Fundamentals Ch. 15 - Economics and the External Environment Flashcards
What is GDP?
- 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.
What is GNP
- 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.
Nominal
Measurement of current prices
Real
Measurement of of the value of goods at a base year price. AKA it accounts for inflation.
What is the GDP deflator
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.
Describe Inflation
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.
Disinflation vs deflation
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.
Describe CPI
Stands for Consumer price index.
Most widely used meaure of inflation.
What are the components of CPI
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%
What are the phases of the business cycle
Expansion
Peak
Contraction
Trough
Characteristics of expansion
GDP, Inflation, and interest rates are rising
Unemployment is decreasing
Characteristics of Peak Expansion
GDP peaks
Inflation and interest rates peaking
Unemployment bottoming
Characteristics of Contraction
GDP growth rate is slowing
Inflation and interest rates begin declining or coming off of their highs
Unemployment rate begins to increase
Characteristics of trough
GDP, Inflation, and interest rates at their lowest levels or bottoming.
Unemployment has peaked or is at it’s highest level
Give 4 examples of leading economic indicators
Average workweek of production workers in manufacturing
Initial unemployment claims for state unemployment insurance
Building permits
Stock prices
Give 3 examples of lagging indicators
Average duration of employment
ratio of manufacturing and trade inventories to sales
ratio of consumer credit outstanding to personal income
What is monetary policy
The means by which the fed controls the money supply and influences interest rates
What is fiscal policy
The means by which congress controls spending and taxation to influence the money supply and interest rates
What are the 3 goals of the fed
Maintain price levels/inflation
maintain long term economic growth/gdp
maintain full employment
What tools does the fed use to influence the money supply/interest rates
- Reserve requirement
- Discount Rate
- Open market operations
- Excess reserve deposits
How does the reserve requirement impact monetary policy
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
Describe open market operations
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.
Describe open market operations
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.
What are the goals of congress as it relates to fiscal policy
- Maintain price levels
2 maintain long term economic growth
- maintain full employment
What tools does the does congress use to influence fiscal policy
- Taxation - Will reduce money supply
- Spending - Will increase money supply
- Debt management - Deficit spending where congress spends more than the tax revenue collected.
Demand Curve
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.
How does price impact demand
Anytime there is a change in price there will be movement along the demand curve. Price alone will not shift the demand curve.
What factors cause a shift in the demand curve
income
taxes
savings rate
disposable income
How does income shift demand curve
An increase in income will cause the curve to shift up to the right. AKA prices go up for the same quantity of goods.
What causes the demand curve to shift up to the right
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.
What causes the demand curve to shift down to the left?
Events that cause discretionary income to go down.
Lower income
higher taxes
higher savings rate
Describe price elasticity
Measures the change in quantity demanded relative to a change in price.
Higher prices mean lower quantity demanded.
Explain elastic demand
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.
Explain inelastic demand
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.
Describe the supply curve
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.
Name the factors that will shift the supply curve
technology
competition
anything other than price
How does technology shift the supply curve
Improvements to technology will shift the supply curve up to the right producing more goods at a lower cost.
What are the 3 types of bankruptcy laws
- 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
Name the types of non-dischargeable debts
All student loans Property Liens 3 yrs back taes Child support Alimony Debt obtained through fraud
What assets are protected from bankruptcy
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
Explain FDIC insurance
250k federal insurance on deposit accounts.
Per depositor, per legal ownership, per financial institution
Legal ownership includes Individual, Joint, Testamentary, and retirement
