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MacroEcon > Exam 2 Study Guide > Flashcards

Exam 2 Study Guide Flashcards

1
Q

Why do Entrepreneurs start firms?

A

To make Profit

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2
Q

What is a sole proprietorship?

A

A firm owned by a single person
- has unlimited liability
- Involved in Day to Day running of the business

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3
Q

What is a partnership?

A

A firmed owned by two or more people
- each person has unlimited liability

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4
Q

What is a corporation?

A

A legal form of a business that provides owners with protection from losing more than their original investment
- limited liability

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5
Q

What is limited liability?

A

If the business fails only the business assets will be sold in order to pay back debts

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6
Q

What is unlimited liability?

A

If a business fails the personal and business assets will be sold in order to pay off debt

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7
Q

What is corporate governance?

A

The way a corporation is structured and the effect that structure has on the companies behavior

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8
Q

What is the principal agent problem?

A

When an agent pursues their own self interest rather than the interests of the principal who hired the agent

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9
Q

What is a remedy for the principal agent problem?

A

Top managers are paid in stock so there salary is directly tied to the performance of the company

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10
Q

How do firms raise funds?

A

Retained Earnings
Recruit Additional Owners
Borrow Money

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11
Q

What is indirect finance?

A

Funds from financial institutions like banks and credit unions

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12
Q

What is direct finance?

A

funds that are borrowed directly from financial markets

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13
Q

What is a bond?

A

a contractual agreement by the borrowers to pay the holder a fixed amount at regular intervals until a specified date

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14
Q

What are coupon payments

A

Interest payments of the bond

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15
Q

What are the three types of bonds?

A

Short Term (less than a year)
Intermediate (1-10 years)
Long Term Bonds (10 years)

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16
Q

What is common stock?

A

partial ownership of a company
- no maturity date
- Dividends are paid out to shareholders

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17
Q

What are mutual funds?

A

actively managed funds that invest in a portfolio of assets and sell shares to investors. Can only be sold back to the company

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18
Q

What are exchanged traded funds?

A

passively managed funds that invest in a portfolio of assets and sell shares to investors. Can be traded directly between investors

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19
Q

What must firms do before selling new stocks, bonds, or obtaining loans?

A

Must provide investors, financial regulators, and banks with information about its finances

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20
Q

What does the SEC require publicly traded firms to do?

A
  • Report performance in income states and balance sheets
  • Disclose financial statement in periodic fillings to the federal government and shareholders
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21
Q

What is an income statement?

A

Shows a firms revenue, costs, profits over a period of time

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22
Q

What is a balance sheet?

A

sums up a firms financial position on a particular day
- summarizes the liabilities and assets of a firm

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23
Q

What is the formula for Accounting Profit?

A

Revenue-Explicit Costs

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24
Q

What are the two formulas for Economic Profit?

A

EP= Revenue - Explicit Costs - Implicit Costs
EP= Accounting Profit - Implicit Costs

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25
Q

What are the implications of the Sarbanes-Oxley Act of 2002?

A
  • requires CEO to personally certify the accuracy of financial statements
  • Requires financial analyst and auditors to disclose any conflicts of interests that might limit the independence of evaluating a firms financial conation
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26
Q

What are the implications of the Dodd-Frank Act of 2010?

A
  • created the Consumer Financial Protection Bureau
  • Established the Financial Stability Oversight Council
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27
Q

What is future value and how do you calculate it?

A

the value on some future investment made today
FV= PV(1+i)^n

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28
Q

What is present value and how do you calculate it?

A
  • The value today of a future cash inflow or outflow
    PV= FV/(1+i)^n
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29
Q

What is long term economic growth?

A

the capacity of an economy to produce more goods and services from one period to the next.

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30
Q

How do we measure the standard of living?

A

Real GDP per Capita

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31
Q

How do we calculate Real GDP per Capita?

A

GDP/Total Population

32
Q

How do we calculate Growth Rate?

A

Current Year - Previous Year/Previous Year * 100

33
Q

What is the rule of 70 and how do we calculate it?

A

to measure how many years it will take for GDP to double. 70/Growth Rate

34
Q

What determines the rate of Long Run Growth?

A

Increased labor productivity

35
Q

What causes labor productivity to increase or decrease?

A

Level of Capital Available
Technological change
Property Rights

36
Q

What is capital?

A

manufactured goods that are used to produce other goods and services

37
Q

What are financial markets?

A

markets where financial securities like stocks and bonds are bought and sold

38
Q

What is risk?

A

the chance that the value of a financial security will change relative to what you expect

39
Q

What is liquidity?

A

the ease with which a financial security can be exchanged for money

40
Q

How do we calculate GDP of a nation with an open economy?

A

Y=C+I+G+NX

41
Q

How do we calculate GDP of a nation with a closed economy?

A

Y=C+I+G

42
Q

What are private savings and how do we calculate them?

A

what a households retains from their income after purchasing goods and services and pay taxes
S private= Y+TR+C-T

43
Q

What are public savings and how do we calculate them?

A

The amount of tax revenue the government retains after paying for government purchases and making transfer payments to households
S public= T-G-TR

44
Q

How do we calculate total savings?

A

S private +S public

45
Q

What is crowding out?

A

a decline in private expenditures as a result of increases in government purchases

46
Q

What happens during the expansion phase of the business cycle?

A

production, employment, and income increase

47
Q

What happens during a recession?

A

employment, production, and income decline

48
Q

What is a recession?

A

Two consecutive quarters of declining GDP

49
Q

What is aggregate expenditure?

A

a tool used to measure the total value of all finished goods and services in an economy at a given time

50
Q

How do we calculate Aggregate Expenditure?

A

AE=C+IP+G+NX
Consumption
Planned Investment
Government Purchases
Net Exports

51
Q

What happens if aggregate expenditure equals GDP?

A

inventories are unchanged and the economy is in macroeconomic equilibrium

52
Q

What happens if aggregate expenditure is less than GDP?

A

inventories rise and GDP, employment decrease

53
Q

What happens if aggregate expenditure is greater than GDP?

A

inventory falls and GDP, employment rise

54
Q

What are some determinants of Consumption

A
  • Current Disposable Income
  • Household Wealth
  • Expected Future Income
  • Price Level
  • Interest Rates
55
Q

What is MPS and how do we calculate it?

A

Marginal Propensity to Save
Change in Savings (S) over Change in Real GDP (Y)

56
Q

What is MPC and how do we calculate it

A

Marginal Propensity to Consume
Change in Consumption (C) over Change in Real GDP (Y)

57
Q

What are some determinants of Planned Investment?

A
  • Expectations of Future Profitability of Investments
  • Interest Rates
  • Taxes
    -Cash Flow
58
Q

What is the Aggregate Demand Curve?

A

the relationship between the price level and the quantity of real GDP demanded by households, firms, and government

59
Q

What is the Short Run Aggregate Supply Curve?

A

shows the relationship in the short run between price level and the quantity of real GDP supplied by firms

60
Q

Why is the Aggregate Demand Curve downward sloping?

A
  • Wealth Effect
    -Interest Rate Effect
    -International Trade Effect
61
Q

What are some variables that Shift the Aggregate Demand Curve?

A
  • Change in government policy
    -Change in expectations of future households and firms
  • Change in foreign variables
62
Q

What is monetary policy?

A

Actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives

63
Q

What is the Aggregate Supply Curve?

A

shows the effect of changes in price level on the quantity of goods and services that firms are willing and able to supply

64
Q

What is the Long Run Aggregate Supply Curve?

A

shows the relationship between the price level and the quantity of real GDP supplied

65
Q

What is money?

A

any asset that is generally accepted as payment for a good or service

66
Q

What are some inefficiencies of the Barter System?

A
  • Double coincidence of wants
  • Each good has many prices
  • Lack of standardization
  • It is difficult to accumulate wealth
67
Q

What is the primary function of money?

A
  • medium of exchange
  • unit of account
  • store of value
  • standard of deferred payment
68
Q

What is commodity money?

A

something that has value independent of its uses as money (ex gold)

69
Q

What is Fiat Money?

A

government issued paper currency that’s not backed by a physical commodity

70
Q

What is M1 monetary aggregate?

A

currency, all paper money and coins in circulation, not held in banks
- The value of all checking and savings account deposits

71
Q

What M2 monetary aggregate?

A
  • M1
  • Small denomination time deposits
  • Non institutional money market mutual fund shares
72
Q

What is a bank run?

A

a situation where many depositors simultaneously decide to withdraw money from a bank

73
Q

What is a bank panic?

A

A situation in which banks experience runs at the same time

74
Q

What are discount loans?

A

loans the federal reserve makes to banks

75
Q

What are discount rates?

A

interest rates the federal reserve charges on discount loans

76
Q
A

MacroEcon (6 decks)

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