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SIE Exam Prep 2 -- SANDBOX > Economics & Monetary Policy > Flashcards

Economics & Monetary Policy Flashcards

This deck focuses on important terms and concepts relating to economics and monetary policy including the business cycle, balance of trade, and the role of the Federal Reserve.

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SIE Exam flashcards
1
Q

Environment in which longer-term bonds have higher yields than short-term securities

A

Normal yield curve

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2
Q

Graphically depicts the yield relationship between long- and short-term bonds

A

Yield curve

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3
Q

A short-term economic contraction

A

Recession

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4
Q

The four phases of the economic cycle

A

Expansion, peak, contraction and trough

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5
Q

Longer term, severe economic contraction

A

Depression

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6
Q

A nation’s annual output of all goods and services

A

Gross Domestic Product (GDP)

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7
Q

Measures the general rate of increase or decrease in prices paid for certain standard goods

A

Consumer Price Index (CPI)

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8
Q

General increase in the level of prices

A

Inflation

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9
Q

The three types of economic indicators

A

Leading, lagging and coincident

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10
Q

Type of indicator that predicts a trend in the economy

A

Leading

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11
Q

Leading, lagging or coincident indicator? The money supply

A

Leading

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12
Q

Leading, lagging or coincident indicator? Employment levels

A

Coincident

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13
Q

Leading, lagging or coincident indicator? Corporate profits

A

Lagging

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14
Q

Leading, lagging or coincident indicator? Industrial production

A

Coincident

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15
Q

Leading, lagging or coincident indicator? Average duration of unemployment

A

Lagging

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16
Q

Leading, lagging or coincident indicator? New orders for consumer goods

A

Leading

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17
Q

Leading, lagging or coincident indicator? Stock prices

A

Leading

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18
Q

Leading, lagging or coincident indicator? Personal income

A

Coincident

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19
Q

Leading, lagging or coincident indicator? GDP

A

Lagging

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20
Q

Leading, lagging or coincident indicator? Manufacturing and trade sales

A

Coincident

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21
Q

Leading, lagging or coincident indicator? Ratio of inventories to sales

A

Lagging

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22
Q

Economist who theorized that aggregate demand controls employment and prices

A

John Maynard Keynes

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23
Q

The originator of monetarist theory

A

Milton Friedman

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24
Q

Three tools used by monetarist theory to regulate the economy

A

Reserve requirement, discount rate, federal open market operations

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25
Q

Two critical fiscal policy tools used to impact economic performance

A

Level of taxation and government spending

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26
Q

Economic theory that promotes strong government involvement in economic policy

A

Keynesian economics

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27
Q

Acts as agent of the US Treasury as the nation’s central bank

A

Federal Reserve Board

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28
Q

Regulates the U.S. money supply

A

Federal Reserve Board

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29
Q

Conducts the U.S. government’s open-market operations

A

Federal Open Market Committee (FOMC)

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30
Q

Impact on the money supply of FOMC purchase of securities

A

Increases

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31
Q

Impact on interest rates of FOMC purchase of securities

A

Decreases

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32
Q

Interest rate charged between banks for loans of excess reserves

A

Federal funds rate

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33
Q

Minimum amount of customer deposits that commercial banks must deposit with the Federal Reserve

A

Reserve requirement

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34
Q

The Interest rate charged by the Fed to member banks for short-term loans

A

Discount rate

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35
Q

Economic policy that centers on federal spending, taxation and federal budgets

A

Fiscal policy

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36
Q

Impact of tight monetary policy on interest rates

A

Interest rates rise

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37
Q

Impact of a weak dollar on U.S. exports

A

Exports will rise

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38
Q

Impact of a weak dollar on U.S. imports

A

Imports will fall

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39
Q

Impact on balance of payments when U.S. exports exceed U.S. imports

A

Surplus in the balance of payments

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40
Q

Impact on balance of trade when foreign interest rates are higher than U.S. interest rates

A

increase in the balance of trade

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41
Q

Defensive, Cyclical or Growth Industry? Food

A

Defensive

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42
Q

Defensive, Cyclical or Growth Industry? Utilities

A

Defensive

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43
Q

Defensive, Cyclical or Growth Industry? Steel

A

Cyclical

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44
Q

Defensive, Cyclical or Growth Industry? Automobile

A

Cyclical

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45
Q

Defensive, Cyclical or Growth Industry? Technology

A

Growth

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46
Q

Basic balance sheet equation

A

Assets - Liabilities = Net Worth

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47
Q

Financial statement that summarizes revenues and expenses

A

Income statement

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48
Q

Characterized by falling stock markets, rising inventories, declining GDP

A

Contraction

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49
Q

Characterized by low unemployment , increased business activities

A

Expansion

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50
Q

assets

A

The component of a company’s balance sheet that reflects everything a company owns.

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51
Q

balance of trade

A

The difference between a country’s exports and imports. Debit items include money flowing out of a country, including imported goods, foreign aid, and domestic spending abroad. Credit items include exported goods and foreign spending in the domestic country.

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52
Q

balance sheet

A

One of a company’s financial statements, which provides a snapshot of the company’s assets and liabilities at a given point in time.

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53
Q

bear market

A

A prolonged period of declining stock prices, typically caused by fear of a slowdown in the economy.

54
Q

broker call rate

A

The rate that a broker-dealer pays a bank when a broker-dealer borrows money so that a customer can purchase securities on margin.

55
Q

bull market

A

A prolonged period of increasing stock prices, typically caused by the expectation of an expanding economy.

56
Q

business cycle

A

The recurring pattern and fluctuation in economic activity ranging over several months to a number of years. The four phases of the cycle are: expansion, peak, contraction, and trough.

57
Q

central bank

A

A country’s banking institution, such as the Federal Reserve Board in the US, which is tasked with controlling the nation’s money supply.

58
Q

classical economics

A

Sometimes referred to as laissez-faire economics, an economic theory that believes that a free market economy with no government interference would achieve full employment and the best results.

59
Q

coincident indicators

A

An economic measure that is used to confirm current trends and changes in the economy.

60
Q

Consumer Price Index (CPI)

A

Measures inflation by measuring the change in the average price of consumer goods and services from one period to the next.

61
Q

contraction

A

One of the four stages of the business cycle, characterized by a slowdown in the pace of economic activity.

62
Q

contractionary fiscal policy

A

A government policy in which a government’s tax revenues outweigh its spending. The goal of this policy is to slow down economic growth.

63
Q

cyclical stock

A

Shares of a company that mirror the larger economic environment. They tend to increase in value when the company is growing and decline in value in a recessionary environment. Examples include companies that produce high-ticket consumer items, such as cars and large appliances.

64
Q

defensive stock

A

Shares of a company that are resistant to downturns in the economy. Sometimes referred to as recession-proof stocks, these include companies that produce consumer staples, such as food retailers and cosmetics and alcohol companies.

65
Q

depression

A

A sustained, long-term downturn in economic activity, typically characterized by a 10% drop in GDP or at least six consecutive quarters of negative GDP growth.

66
Q

discount rate

A

A tool of the Federal Reserve Board, this is the interest rate the Fed charges banks over short-term loans. To ease the money supply, the Fed would lower the rate, allowing banks to borrow at a cheaper rate. To tighten the money supply, the Fed would raise the rate, making it more expen-sive for banks to borrow money from the Fed.

67
Q

ease the money supply

A

A situation in which the Federal Reserve Board wants to drive down interest rates, by increasing the money supply. To do this, the Fed would purchase government securities from primary dealers or lower the discount rate and/or reserve requirement. This action will generally spur economic growth.

68
Q

economic indicators

A

Measures that help evaluate the health of the economy, including its past, current, or future performance.

69
Q

economic policy

A

Refers to government intervention to impact economic performance, generally to stimulate an economy out of recession or to constrain excessive growth and prevent inflation.

70
Q

economy

A

Encompasses all wealth and resources of a specific area or country, especially as these relate to production and consumption of goods and services.

71
Q

exchange rate

A

Specifies how much one currency is worth in terms of another.

72
Q

expansion

A

One of the four stages of the business cycle, characterized by increased economic activity.

73
Q

expansionary fiscal policy

A

A government policy in which government spending exceeds tax revenue. The goal of this policy is to spur economic growth at the cost of increasing the budget deficit.

74
Q

expenses

A

The total costs incurred by a business to generate its sales. This includes variable costs, which are the costs directly associated with producing the goods that generate sales as well as the fixed costs of the business.

75
Q

export

A

A product or service that is sold to a trading partner in another country.

76
Q

federal funds rate

A

The interest rate that banks charge each other for overnight loans. This rate is heavily influenced by the open market operations of the Federal Reserve Board. However, it is not actually set by the Fed. Instead, it is determined by supply and demand in the market.

77
Q

Federal Open Market Committee (FOMC)

A

The arm of the Federal Reserve Board that conducts open market operations, therefore controlling the amount of money in circulation.

78
Q

fiscal policy

A

The use of government spending and taxation to influence the economy.

79
Q

flat yield curve

A

A rare type of yield curve in which short-term and long-term yields are equal to one another.

80
Q

gross domestic product (GDP)

A

The total market value of all goods and services produced within a country.

81
Q

gross national product (GNP

A

The total market value of all goods and services produced by the residents of a country, even if they are living abroad.

82
Q

income statement

A

One of a company’s financial statements, which shows the revenue, expenses, and net income of a business over a period of time.

83
Q

import

A

A product or service that is purchased from a trading partner in another country.

84
Q

inflation

A

A rise in the prices of goods and services in an economy over a period of time, which is measured by the Consumer Price Index.

85
Q

inverted yield curve

A

A type of yield curve in which the yields on short-term bonds are higher than the yields on long-term bonds. This is often a sign of an upcoming recession.

86
Q

lagging indicators

A

An economic measure that is used to confirm past trends and changes in the economy.

87
Q

Keynesian economics

A

An economic theory that believes that government intervention in the form of government spending and taxes can help ensure a strong economy.

88
Q

liabilities

A

The component of a company’s balance sheet that reflects everything a company owes.

89
Q

leading indicators

A

An economic measure that is used to predict future trends and changes in the economy.

90
Q

monetary policy

A

Set by the Federal Reserve Board, it is the amount of money in circulation, which helps to control inflation and economic growth.

91
Q

monetarism

A

An economic theory that believes that controlling the money supply of a country can help control inflation and economic growth and therefore ensure a strong economy.

92
Q

narrowing yield spread

A

When the rates of return between bonds with different quality ratings decrease, forecasting a smaller risk of default on lower-grade bonds.

93
Q

neutral fiscal policy

A

A government policy in which government spending equals tax revenue in order to maintain a balanced budget.

94
Q

net income

A

The profits earned by a company after all of its expenses, including fixed and variable costs, interest expenses, and taxes, have been paid.

95
Q

normal yield curve

A

The most common type of yield curve in which longer maturity bonds have a higher yield compared to shorter-term bonds. Higher rates for longer maturities compensate investors for the default risk associated with longer-term bonds.

96
Q

open market operations

A

The primary tool of the Federal Reserve Board’s monetary policy, which is the buying and selling of government securities with primary dealers (banks). To ease the money supply, the Fed would buy securities as this would add cash to the banking system. To tighten the money supply, the Fed would sell securities as this would remove cash from the banking system.

97
Q

peak

A

One of the four stages of the business cycle, in which an expansion reaches its highest point and marks the beginning of an economic downturn.

98
Q

primary dealers

A

Banks that are required to buy and sell government securities with the Federal Reserve Board in order to aid in open market transactions and allow the Fed to implement monetary policy.

99
Q

prime rate

A

The interest rate that banks charge their most credit-worthy customers, typically large institutional clients.

100
Q

real economic growth

A

The change in gross domestic product (GDP) from one period to another, adjusted for inflation.

101
Q

recession

A

A prolonged period of contraction defined as a decline in GDP for at least two consecutive quarters.

102
Q

reserve requirement

A

A tool of the Federal Reserve Board requiring banks to keep a certain percent-age of deposits on hand that are not to be lent out to customers. To ease the money supply, the Fed would lower this requirement, allowing banks to give out more loans. To tighten the money supply, the Fed would raise this requirement, forcing banks to keep more money on reserve and therefore allowing them to give out fewer loans.

103
Q

retained earnings

A

The portion of a company’s net income that is not paid out to shareholders and is instead reinvested in the business.

104
Q

revenue

A

The sales of a company’s products and services that are generated by a business.

105
Q

shareholder’s equity

A

The component of a company’s balance sheet that reflects the difference between a company’s assets and its liabilities.

106
Q

stagflation

A

A period of slow economic growth accompanied by high unemployment and rising prices.

107
Q

tighten the money supply

A

A situation in which the Federal Reserve Board wants to increase interest rates, by decreasing the money supply. To do this the Fed would sell government securities to primary dealers or raise the discount rate and/or reserve requirement. This action will help curb inflation and prevent the economy from overheating.

108
Q

trade deficit

A

Occurs when a country has more imports than exports.

109
Q

trade surplus

A

Occurs when a country has more exports than imports.

110
Q

trough

A

One of the four stages of the business cycle, in which a contraction reaches its lowest point and begins to turn into an expansion.

111
Q

unemployment rate

A

An economic measure that details the percentage of individuals in the labor force who are without work.

112
Q

widening yield spread

A

When the rates of returns between bonds with different quality ratings increase, forecasting a greater risk of default on lower-grade bonds.

113
Q

yield curve

A

A graph that plots the relationship between interest rates and time until maturity, which provides an idea of future interest rate expectations and predicts changes in economic output and growth.

114
Q

yield spread

A

The difference in the quoted rates of return between two types of bonds. Yield spread provides an indication of the increased return for investing in one type of bond over another.

115
Q

What is it called when short-term rates match long-term rates on the yield curve?

A

Flat Yield Curve

116
Q

What is it called when short-term rates exceed long-term rates?

A

Inverted Yield Curve

117
Q

What is the relationship between maturity and yield?

A

Longer Maturity = Higher Yield

Investors demand higher yields for locking up their money for longer periods of time. Exactly how much yield is required is what determines the shape of the yield curve.

118
Q

The difference between the value of a country’s exports and imports is known as the:

A

balance of trade

The balance of trade is the difference between the value of a country’s exports and the value of its imports.

119
Q

What is most likely cause a nation’s currency to depreciate?

A

an extreme increase in the nation’s inflation rate

High domestic inflation will cause the currency to depreciate because the demand for the nation’s output will fall as prices increases.

According to the law of demand, as price rises the demand for a good decreases. Thus, rising domestic prices implies that foreign demand for the nation’s output will fall. Falling demand for goods implies falling demand for domestic currency; this decrease in demand causes the “price” or exchange rate of the nation to fall or depreciate.

120
Q

If the value of a nation’s exports exceeds imports, then the nation is running a ________.

A

balance of trade surplus

The balance of trade is the difference between the value of a country’s exports and the value of its imports. Whenever this difference is positive, the balance of trade is said to be in surplus.

121
Q

Define:

shareholders equity

A

Reflects the difference between a company’s assets and liabilities and can be calculated as:

Total Assets - Total Liabilities = Shareholders Equity

122
Q

What is a rights offering?

A

Rights offering is a capital raise where existing shareholders are given the right to purchase additional shares, proportionate to their current holdings in order to avoid dilution.

123
Q

What are the risks a stock owner faces?

A
  • Market Risk - the risk that the performance of an individual security will be impacted by the performance of the overall market
  • Business Risk - the risk that the the performance of an investment is negatively impacted by company’ management and other company specific factors
124
Q

What are the broad categories usually used to describe a particular segment or industry?

A
  • Growth - Stocks that reinvest most of their earnings to their business in order to grow the value over time
  • Income - Stocks that regularly pay income in the form of dividends
  • Defensive - Stocks that are resistant to changes in the business cycle
  • Cyclical - Stocks that mirror the performance of the conomy
125
Q

Assets, liabilities, and shareholders’ equity are reported on a company’s

A

balance sheet

126
Q

An investor’s stock position has appreciated, but they have not yet sold the shares. The investor has

A

Unrealized capital gains

127
Q

What type of risk cannot be avoid through diversification?

A

systematic risk

128
Q

Define:

Which section of a company’s balance sheet reflects everything owed by the company?

A

liabilities

129
Q

During which stage of the business cycle would it be advisable for an investor to purchase defensive stocks?

A

Recession

130
Q

Define:

Which part of the balance sheet reflects a company’s net worth?

A

Shareholder’s equity

SIE Exam Prep 2 -- SANDBOX (14 decks)

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