Economics/Markets Flashcards
Economic Expansion: GDP (increases/decreases) and unemployment (increases/decreases)
increases; decreases
Economic Contraction: GDP (increases/decreases) and unemployment (increases/decreases)
decreases; increases
Gross Domestic Product (GDP)
Definition
The market value of goods and services produced by labor and property in the US
Recession
Two consecutive quarters of negative GDP growth
- Not every contraction is a recession, but every recession is a contraction
Characteristics of Early Expansion
- Activity rebounds (GDP, unemployment)
- Credit begins to grow
- Profits grow rapidly
- Policy still stimulative
- Inventories low; sales improve
Characteristics of Mid Expansion
- Growth peaking
- Credit growth strong
- Profits growth peaks
- Policy neutral
- Inventories, sales grow; equilibrium reached
Characteristics of Late Expansion
- Growth moderating
- Credit tightens
- Earnings under pressure
- Policy contractionary
- Inventories grow; sales growth falls
Characteristics of Contraction
- Falling activity
- Credit dries up
- Profits decline
- Policy eases
- Inventories, sales fall
The Business Cycle
Expansion –> Peak –> Contraction –> Trough –> Expansion
GDP is important because it…
- Indicates the pace of growth or decline of the economy relative to history
- Determines which sectors are over or under-performing
- Can compare the size and growth rate of economies throughout the world
Real GDP Includes:
- Market value of all final goods and services produced within an economy
- Income of foreigners working in the US
- Profits that foreign companies earn in the US
Real GDP Excludes:
- Imports
- Inflation
- Transactions where money changes hands but no new goods or services are produced
- Income of US citizens working abroad
- Profits earned by US companies in foreign countries
GDP Formula
Y = C + I + G + (X - M)
C - consumer spending
I - investment made by industry
G - government spending
(X-M) - excess of exports over imports (may see this listed as NE (Net Exports))
A good is __________ when its quantity demanded responds greatly to price changes.
elastic
A good is _________ when its quantity demanded responds little to price changes.
inelastic
In theory, all items are (elastic/inelastic) over the long term.
elastic
Goods are considered __________ when an increase in the price of one causes an increase in the demand for the other.
substitutes
Goods are considered __________ when a decrease in the price of one causes an increase in the demand for the other.
complements
__________ __________ is the additional benefit received from the consumption of an additional unit of a good.
Marginal utility
As the rate of consumption increases, the marginal utility derived from consuming additional units will (increase/decrease).
decrease (known as diminishing marginal utility)
Who controls Fiscal Policy?
Congress
What tools does Congress use to control Fiscal Policy?
- Taxation
- Government Spending
__________ is the only means of revenue generation for the government.
Taxation
(Increases/Decreases) in government spending are used to promote economic growth and/or recovery.
Increases
In deficit spending, the government will (buy/sell) treasury securities.
sell
In a stimulative fiscal policy, Congress will (increase/decrease) taxes and (increase/decrease) government spending.
decrease;increase
Who controls Monetary Policy?
The Federal Reserve Bank
Federal Reserve Mandates
- Maintain sustainable long-term growth as measured by GDP
- Maintain price levels that are supported by economic growth as measured by CPI (2%)
- Maintain full employment as measured by the long-term unemployment rate (4%)
What tools does the Fed use to control monetary policy?
- Discount Rate
- Reserve Requirements
- Open Market Activities
The __________ __________ is the rate at which member banks borrow from the government.
discount rate
The percentage of deposits that must be held on reserve overnight by banks is called the __________ __________.
reserve requirement
The __________ __________ __________ is the rate at which banks borrow from other banks.
federal funds rate
In a contractionary monetary policy, what happens to:
- discount rate?
- reserve requirements?
- open market operations?
- discount rate increases
- reserve requirements increase
- Fed sells treasury investments
In an expansionary monetary policy, what happens to:
- discount rate?
- reserve requirements?
- open market operations?
- discount rate decreases
- reserve requirement decreases
- Fed buys treasury investments
Financial Ratios:
Current Ratio
Current Assets / Current Liabilities
Higher is better
Financial Ratios:
Quick Ratio
(Current Assets - Inventories) / Current Liabilities
Financial Ratios:
Liquidity Ratios
- Current Ratio
- Quick Ratio
- Working Capital Ratio
Financial Ratios:
Activity Ratios
- Inventory Turnover
- Days to Sell Inventory
- Accounts Receivable Turnover
- Receivable Collection Period
Financial Ratios:
Profitability Ratios
- Gross Profit Margin
- Operating Profit Margin
- Return on Assets (ROA)
- Return on Equity (ROE)
Financial Ratios:
Debt Ratios
- Debt to Equity
- Times Interest Earned
- Debt Ratio
Financial Ratio:
Debt Ratio
Total Debt / Total Assets
Lower is better
