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MacroEcon > MacroEcon Exam 2 Study Guide > Flashcards

MacroEcon Exam 2 Study Guide Flashcards

1
Q

What are firms responsible for organizing in a market system?

A
  • Land
  • Capital
  • Labor
  • Entrepreneurship
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2
Q

Why do people start firms?

A

To make profit

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3
Q

What is a sole proprietorship?

A

A firm owned by a single person
- Unlimited liability
- All assets belong to the owner

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4
Q

What is a partnership?

A

A firm owned by two or more people?
- each partner has unlimited liability for debts

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5
Q

What is a corporation?

A

A legal form of a business that provides owners with protection from losing more than their investment should the business fail
- Owners have limited liability
- Can issue stock and bonds, (money is easier to raise)

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6
Q

What is limited liability?

A

Means that only business assets will be sold to pay off debt if the business fails.

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7
Q

What is unlimited liability?

A

Means that business and personal assets will be sold to pay off debt if the business fails

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8
Q

What is corporate governance?

A

the way a corporation is structured and the effect it has on the firms behavior

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9
Q

What is the main difference between a sole proprietorship and a corporation?

A

The owner of a sole proprietorship is usually involved in day to day operations. Where as a corporations has separation between management and operations.

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10
Q

What is the principal agent problem?

A

A conflict caused by an agent pursing his own interest rather than the interests of the principal who hired the agent.

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11
Q

How do small business raise funds?

A
  • Retained earning: profits are reinvested in the firm
  • Recruit additional owners: increase the firms financial capital
  • Borrow: from institutions, friends and family
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12
Q

What is indirect finance?

A

A flow of funds from savers to borrows through financial institutions (banks, credit unions etc..)

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13
Q

What is direct finance?

A
  • Borrowers borrow funds directly from lenders in a financial market by selling stock and bonds
  • Must be a big business
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14
Q

What is a bond?

A

a contractual agreement by the borrower to pay the holder a interest and the principal amount until a specified date

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15
Q

What are the two payments received from a bond?

A
  • Interest Payment
  • Final Payment
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16
Q

What is the difference between a Short Term, Long Term, and Intermediate bond?

A
  • Short Term: last less than a year
  • Intermediate: 1-10 years
  • Long Term: 10 years
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17
Q

What is common stock?

A
  • part ownership in the company
  • Receives dividends
  • Long term securities because they have no maturity date
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18
Q

When giving out interest payments and dividends, are bond holders or shareholders paid first?

A

Bond Holders

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19
Q

What are mutual funds?

A
  • investments in a portfolio of assets and shares.
  • Can only be sold back to the company
  • Traded only once a day
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20
Q

What are exchange traded funds?

A

passively managed funds that invest in a portfolio of assets and shares.
- These can be traded directly between investors
- Can be traded multiple times

21
Q

What must a firm do before selling new stock, bonds, or obtain a loan?

A

Provide investors, financial regulators, and bands with information about its finances

22
Q

What does the SEC require publicly traded firms to do?

A
  • Report performances via income statements and balance sheet
  • Disclose financial statements in periodic filings to the federal government and shareholders
23
Q

What is an income statement?

A
  • shows a firms revenue, costs, and profit over a period of time
24
Q

What are the two equations for Economic Profit?

A
  • Revenue - Explicit Costs - Implicit Costs
  • Accounting Profit - Implicit Costs
25
Q

What is the equation for Accounting Profit?

A

Revenue - Explicit Costs

26
Q

What is a balance sheet?

A
  • Shows a firms financial position on a particular day
27
Q

What is the Sarbanes-Oxley Act of 2002?

A
  • Require CEO’s to personally certify the accuracy of financial statements
  • Require Analysts and Auditors to disclose any conflicts of interest that would limit independence in evaluating a firms finances
28
Q

What is the future value formula?

A

Future Value= PV(1+r)^n
- Present Value (1+ annual interest rate)^ number of periods interest held

29
Q

What is long term economic growth?

A

the ability of a country to produce more goods and services from one year to the next

30
Q

What’s the equation for GDP per Capita

A

GDP/Population

31
Q

What’s the equation for Growth Rate?

A

Current Year-Previous Year over previous year *100

32
Q

What’s the equation for Average Annual Growth Rate?

A

Real GDP Growth Rates over # of Years

33
Q

Whats the equation for Present Real GDP?

A

Past Real GDP * (1+g)^n

34
Q

What does real GDP per capita rely on?

A

Increases in labor productivity

35
Q

What is the equation for Rule of 70?

A

70/Growth Rate

36
Q

What is the purpose of the Rule of 70?

A

to measure the number of years to double GDP

37
Q

What is capital?

A

manufactured goods that are used to produce other goods and services

38
Q

What are property rights?

A

legal rights that define how people can own and use resources

39
Q

What is potential GDP?

A

the amount of goods and services a country could produce at max productivity

40
Q

What are financial markets?

A

where financial securities such as stocks and bonds are traded

41
Q

What is risk?

A

the chance that the value of a financial security will change relative to what you expect.

42
Q

What is liquidity?

A

the ease with which the financial security can be exchanged for money

43
Q

What is the GDP formula?

A

Y=C+I+G+NX
- only applies to open economies
- Consumer spending (C)
- Business Investment (I)
- Government Spending (G)
- Net Exports (NX)

44
Q

What is the GDP formula of a closed economy?

A

Y= C+I+G

45
Q

What is the formula for private savings (S,private)?

A

Y+TR-C-T
Y= Total Income
TR= Transfer Payments from government
C= Consumer Spending
T= Taxes

46
Q

What is the formula for public savings (S,Public)?

A

T-G-TR
Taxes (T)
Government Spending (G)
Transfer Payments from Government (TR)

47
Q

What is the equation for total savings?

A

(S,Private)+(S,Public)
(Y+TR-C-T)(T-G-TR)

48
Q

The interaction of borrowers and lenders determines what?

A

market interest rate and quantity of loanable funds exchange

49
Q
A

MacroEcon (5 decks)

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