MacroEcon Exam 2 Study Guide Flashcards
What are firms responsible for organizing in a market system?
- Land
- Capital
- Labor
- Entrepreneurship
Why do people start firms?
To make profit
What is a sole proprietorship?
A firm owned by a single person
- Unlimited liability
- All assets belong to the owner
What is a partnership?
A firm owned by two or more people?
- each partner has unlimited liability for debts
What is a corporation?
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)
What is limited liability?
Means that only business assets will be sold to pay off debt if the business fails.
What is unlimited liability?
Means that business and personal assets will be sold to pay off debt if the business fails
What is corporate governance?
the way a corporation is structured and the effect it has on the firms behavior
What is the main difference between a sole proprietorship and a corporation?
The owner of a sole proprietorship is usually involved in day to day operations. Where as a corporations has separation between management and operations.
What is the principal agent problem?
A conflict caused by an agent pursing his own interest rather than the interests of the principal who hired the agent.
How do small business raise funds?
- Retained earning: profits are reinvested in the firm
- Recruit additional owners: increase the firms financial capital
- Borrow: from institutions, friends and family
What is indirect finance?
A flow of funds from savers to borrows through financial institutions (banks, credit unions etc..)
What is direct finance?
- Borrowers borrow funds directly from lenders in a financial market by selling stock and bonds
- Must be a big business
What is a bond?
a contractual agreement by the borrower to pay the holder a interest and the principal amount until a specified date
What are the two payments received from a bond?
- Interest Payment
- Final Payment
What is the difference between a Short Term, Long Term, and Intermediate bond?
- Short Term: last less than a year
- Intermediate: 1-10 years
- Long Term: 10 years
What is common stock?
- part ownership in the company
- Receives dividends
- Long term securities because they have no maturity date
When giving out interest payments and dividends, are bond holders or shareholders paid first?
Bond Holders
What are mutual funds?
- investments in a portfolio of assets and shares.
- Can only be sold back to the company
- Traded only once a day
What are exchange traded funds?
passively managed funds that invest in a portfolio of assets and shares.
- These can be traded directly between investors
- Can be traded multiple times
What must a firm do before selling new stock, bonds, or obtain a loan?
Provide investors, financial regulators, and bands with information about its finances
What does the SEC require publicly traded firms to do?
- Report performances via income statements and balance sheet
- Disclose financial statements in periodic filings to the federal government and shareholders
What is an income statement?
- shows a firms revenue, costs, and profit over a period of time
What are the two equations for Economic Profit?
- Revenue - Explicit Costs - Implicit Costs
- Accounting Profit - Implicit Costs
What is the equation for Accounting Profit?
Revenue - Explicit Costs
What is a balance sheet?
- Shows a firms financial position on a particular day
What is the Sarbanes-Oxley Act of 2002?
- 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
What is the future value formula?
Future Value= PV(1+r)^n
- Present Value (1+ annual interest rate)^ number of periods interest held
What is long term economic growth?
the ability of a country to produce more goods and services from one year to the next
What’s the equation for GDP per Capita
GDP/Population
What’s the equation for Growth Rate?
Current Year-Previous Year over previous year *100
What’s the equation for Average Annual Growth Rate?
Real GDP Growth Rates over # of Years
Whats the equation for Present Real GDP?
Past Real GDP * (1+g)^n
What does real GDP per capita rely on?
Increases in labor productivity
What is the equation for Rule of 70?
70/Growth Rate
What is the purpose of the Rule of 70?
to measure the number of years to double GDP
What is capital?
manufactured goods that are used to produce other goods and services
What are property rights?
legal rights that define how people can own and use resources
What is potential GDP?
the amount of goods and services a country could produce at max productivity
What are financial markets?
where financial securities such as stocks and bonds are traded
What is risk?
the chance that the value of a financial security will change relative to what you expect.
What is liquidity?
the ease with which the financial security can be exchanged for money
What is the GDP formula?
Y=C+I+G+NX
- only applies to open economies
- Consumer spending (C)
- Business Investment (I)
- Government Spending (G)
- Net Exports (NX)
What is the GDP formula of a closed economy?
Y= C+I+G
What is the formula for private savings (S,private)?
Y+TR-C-T
Y= Total Income
TR= Transfer Payments from government
C= Consumer Spending
T= Taxes
What is the formula for public savings (S,Public)?
T-G-TR
Taxes (T)
Government Spending (G)
Transfer Payments from Government (TR)
What is the equation for total savings?
(S,Private)+(S,Public)
(Y+TR-C-T)(T-G-TR)
The interaction of borrowers and lenders determines what?
market interest rate and quantity of loanable funds exchange
