FUND CH15 Economics and the External Environment Flashcards
Factors that Impact Elasticity
o Substitute products
o Consumer’s income
o Time
Supply
Supply represents the quantity firms are willing to produce and sell of a good or service, at a particular price
Supply Curve (up and to the left)
o Decreased competition o Outdated technologies o Increased price of an input used in the manufacturing process
Supply Curve (down and to the right)
o Increased competition o Improved technology to increase efficiency o Decreased price of an input used in the manufacturing process
Bankruptcy -
Some assets and property are exempt from the bankruptcy court and creditors
o Traditional and Roth IRAs up to $1.3 million (as indexed).
o Rollover IRAs for an unlimited amount
o Qualified retirement plans, deferred compensation, and tax–deferred annuities unlimited amount
o Some personal property including one car, one television,etc.
o Education funds contributed to a qualified tuition plan
Bankruptcy- debts that are not discharged
o All student loans
o Property liens
o Three years of back taxes
o Child support
o Alimony
o Debts obtained through fraud
Equal Credit Opportunity Act
prohibits discrimination, when evaluating a decision to grant consumer credit
(FICO)
Fair Isaac Credit Organization, most popular method of determining a credit score
3 best ways to increase a FICO score
o Pay all bills on time
o Keep outstanding balances low on revolving credit
accounts
o Take on new credit obligations sparingly and only when really needed
Fair Credit Reporting Act
protects consumer’s information collected by the major credit bureaus
can file once a year for free
***if error can submit 100 word statement- must be reported with score even if deemed not an error
Truth in Lending Act
protect consumers so that they fully understand the terms of a loan
disclosures!
Annual percentage rate
Fair Credit Billing Act
error on bill - 60 days written verification to a consumer disputing a billing error
90 days to resolve and investigate
Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005
amends the Truth in Lending Act
requiring certain creditors to disclose on the front of billing statements a minimum monthly payment warning for consumers
Credit Card Accountability, Responsibility
and Disclosure (CARD) Act of 2009
prevents credit card companies (and banks) from charging hidden fees and extraordinary interest rates
o Prevent certain rate increase practices
o Prevent hidden fees and confusing payment due dates
o Easy to understand disclosures
o Protection for young adults- A co-signer is required to issue a card to anyone under 21.
Federal Deposit Insurance Corporation (FDIC)
The FDIC insures up to $250,000 per depositor, per legal account ownership, per financial institution
Individual
Joint
Testamentary
Retirement
Securities Investor Protection Corporation
(SIPC)
1970 as a statutorily created nonprofit membership corporation funded by its member securities broker dealers, with the goal of returning cash and securities to investors, in the event a brokerage firm becomes insolvent.
• When a broker-dealer becomes insolvent, the SIPC will step in and return the investor’s cash and securities, up to $500,000 in securities. The $500,000 limit includes up to $250,000 in cash.
8 Securities Regulation Acts
- The Securities Act of 1933 regulates the primary market. (IPO’s- from Company)
- The Securities Act of 1934 created the SEC to regulate the secondary market.
- The Investment Company Act of 1940 set standards to regulate investment companies.
- The Investment Advisers Act of 1940 requires investment advisers to register with their state or the SEC.
- The term Registered Investment Adviser must be spelled out, and the adviser is not permitted to use the letters “RIA” after their name.
- The Financial Industry Regulatory Authority (FINRA) is a self regulatory organization for all security firms.
- The Sarbanes-Oxley Act of 2001 established new or enhanced standards for all U.S. public company boards, management, and public accounting firms.
- Regulation Full Disclosure (or Regulation FD) was implemented to level the playing field between investment analysis and the general public. Regulation FD requires companies to disclose all material information simultaneously to both the investment community and individual investors.
Dodd-Frank Wall Street Reform and Consumer Protection Act
-sixteen major sections addressing everything from debit card transaction fee limits to preventing firms that are “too big to fail”, and much more
The Dodd-Frank Act also gives the SEC the authority to require broker-dealers to abide by a fiduciary standard duty of care, rather than the current suitability standard
-permanently increased FDIC insurance for interest bearing accounts from $100,000 to $250,000
Worker Protection Laws
ERISA- The Employee Retirement Income Security Act (ERISA) was designed to protect employee retirement savings accounts from creditors. (Also unlimited bankruptcy protection)
Workers’ Compensation is designed to protect employees if they are injured while at work
Unemployment benefits provide an unemployed worker with income for a period of time
OSHA (Occupational Safety and Health Administration) was created by Congress to promote safe and healthy working conditions (don’t drink the copy toner)
External Environment
• Macroeconomics is the study of large economic factors that are reflective of the entire economy such as gross domestic product (GDP), the unemployment rate, and the inflation
rate.
• Microeconomics is the study of factors that impact small or individual economies, such as supply and demand for a product.
Economic Output
- Gross National Product (GNP) measures the total final output by the citizens of a country, whether produced domestically or in a foreign country.
- Gross Domestic Product (GDP) represents the total final output of a country, by its citizens and foreigners in the country, over a period of time.
- A positive GDP is generally a sign that the economy is expanding, a negative GDP is a sign that the economy is contracting.
Gross Domestic Product
Nominal GDP measures the value of goods and services in current prices.
• Real GDP measures the value of goods and services at a base
year price.
• The GDP deflator measures the current price of goods and
services (nominal GDP) relative to a base year (real GDP). The formula for the GDP deflator is:
• GD Deflator =Nominal GDP/Real GDP
o The GDP deflator could also be thought of as a measure of price increases or decreases.
Inflation
represents an increase in the general level of prices of goods and services, biggest risks inflation presents are the loss of purchasing power, causes a decline in the real value of money, cause of inflation is when the money supply increases faster than the growth in real GDP.
- Disinflation is a slowdown in the rate of inflation.
- Deflation is a decrease in overall price levels of goods and services (housing-not since 1930s)
Measures of Inflation
• The Consumer Price Index (CPI) measures the overall price levels for a basket of goods and services. Most widely quoted and relied upon measure of inflation.
• The Producer Price Index (PPI) measures the inflation rate for raw materials used in the manufacturing process.
Interest Rates
price that a borrower pays to borrow money
nominal interest rate - real rate of return + an adjustment for anticipated future inflation
influenced by the demand for and the supply of loanable funds
influenced by fiscal and monetary policy
Unemployment
Individuals 16 years of age and older who are not working and are making an effort to seek employment
- Frictional unemployment occurs when people are voluntarily unemployed.
- Structural unemployment occurs when there is inequality between the supply of adequately skilled workers and the demand for workers.
- Cyclical unemployment occurs when there is an overall downturn in business activity.
- Full employment is defined as the rate of employment that exists when there is efficiency in the labor market, approximately 95% employment of the labor force.
Business Cycle
o Expansion
o Peak
o Contraction or Recession
o Trough
Business Life Cycle
Business Cycle
Economic Indicators
• The Index of Leading Economic Indicators
o The Index of Leading Economic Indicators is relied on to
predict changes in the economy.
• The Index of Trailing Economic Indicators
o The index of lagging economic indicators summarizes past
performance.
o It does not predict future trends in the economy.
o It validates current assessments of the economy.
• The Index of CO-incident Economic Indicators
o This index is comprised of economic variables that change
along with the business cycle.
Monetary Policy
• Monetary policy represents the intended influence on the
money supply and interest rates.
• Monetary policy is established by the Chairman of the Federal
Reserve and the Federal Open Market Committee (FOMC).
• The Federal Reserve has three primary goals:
o Maintain price levels
o Maintain long-term economic growth
o Maintain full employment
Monetary Policy
• The Federal Reserve has four tools that it uses to implement
monetary policy. The four tools are:
o Reserve Requirement
o Discount Rate / Federal Funds Rate
o Open Market Operations
o Excess Reserve Deposits
Reserve Requirement
The Federal Reserve requires that banks maintain a certain
percentage of their deposits on hand, in the form of cash
known as their reserve requirement
Discount Rate
The discount rate is the interest rate that the Federal Reserve
charges financial institutions for short-term loans.
• The bank to bank lending rate is the federal funds rate (also
known as the overnight rate).
• The Federal Open Market Committee (FOMC) will set the
discount rate and also a target for the federal funds rate. The
Federal Reserve does not directly control the federal funds
rate.
Open Market Operations
Excess Reserves
Excess reserves represent the amount of cash or deposits with the Federal Reserve in excess of the minimum amount required.
• Financial institutions have an incentive to keep excess reserves on deposit with the Federal Reserve.
Fiscal Policy- Congress has the same three goals:
o Maintain price levels
o Maintain long-term economic growth
o Maintain full employment
Fiscal Policy Tax Impact
Spending & Deficits
- Spending by the federal government can directly impact aggregate demand.
- If a fiscal policy of deficit spending is chosen in an unstable economy, such as a deep recession or depression, the deficit increase can be worth the risk.
- However, if deficit spending is related to overspending or failure to follow a budget, then the risk of deficit spending is not reasonable.
- Government borrowing competes with industry putting upward pressure on rates.
Demand
Demand is the quantity consumers are willing to purchase of a good or service, at a particular price.
• Demand is inversely related to price
The Demand Curve
and
Examples that cause the demand curve to shift down and to the left include:
o Decrease in disposable income (Decrease in price of a substitute product)
o Increase in tax rate
o Increase in unemployment rate
o Increase in savings rate (Increase in price of a complement product)
Substitutes and Complements
- Substitutes are products that serve a similar purpose (pork and chicken)
- Complements are products that are consumed jointly (PB&J)
Price Elasticity of Demand
Elasticity =Percentage Change in Quantity Demanded/Percentage Change in Price
small percentage change in price, results in a large percentage change in the quantity demanded
Elastic Demand
Inelastic Demand
If a one percent change in price leads to a one percent change in quantity demanded, then elasticity is one, which is defined as unit elasticity
Disinflation vs. Deflation
- Disinflation is a slowdown in the rate of inflation.
- Deflation is a decrease in overall price levels of goods and services (housing-not since 1930s)
3 Unemployment types
Cyclical – overall downturn in business activity
Structural- supply of workers and demand
Frictional – voluntarily unemployed
