External Factors Part 1

Question 1

what are the two types of fiscal policy?

Answer 1

expansionary and contractionary

Question 2

what are expansionary policies designed to do?

Answer 2

increase the money supply, encourage spending and capital investment which happens during deflation (when prices decline)

Question 3

what are the taxes and spending rules related to expansionary policy and some examples?

Answer 3

decrease tax rates

1. increase transfer payments (unemployment benefits)
2. increase spending on roads, bridges
3. increase government spending to stimulate new jobs and employment

exs. purchasing federal securities,
lowering discount rate,
decrease reserve requirements for member banks

Question 4

what are contractionary policies designed to do?

Answer 4

prevent economy from growing too rapidly minimizes inflationary pressures

when consumers choose to increase saving, overall spending decreases

Question 5

what are the taxes and spending rules related to contractionary policy and some examples?

Answer 5

increase tax rates

1. decrease transfer payments (unemployment benefits)
2. decrease spending on roads, bridges

exs. selling federal securities, raising discount rate, increase reserve requirements; reduction in export subsidies reduces government payments to exporting business

Question 6

if actual GDP exceeds potential GDP

Answer 6

economic growth is not sustainable and eventually prices and wages will be bid up resulting in inflation

Question 7

what industry is uninfluenced by economic upturn or downtown?

Answer 7

health care

Question 8

inflation affects accounting measures that take place over….

Answer 8

extended periods of time (ie. depreciation) because they are based on historical costs

Question 9

when a recession occurs, what has happened to real GDP, economic output, employment and disposable income?

Answer 9

it has been in decline for at least two consecutive quarters
all three decrease

Question 10

what are the 4 components in the business cycle?

Answer 10

recession (contraction)
expansion (recovery)
trough
peak

Question 11

what are the 6 characteristics of a recessionary (contraction) phase?

Answer 11

1. unemployment increase
2. potential national income > actual national income
3. decreases in demand (including for raw materials) and in payments for goods and services
4. rising costs
5. falling prices
6. two consecutive quarters of negative GDP growth (decline in output not prices)

Question 12

what are the 4 characteristics of an expansion (recovery) phase?

Answer 12

1. economy growing: stocks in bull market
2. inflation nearing target rate
3. unemployment decreasing
4. increased aggregate demand and prices

Question 13

what are the 3 characteristics of a trough phase?

Answer 13

1. transitionary phase: economy hits bottom
2. low or stagnant growth
3. high unemployment

Question 14

what are the 5 characteristics of a peak phase?

Answer 14

1. transitionary phase: economy “overheating”
2. excessive inflation and growth
3. unemployment at its natural rate
4. businesses cannot meet excessive consumer demand
5. prices rise

Question 15

elastic demand is…

Answer 15

price elasticity of demand > 1
% change in QD > % change in P
TR decreases if P increases

Question 16

price elasticity of demand

Answer 16

% change in QD / % change in P

Question 17

unit elastic is….

Answer 17

price elasticity of demand = 1
% change in QD = % change in P
TR not sensitive to P

Question 18

inelastic demand is..

Answer 18

price elasticity of demand < 1
% change in QD < % change in P
TR increase if P increases

Question 19

frictional unemployment

Answer 19

due to imperfections in the labor market and relates to workers searching for jobs, waiting to take jobs in the near future (entering the workforce or between jobs)

Question 20

cyclical unemployment

Answer 20

due to fluctuation in the business cycle, by a deficiency of aggregate spending (recession vs expansion)

Question 21

structural unemployment

Answer 21

changes over time in the structure of consumer demand, which alters the structure or composition of the demand for labor (technological changes and required skill sets)

Question 22

full employment unemployment

Answer 22

the sum of frictional and structural unemployment; does not mean zero unemployment

Question 23

seasonal unemployment

Answer 23

due to changes in seasons (snowmobiles only in winter)

Question 24

stagflation (cost push inflation)

Answer 24

whenever actual unemployment is significantly greater than the natural level, and these conditions are couple with high rates of inflation caused by an increase in the costs of production (labor/energy prices) which pushes aggregate supply left
market equilibrium shifts to higher prices and lower output

Question 25

what is the general idea of inflation?
what areas does it affect/not affect?

Answer 25

rising prices; low unemployment
affects: health care, wages and materials
does not affect: expenses based on historical costs, fixed costs or fixed interest costs

Question 26

deflation

Answer 26

general decline in prices due to a long-term drop in aggregate demand accompanied by low interest and discount rates signals and impending recession

Question 27

what are some examples of economic indicators that create a lag?

Answer 27

chronic unemployment
change in the index of labor cost per unit of output
average prime rate charged by banks
ratio of manufacturing and trade inventories to sales
commerical and industrial loans outstanding
ratio of consumer installement credit outstanding to personal income
change in the CPI for services

Question 29

what are some examples of economic indicators that lead?

Answer 29

orders for consumer/producer goods
housing starts
consumer expectations
initial claims of unemployment

Question 30

consumer price index

Answer 30

measures the rate of inflation by comparing the average change in relative prices between two periods of time for a market basket of consumer goods

Question 31

what are the 3 objectives of fiscal policy?

Answer 31

1. stabilize GDP growth by growing it to near potential through government spending and taxation
2. better distribution of income/wealth by giving support to the disadvantaged through transfer payments and subsidies
3. improve resource allocation by directing resources to industries/sectors through special tax provisions or subsidies