General Financial Planning Principles Sections 7 - 8

Question 1

What is the demand curve?

Answer 1

Its the relationship between price and quantity bought

Question 2

Describe the substitution effect?

Answer 2

When prices of goods rises, consumers substitute those items with similar goods

Question 3

Describe the income effect?

Answer 3

When prices rises, consumers will begin purchase less

Question 4

What factors affect demand? (6)

Answer 4

1. The price of the good
2. The average income of consumers
3. Population
4. The prices and availability of related goods
5. Tastes and preferences
6. Special influences, such as expectations about future economic conditions, particularly prices

Question 5

What does the supply curve show its relationship between?

Answer 5

The supply curve shows the relationship between its market price and the amount of that commodity producers are willing to produce and sell

Question 6

What is the main force that determines supply?

Answer 6

Profit

Question 7

A reduction in tariffs and quotas on foreign goods will.

Answer 7

open the market to foreign producers and will likely increase supply

Question 8

What are the factors that affects supply? (5)

Answer 8

1. The price of the good
2. Technology
3. Input prices
4. Prices of related goods
5. Special influences, such as government tax incentives

Question 9

What is price elasticity?

Answer 9

is the responsiveness of the quantity of a good demand to changes in the good’s price, all other economic forces remaining constant

Question 10

What is price inelastic?

Answer 10

Is when the demand for certain products (necessities) responds little to price change. (Food, gasoline, etc)

Question 11

When does unit-elastic occur?

Answer 11

It occurs when the percentage change in quantity is exactly the same as the percentage change in price

Question 12

What is deflation?

Answer 12

it is the opposite of inflation, the decline in general price levels

Question 13

What is disinflation?

Answer 13

A decline in the inflation rate

Question 14

What does an unanticipated inflation do?

Answer 14

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)

Question 15

What does the Consumer Price Index (CPI) measure?

Answer 15

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.

Question 16

Described Gross Domestic Product (GDP).

Answer 16

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.

Question 17

What does the Producer of Price Index (PPI) measure?

Answer 17

it measures the average change over time in selling prices received by domestic goods and services

Question 18

Who is in control of monetary policy and fiscal policy?

Answer 18

Fed is control of monetary policy and Congress is control of fiscal policy

Question 19

What are the 3 methods the Fed can use to control monetary policy?

Answer 19

1. lowing or increasing the reserve requirement
2. lowing or increasing the Discount Rate
3. Engaging in open market operations

Question 20

Describe the Reserve requirement?

Answer 20

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.

Question 21

What is the Fed Discount Rate?

Answer 21

Its the rate at which member banks can borrow funds from the Federal Reserve to meet requirements

Question 22

What happens when the Feds raises or lowers the Fed discount rate?

Answer 22

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

Question 23

Open Market Operations -When the Feds buy government securities, what are they attempting to do?

Answer 23

By buying securities, the Fed is adding more money for circulation, thus increasing lending and lowering interest rates.

Question 24

Open Market Operations -When the Feds sells government securities, what are they attempting to do?

Answer 24

By selling securities, the Fed is restricting the money supply, thus decreases lending and increasing interest rates

Question 25

Who is in charge of open market operations?

Answer 25

The Federal Open Market Committee (FOMC)

Question 26

When does deficit spending occur?

Answer 26

When expenditures exceed revenues of the government

Question 27

What is the difference between the nominal interest rate and real interest rate?

Answer 27

Nominal interest rates measures the yield in dollars per year per dollar invested whereas real interest rate is the nominal interest rate adjusted for inflation

Question 28

What are leading indicators use for and what are examples of them? (4)

Answer 28

Leading indicators are used to predict changes in the business cycles because they precede changes. Examples Include;

1. Bond yields
2. Housing Starts
3. Investor Sentiment
4. durable good orders

Question 29

What are coincident indicators use for and what are examples of them? (4)

Answer 29

Coincident indicators are used to confirm the current state of the economy or business cycle because they usually occur simultaneously.
Examples Include;
1. Unemployment
2. Consumer income
3. Industrial production
4. Profits

Question 30

Lagging or confirming indicators are those that usually change…..

What are examples of them?

Answer 30

after the economy has passed through one business cycle and is in another.
Examples Include;
1. average duration of unemployment
2. prime interest rate;
3. change in consumer price index (CPI), particularly for services;
4. amount of business and consumer loans outstanding

Question 31

What is Gross National Product (GNP)?

Answer 31

is the total market value of all goods and services produced by U.S. residents’ labor and property (domestic and international)

Question 32

What is the difference between GDP and GNP?

Answer 32

Unlike gross domestic product (GDP), which defines production based on the geographical location of production (within the U.S. border. including international firms) , GNP measures production based on ownership (American firms in other countries as well)

Question 33

For an annuity, if a payment occurs at the end of each period, it is referred to as _____

Answer 33

Ordinary annuity (e.g., mortgage payment)

Question 34

For an annuity, if a payment occurs at the beginning of each period, it is referred to as _____

Answer 34

Annuity due (e.g., lease or rent payment)