Unit 3 - Session 11 - Basic Economics & Fin Reporting Flashcards
Fiscal Policy
Gov’s use of spending on taxation to influence economic activity
Monetary policy
Central Banks actions the affect the quantity of money and credit in an economy in order to influence economic activity. It is either expansionary (increase in the money supply and credit to the economy) or contractionary (reduces the quantity of money and credit in the economy).
Keynesian Economics
Recognizes the importance of government intervention. During recessionary times, government should run deficits to stimulate demand and employment.
Classical and Supply-side Economics
Lower taxes and less government regulations benefits consumers through a greater supply of goods and services at lower costs. Supply-side holds that supply creates demand by providing jobs and wages
Monetarist Theory
The quantity of money or money supply determines overall price levels and economic activity. Milton Freedom school of thought. Too many dollars chasing too few goods leads to inflation and too few dollars chasing too many goods leads to deflation. A moderately increasing money supply leads to price stability
Tools of the FED
- ) Chases in reserve requirements: by changing the amount of funds commercial banks must leave on deposit with the FED, the amount of money available for these banks to lend out is decreased. The shrinkage of money supply translates into higher interest rates. the reserves is true when reserve requirements are eased
- ) Changes in the discount rate: This is the rate the FED charges member banks when lending them money. Higher rates discourage borrowing, reducing the money supply with lower rates having an opposite effect
- ) Open market options: FED buys and sells US Treasury securities in the open market under the direction of the Federal Open Market Committee (FOMC). When Treasuries are purchased, it adds to the money supply, b/c the FOMC is purchasing the securities from commercial banks causing the banks to have greater reserves. the opposite occurs when treasuries are sells the money supply is reduced
Economic Business Cycles
Expansion, Peak, Contraction, Trough
Expansion
increasing business activity throughout the economy. This leads to an increase in inflation and production - decreases unemployment, hiring accelerates, falling inventories, rising stock markets, rising property values, increasing GDP
Peak
When business reach their productive capacity. this leads to a decrease in GDP, decrease to the unemployment rate, slowdown in hiring, slower rate of growth in consumer spending and business investment, increase to the inflation rate
Contraction
When businesses decline from their peak; mild term contractions are recessions, more severe are depressions. Contraction leads to risking number of bankruptcies and bond defaults, decreasing hours worked, increasing unemployment rate, decrease in consumer spending, home construction, business investments; falling stocks; decrease in inflation; rising inventories; negative growth rate for the GDP
Trough
business activity stops declining and levels off. Such as change from negative to positive GDP, high unemployment rate - increasing use of overtime and temp workers; spending on consumer durable goods and housing may increase; moderate or decrease in inflation
Economic Recession
When an output of goods and services (GDP) continues for two or more consecutive quarters
Economic Depression
When an output of goods and services (GDP) continues for six or more consecutive quarters
Cyclical Industries
Highly sensitive to business cycles and inflation trends. Most produce durable goods such as heavy machinery and autos as well as raw materials. During recessions the demand for durable goods declines, manufacturers postpone investment and new capital goods and consumers postpone purchases
Countercyclical Industries
Turn down as the economy heats up and rise the economy turns down. I.e. Golding mining
Defensive industries
Least affected by normal business cycles. Companies in defensive industries generally produce nondurable consumer goods such as food, pharmaceuticals, tobacco, and energy. During recessions these stocks tend to decline less than other industries
Inflation
General increase in prices as measured by an index such as the consumer price index (CPI). CPI reflects the average cost of goods and serves purchases by consumers compared to those same goods and services purchased during a base period. CPI stats are purchasing monthly by the BLS.
Inflation inertia
the concept that inflation does not immediately reflect unexpected changes to economic conditions rather, it lags behind, sometimes for several quarters
Deflation
General decline in prices, usually occurs during severe recessions when unemployment is on the rise
Real rate of interest
the nominal rate (rate of interest) minus the expected inflation
Federal Funds Rate
The rate banks that are members of the Federal Reserve System charge each other for overnight loans of $1MM or more. The rate is considered a barometer of the direction of short-term interest rates.
Prime Rate
Most preferential interest rate on corporate loans at large US money center commercial banks. This rate is lowered when the Fed eases the money supply and raises rates when the Fed contracts the money supply
