General Financial Planning Principles Sections 7 - 8 Flashcards
What is the demand curve?
Its the relationship between price and quantity bought
Describe the substitution effect?
When prices of goods rises, consumers substitute those items with similar goods
Describe the income effect?
When prices rises, consumers will begin purchase less
What factors affect demand? (6)
- The price of the good
- The average income of consumers
- Population
- The prices and availability of related goods
- Tastes and preferences
- Special influences, such as expectations about future economic conditions, particularly prices
What does the supply curve show its relationship between?
The supply curve shows the relationship between its market price and the amount of that commodity producers are willing to produce and sell
What is the main force that determines supply?
Profit
A reduction in tariffs and quotas on foreign goods will.
open the market to foreign producers and will likely increase supply
What are the factors that affects supply? (5)
- The price of the good
- Technology
- Input prices
- Prices of related goods
- Special influences, such as government tax incentives
What is price elasticity?
is the responsiveness of the quantity of a good demand to changes in the good’s price, all other economic forces remaining constant
What is price inelastic?
Is when the demand for certain products (necessities) responds little to price change. (Food, gasoline, etc)
When does unit-elastic occur?
It occurs when the percentage change in quantity is exactly the same as the percentage change in price
What is deflation?
it is the opposite of inflation, the decline in general price levels
What is disinflation?
A decline in the inflation rate
What does an unanticipated inflation do?
It redistributes wealth from creditors to debtors (i.e unanticipated inflation helps those who have borrowed money and hurts those who have lent money. An unanticipated decline has the opposite effect)
What does the Consumer Price Index (CPI) measure?
It measures the market cost of a basket of consumer goods and services, including prices of food, clothing, shelter, fuels, transportation, medical care, college, and other commodities purchases for day to day living.
Described Gross Domestic Product (GDP).
It is the total market value of all goods and services produce within the United States over the course of a given year, including income generated domestically by a foreign firm.
What does the Producer of Price Index (PPI) measure?
it measures the average change over time in selling prices received by domestic goods and services
Who is in control of monetary policy and fiscal policy?
Fed is control of monetary policy and Congress is control of fiscal policy
What are the 3 methods the Fed can use to control monetary policy?
- lowing or increasing the reserve requirement
- lowing or increasing the Discount Rate
- Engaging in open market operations
Describe the Reserve requirement?
For members of the Federal Reserve Bank, it is the percentage of deposit liabilities that must beheld in reserve. When this requirement is increase, there is less money for available for banks to loan to customers, thus restricts money supply.
What is the Fed Discount Rate?
Its the rate at which member banks can borrow funds from the Federal Reserve to meet requirements
What happens when the Feds raises or lowers the Fed discount rate?
When its raise, it increases the cost of borrowing which discourages member banks from borrowing funds, thus contracting the money supply. When lowered, it increases the money supply so banks are able to borrow more at lower rates which increases the money supply
Open Market Operations -When the Feds buy government securities, what are they attempting to do?
By buying securities, the Fed is adding more money for circulation, thus increasing lending and lowering interest rates.
Open Market Operations -When the Feds sells government securities, what are they attempting to do?
By selling securities, the Fed is restricting the money supply, thus decreases lending and increasing interest rates
