FUND CH15 Economics and the External Environment

Question 1

Factors that Impact Elasticity

Answer 1

o Substitute products

o Consumer’s income

o Time

Question 2

Supply

Answer 2

Supply represents the quantity firms are willing to produce and sell of a good or service, at a particular price

Question 3

Supply Curve (up and to the left)

Answer 3

o Decreased competition o Outdated technologies o Increased price of an input used in the manufacturing process

Question 4

Supply Curve (down and to the right)

Answer 4

o Increased competition o Improved technology to increase efficiency o Decreased price of an input used in the manufacturing process

Question 5

Bankruptcy -

Some assets and property are exempt from the bankruptcy court and creditors

Answer 5

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

Question 6

Bankruptcy- debts that are not discharged

Answer 6

o All student loans

o Property liens

o Three years of back taxes

o Child support

o Alimony

o Debts obtained through fraud

Question 7

Equal Credit Opportunity Act

Answer 7

prohibits discrimination, when evaluating a decision to grant consumer credit

Question 8

(FICO)

Answer 8

Fair Isaac Credit Organization, most popular method of determining a credit score

Question 9

3 best ways to increase a FICO score

Answer 9

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

Question 10

Fair Credit Reporting Act

Answer 10

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

Question 11

Truth in Lending Act

Answer 11

protect consumers so that they fully understand the terms of a loan

disclosures!

Annual percentage rate

Question 12

Fair Credit Billing Act

Answer 12

error on bill - 60 days written verification to a consumer disputing a billing error

90 days to resolve and investigate

Question 13

Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005

Answer 13

amends the Truth in Lending Act

requiring certain creditors to disclose on the front of billing statements a minimum monthly payment warning for consumers

Question 14

Credit Card Accountability, Responsibility

and Disclosure (CARD) Act of 2009

Answer 14

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.

Question 15

Federal Deposit Insurance Corporation (FDIC)

Answer 15

The FDIC insures up to $250,000 per depositor, per legal account ownership, per financial institution

 Individual

 Joint

 Testamentary

 Retirement

Question 16

Securities Investor Protection Corporation

(SIPC)

Answer 16

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.

Question 17

8 Securities Regulation Acts

Answer 17

• 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.

Question 18

Dodd-Frank Wall Street Reform and Consumer Protection Act

Answer 18

-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

Question 19

Worker Protection Laws

Answer 19

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)

Question 20

External Environment

Answer 20

• 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.

Question 21

Economic Output

Answer 21

• 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.

Question 22

Gross Domestic Product

Answer 22

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.

Question 23

Inflation

Answer 23

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)

Question 24

Measures of Inflation

Answer 24

• 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.

Question 25

Interest Rates

Answer 25

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

Question 26

Unemployment

Answer 26

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.

Question 27

Business Cycle

Answer 27

o Expansion

o Peak

o Contraction or Recession

o Trough

Question 28

Business Life Cycle

Answer 28

Question 29

Business Cycle

Question 30

Economic Indicators

Answer 30

• 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.

Question 31

Monetary Policy

Answer 31

• 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

Question 32

Monetary Policy

Answer 32

• 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

Question 33

Reserve Requirement

Answer 33

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

Question 34

Discount Rate

Answer 34

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.

Question 35

Open Market Operations

Question 36

Excess Reserves

Answer 36

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.

Question 37

Fiscal Policy- Congress has the same three goals:

Answer 37

o Maintain price levels

o Maintain long-term economic growth

o Maintain full employment

Question 38

Fiscal Policy Tax Impact

Question 39

Spending & Deficits

Answer 39

• 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.

Question 40

Demand

Answer 40

Demand is the quantity consumers are willing to purchase of a good or service, at a particular price.

• Demand is inversely related to price

Question 41

The Demand Curve

and

Examples that cause the demand curve to shift down and to the left include:

Answer 41

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)

Question 42

Substitutes and Complements

Answer 42

• Substitutes are products that serve a similar purpose (pork and chicken)
• Complements are products that are consumed jointly (PB&J)

Question 43

Price Elasticity of Demand

Answer 43

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

Question 44

Elastic Demand

Question 45

Inelastic Demand

Answer 45

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

Question 46

Disinflation vs. Deflation

Answer 46

• 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)

Question 47

3 Unemployment types

Answer 47

Cyclical – overall downturn in business activity

Structural- supply of workers and demand

Frictional – voluntarily unemployed