Exam 2 Study Guide Flashcards
Why do Entrepreneurs start firms?
To make Profit
What is a sole proprietorship?
A firm owned by a single person
- has unlimited liability
- Involved in Day to Day running of the business
What is a partnership?
A firmed owned by two or more people
- each person has unlimited liability
What is a corporation?
A legal form of a business that provides owners with protection from losing more than their original investment
- limited liability
What is limited liability?
If the business fails only the business assets will be sold in order to pay back debts
What is unlimited liability?
If a business fails the personal and business assets will be sold in order to pay off debt
What is corporate governance?
The way a corporation is structured and the effect that structure has on the companies behavior
What is the principal agent problem?
When an agent pursues their own self interest rather than the interests of the principal who hired the agent
What is a remedy for the principal agent problem?
Top managers are paid in stock so there salary is directly tied to the performance of the company
How do firms raise funds?
Retained Earnings
Recruit Additional Owners
Borrow Money
What is indirect finance?
Funds from financial institutions like banks and credit unions
What is direct finance?
funds that are borrowed directly from financial markets
What is a bond?
a contractual agreement by the borrowers to pay the holder a fixed amount at regular intervals until a specified date
What are coupon payments
Interest payments of the bond
What are the three types of bonds?
Short Term (less than a year)
Intermediate (1-10 years)
Long Term Bonds (10 years)
What is common stock?
partial ownership of a company
- no maturity date
- Dividends are paid out to shareholders
What are mutual funds?
actively managed funds that invest in a portfolio of assets and sell shares to investors. Can only be sold back to the company
What are exchanged traded funds?
passively managed funds that invest in a portfolio of assets and sell shares to investors. Can be traded directly between investors
What must firms do before selling new stocks, bonds, or obtaining loans?
Must provide investors, financial regulators, and banks with information about its finances
What does the SEC require publicly traded firms to do?
- Report performance in income states and balance sheets
- Disclose financial statement in periodic fillings to the federal government and shareholders
What is an income statement?
Shows a firms revenue, costs, profits over a period of time
What is a balance sheet?
sums up a firms financial position on a particular day
- summarizes the liabilities and assets of a firm
What is the formula for Accounting Profit?
Revenue-Explicit Costs
What are the two formulas for Economic Profit?
EP= Revenue - Explicit Costs - Implicit Costs
EP= Accounting Profit - Implicit Costs
What are the implications of the Sarbanes-Oxley Act of 2002?
- 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
What are the implications of the Dodd-Frank Act of 2010?
- created the Consumer Financial Protection Bureau
- Established the Financial Stability Oversight Council
What is future value and how do you calculate it?
the value on some future investment made today
FV= PV(1+i)^n
What is present value and how do you calculate it?
- The value today of a future cash inflow or outflow
PV= FV/(1+i)^n
What is long term economic growth?
the capacity of an economy to produce more goods and services from one period to the next.
How do we measure the standard of living?
Real GDP per Capita
How do we calculate Real GDP per Capita?
GDP/Total Population
How do we calculate Growth Rate?
Current Year - Previous Year/Previous Year * 100
What is the rule of 70 and how do we calculate it?
to measure how many years it will take for GDP to double. 70/Growth Rate
What determines the rate of Long Run Growth?
Increased labor productivity
What causes labor productivity to increase or decrease?
Level of Capital Available
Technological change
Property Rights
What is capital?
manufactured goods that are used to produce other goods and services
What are financial markets?
markets where financial securities like stocks and bonds are bought and sold
What is risk?
the chance that the value of a financial security will change relative to what you expect
What is liquidity?
the ease with which a financial security can be exchanged for money
How do we calculate GDP of a nation with an open economy?
Y=C+I+G+NX
How do we calculate GDP of a nation with a closed economy?
Y=C+I+G
What are private savings and how do we calculate them?
what a households retains from their income after purchasing goods and services and pay taxes
S private= Y+TR+C-T
What are public savings and how do we calculate them?
The amount of tax revenue the government retains after paying for government purchases and making transfer payments to households
S public= T-G-TR
How do we calculate total savings?
S private +S public
What is crowding out?
a decline in private expenditures as a result of increases in government purchases
What happens during the expansion phase of the business cycle?
production, employment, and income increase
What happens during a recession?
employment, production, and income decline
What is a recession?
Two consecutive quarters of declining GDP
What is aggregate expenditure?
a tool used to measure the total value of all finished goods and services in an economy at a given time
How do we calculate Aggregate Expenditure?
AE=C+IP+G+NX
Consumption
Planned Investment
Government Purchases
Net Exports
What happens if aggregate expenditure equals GDP?
inventories are unchanged and the economy is in macroeconomic equilibrium
What happens if aggregate expenditure is less than GDP?
inventories rise and GDP, employment decrease
What happens if aggregate expenditure is greater than GDP?
inventory falls and GDP, employment rise
What are some determinants of Consumption
- Current Disposable Income
- Household Wealth
- Expected Future Income
- Price Level
- Interest Rates
What is MPS and how do we calculate it?
Marginal Propensity to Save
Change in Savings (S) over Change in Real GDP (Y)
What is MPC and how do we calculate it
Marginal Propensity to Consume
Change in Consumption (C) over Change in Real GDP (Y)
What are some determinants of Planned Investment?
- Expectations of Future Profitability of Investments
- Interest Rates
- Taxes
-Cash Flow
What is the Aggregate Demand Curve?
the relationship between the price level and the quantity of real GDP demanded by households, firms, and government
What is the Short Run Aggregate Supply Curve?
shows the relationship in the short run between price level and the quantity of real GDP supplied by firms
Why is the Aggregate Demand Curve downward sloping?
- Wealth Effect
-Interest Rate Effect
-International Trade Effect
What are some variables that Shift the Aggregate Demand Curve?
- Change in government policy
-Change in expectations of future households and firms - Change in foreign variables
What is monetary policy?
Actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives
What is the Aggregate Supply Curve?
shows the effect of changes in price level on the quantity of goods and services that firms are willing and able to supply
What is the Long Run Aggregate Supply Curve?
shows the relationship between the price level and the quantity of real GDP supplied
What is money?
any asset that is generally accepted as payment for a good or service
What are some inefficiencies of the Barter System?
- Double coincidence of wants
- Each good has many prices
- Lack of standardization
- It is difficult to accumulate wealth
What is the primary function of money?
- medium of exchange
- unit of account
- store of value
- standard of deferred payment
What is commodity money?
something that has value independent of its uses as money (ex gold)
What is Fiat Money?
government issued paper currency that’s not backed by a physical commodity
What is M1 monetary aggregate?
currency, all paper money and coins in circulation, not held in banks
- The value of all checking and savings account deposits
What M2 monetary aggregate?
- M1
- Small denomination time deposits
- Non institutional money market mutual fund shares
What is a bank run?
a situation where many depositors simultaneously decide to withdraw money from a bank
What is a bank panic?
A situation in which banks experience runs at the same time
What are discount loans?
loans the federal reserve makes to banks
What are discount rates?
interest rates the federal reserve charges on discount loans
