Fundamentals Ch. 15 - Economics and the External Environment

Question 1

What is GDP?

Answer 1

1. Gross Domestic Product

It measures total economic output for a country.

It represents the total final output of a country by it’s citizens and foreigners in the country over a period of time.

If a US citzen owns a business that produces goods in another country and sells those goods in other countries, it would not be included in GDP.

Question 2

What is GNP

Answer 2

1. Gross National Product

This measures the output of US Citizens whether produced domestically or internationally. A US citizen who owns a business in China would be included in GNP.

Question 3

Nominal

Answer 3

Measurement of current prices

Question 4

Real

Answer 4

Measurement of of the value of goods at a base year price. AKA it accounts for inflation.

Question 5

What is the GDP deflator

Answer 5

Measures current price of goods and services relative to a base year. In otherwords it is a function of nominal GDP/Real GDP.

This could be a measure of price increases or decreases.

Question 6

Describe Inflation

Answer 6

It represents an increase in the price level of goods and services.

Causes a decline in the value of real money.

The primary cause is when the money supply increases faster than growth in real GDP.

Question 7

Disinflation vs deflation

Answer 7

Disinflation means we are still in an inflationary environment, but the pace of inflation is declining.

Deflation means real prices are going down or negative inflation.

Question 8

Describe CPI

Answer 8

Stands for Consumer price index.

Most widely used meaure of inflation.

Question 9

What are the components of CPI

Answer 9

Group 	Weight
Food 	13.4%
Energy (incl. gasoline) 	8.7%
Commodities (incl. medication and autos) 	21.3%
Housing 	32.3%
Health care 	6.8%
Transportation  	5.9%
Other expenses 	11.6%
TOTAL 	100%

Question 10

What are the phases of the business cycle

Answer 10

Expansion
Peak
Contraction
Trough

Question 11

Characteristics of expansion

Answer 11

GDP, Inflation, and interest rates are rising

Unemployment is decreasing

Question 12

Characteristics of Peak Expansion

Answer 12

GDP peaks
Inflation and interest rates peaking
Unemployment bottoming

Question 13

Characteristics of Contraction

Answer 13

GDP growth rate is slowing
Inflation and interest rates begin declining or coming off of their highs
Unemployment rate begins to increase

Question 14

Characteristics of trough

Answer 14

GDP, Inflation, and interest rates at their lowest levels or bottoming.

Unemployment has peaked or is at it’s highest level

Question 15

Give 4 examples of leading economic indicators

Answer 15

Average workweek of production workers in manufacturing

Initial unemployment claims for state unemployment insurance

Building permits

Stock prices

Question 16

Give 3 examples of lagging indicators

Answer 16

Average duration of employment

ratio of manufacturing and trade inventories to sales

ratio of consumer credit outstanding to personal income

Question 17

What is monetary policy

Answer 17

The means by which the fed controls the money supply and influences interest rates

Question 18

What is fiscal policy

Answer 18

The means by which congress controls spending and taxation to influence the money supply and interest rates

Question 19

What are the 3 goals of the fed

Answer 19

Maintain price levels/inflation

maintain long term economic growth/gdp

maintain full employment

Question 20

What tools does the fed use to influence the money supply/interest rates

Answer 20

1. Reserve requirement
2. Discount Rate
3. Open market operations
4. Excess reserve deposits

Question 21

How does the reserve requirement impact monetary policy

Answer 21

increasing the reserve requirement will decrease the money supply and increase interest rtes.

decreasing the reserve requirment increases the money supply and decreases interest rates

Question 22

Describe open market operations

Answer 22

The process by which the fed buys and sells treasury securities to influence the money supply.

To tighten the fed will sell treasuries to the open market. The funds from the open market come onto the fed’s balance sheet thus reducing the supply of money available.

To ease, the fed will buy back treasuries from the market which will have the effect of increasing the money supply which will lower interest rates.

Question 23

Describe open market operations

Answer 23

The process by which the fed buys and sells treasury securities to influence the money supply.

To tighten the fed will sell treasuries to the open market. The funds from the open market come onto the fed’s balance sheet thus reducing the supply of money available.

To ease, the fed will buy back treasuries from the market which will have the effect of increasing the money supply which will lower interest rates.

Question 24

What are the goals of congress as it relates to fiscal policy

Answer 24

1. Maintain price levels

2 maintain long term economic growth

3. maintain full employment

Question 25

What tools does the does congress use to influence fiscal policy

Answer 25

1. Taxation - Will reduce money supply 2. Spending - Will increase money supply 3. Debt management - Deficit spending where congress spends more than the tax revenue collected.

Question 26

Demand Curve

Answer 26

Price on the y axis, quantity on the x axis. Slopes down to the right. Demand is a function of price. As price decreases consumers will demand more. As prices increase consumers will demand less. Think gas prices. Higher gas prices will discourage travel and reduce demand for gas. Unfortunately gas is inelastic which means that the demand is likely to remain unchanged or change little in response to price.

Question 27

How does price impact demand

Answer 27

Anytime there is a change in price there will be movement along the demand curve. Price alone will not shift the demand curve.

Question 28

What factors cause a shift in the demand curve

Answer 28

income taxes savings rate disposable income

Question 29

How does income shift demand curve

Answer 29

An increase in income will cause the curve to shift up to the right. AKA prices go up for the same quantity of goods.

Question 30

What causes the demand curve to shift up to the right

Answer 30

Higher income lower taxes, lower savings rate All of these things mean that the customer immediately has more discretionary income, or an increase in the money supply which causes higher prices.

Question 31

What causes the demand curve to shift down to the left?

Answer 31

Events that cause discretionary income to go down. Lower income higher taxes higher savings rate

Question 32

Describe price elasticity

Answer 32

Measures the change in quantity demanded relative to a change in price. Higher prices mean lower quantity demanded.

Question 33

Explain elastic demand

Answer 33

A significant change in quantity relative to price. Think airline tickets. A lower price will mean more people want to travel. Higher prices will cause fewer peple to travel or take fewer trips.

Question 34

Explain inelastic demand

Answer 34

Small or no change to quantity demanded relative to price changes. Think gas. People must drive to the grocery store or work so a change to the price of gas is unlikely to change the quantity demanded.

Question 35

Describe the supply curve

Answer 35

Y axis + price X axis equals Quantity supplied If goods or services fetch a higher price then suppliers are willing to supply more of the good or service. The supply curve slopes up to the right.

Question 36

Name the factors that will shift the supply curve

Answer 36

technology competition anything other than price

Question 37

How does technology shift the supply curve

Answer 37

Improvements to technology will shift the supply curve up to the right producing more goods at a lower cost.

Question 38

What are the 3 types of bankruptcy laws

Answer 38

1. Chapter 7 - Relief that is voluntary or involuntary through asset liquidation. Some debts are not dischargeable: 3 years back taxes, alimony and child support, student loans Chapter 11 Relief through reorganization Chapter 13 Relief through adjusting debts - think payment plan

Question 39

Name the types of non-dischargeable debts

Answer 39

``` All student loans Property Liens 3 yrs back taes Child support Alimony Debt obtained through fraud ```

Question 40

What assets are protected from bankruptcy

Answer 40

Traditional and Roth IRAs - Up to 1mm Rollover IRAs from qualified plans, unlimited amount Qualified retirement plans, deferred comp, tax deferred annuities Some personal property, one car, one television Education funds

Question 41

Explain FDIC insurance

Answer 41

250k federal insurance on deposit accounts. Per depositor, per legal ownership, per financial institution Legal ownership includes Individual, Joint, Testamentary, and retirement