
What was Keynes’ theory?
Demand side economics. Increaseing income through higher taxes and gov spending.
Divident payount ratio =
1) EPS (Earnings / Shares outstanding)
2) Divide dividend per share / EPS
Paid in surpluss =
When more shares are sold in excess of par value
