unit 4 Flashcards
1
Q
what’s GDP
A
GDP measures the total market value of all final goods and services produced in the economy in a year.
2
Q
What is the difference between nominal GDP and real GDP?
A
Nominal GDP is measured based on current market prices, while real GDP is adjusted for inflation to remove the effect of price increases.
3
Q
Which economic indicator is used to reflect the cost of purchasing goods and services within a country?
A
The Consumer Price Index (CPI) reflects the cost of purchasing goods and services within a country.
4
Q
What does an increase in the Consumer Price Index (CPI) typically indicate for investors?
A
An increase in the Consumer Price Index (CPI) typically indicates that the cost of goods and services is rising, which means inflation is occurring. For investors, this could be concerning for a few reasons:
- Reduced purchasing power: As prices increase, consumers have less money to spend, potentially leading to lower demand for goods and services.
- Less disposable income for investing: With rising costs for essentials, individuals may have less money available to invest.
- Impact on returns: Those relying on investment income for living expenses might find that their returns are not enough to cover increased living costs.
So, for investors, an increase in the CPI often signals that it could be harder to achieve the same level of returns or that they might need to adjust their investment strategy to account for inflation.
5
Q
what’s included in the basket of goods and services used to calculate CPI?
A
Food
Groceries like bread, meat, dairy products, fruits, vegetables, and beverages.
Housing
Rent, mortgage interest payments, property taxes, utilities (electricity, heating, water), and household maintenance.
Transportation
Vehicle purchase prices, gasoline, public transportation fares, and vehicle maintenance costs (e.g., repairs, insurance).
Clothing and Footwear
Clothing items like shirts, pants, jackets, shoes, and seasonal clothing.
Health and Personal Care
Medical services, prescription drugs, personal care items (e.g., shampoo, toothpaste), and health insurance.
Recreation
Leisure activities like movies, sporting events, equipment (e.g., bicycles), and recreational vehicle costs.
Education and Communication
Tuition fees, books, school supplies, phone services, internet, and postal services.
Alcoholic Beverages and Tobacco
Alcohol (beer, wine, spirits) and tobacco products.
Furnishings and Household Equipment
Furniture, household appliances, cleaning products, and home decoration.
These items are weighted based on how much the average household spends in each category, which helps reflect the impact of price changes on overall consumer spending.
6
Q
what’s the ‘business cycle’?
A
The business cycle refers to the natural rise and fall of economic activity over time, which includes periods of expansion (growth) and contraction (recession) in the economy.
7
Q
what’s monetary policy?
A
Monetary policy involves central banks managing interest rates and money supply to influence inflation and economic growth. This is typically done by the Bank of Canada in Canada to stabilize the economy.
8
Q
What is the primary goal of fiscal policy?
A
The primary goal of fiscal policy is to adjust government spending and taxation to influence economic activity. This helps manage the overall health of the economy by stabilizing growth and controlling inflation.
9
Q
Which economic indicator is used to measure the cost of borrowing money in an economy?
A
prime rate:
The prime rate is the interest rate that commercial banks charge their most creditworthy customers and is often used as a benchmark for the cost of borrowing money in the economy.
10
Q
An increase in unemployment rates typically signals which of the following?
a) Economic expansion
b) Economic contraction or recession
c) Rising inflation
d) A stable economy
A
An increase in unemployment rates typically signals economic contraction or recession, as it often reflects a slowdown in business activity and a reduction in demand for workers.
11
Q
Which of the following is an example of an economic indicator used to measure the health of the economy?
a) Unemployment Rate
b) Interest Rate
c) Bank Profit Margins
d) Stock Market Index
A
The unemployment rate is a key economic indicator used to measure the health of the economy. It provides insight into the number of people actively seeking work and can reflect overall economic conditions.
12
Q
When the economy is in a recession, which of the following is most likely to happen?
a) Rising inflation
b) Falling GDP
c) Decreasing unemployment
d) Increased consumer spending
A
During a recession, falling GDP is typical, as economic activity slows down, leading to reduced production, income, and spending.
13
Q
What is the primary purpose of government fiscal policy?
A
The primary purpose of government fiscal policy is to regulate business cycles through government spending and taxation. This helps manage economic activity, such as stimulating the economy during a downturn or slowing it down during periods of excessive growth.
14
Q
Which of the following actions would be considered a contractionary monetary policy?
a) Lowering interest rates to encourage borrowing
b) Increasing government spending to stimulate the economy
c) Raising interest rates to reduce inflation
d) Reducing taxes to increase consumer spending
A
c) Raising interest rates to reduce inflation.
Contractionary monetary policy involves increasing interest rates or reducing the money supply to slow down economic activity and reduce inflation. Lowering interest rates, as you mentioned in option a, would be considered expansionary monetary policy, which is used to stimulate the economy.
15
Q
Increasing interest rates is part of contractionary monetary policy. explain how it works to slow down the economy
A
- Higher borrowing costs: When interest rates rise, it becomes more expensive to borrow money. People and businesses are less likely to take out loans for things like buying homes, cars, or funding expansion projects. This reduces spending and investment in the economy.
- Reduced consumer spending: Higher interest rates make it more expensive to carry debt. For consumers, this means higher monthly payments on things like credit cards, mortgages, or car loans. As a result, consumers may cut back on spending to manage their debt, leading to a slowdown in demand for goods and services.
- Lower investment by businesses: When borrowing costs rise, businesses are less likely to invest in new projects or expansion. They may delay hiring, reduce capital expenditures, or scale back growth plans because it’s more expensive to finance these activities.
- Stronger currency: Higher interest rates can attract foreign investment, leading to an increase in demand for the country’s currency. A stronger currency can reduce the cost of imports but make exports more expensive, which could lead to reduced demand for goods produced in the country
16
Q
If the central bank raises interest rates, what is the most likely immediate effect on borrowing in the economy?
A
if the banks increase interest rates, borrowing becomes more expensive, so people would buy less, and they would borrow less, but maybe also GICs will give you higher returns, so you’d want to get GICs, so you wouldn’t be spending that money. so for both of those, more of your money would be tied up at the bank, hence less overall spending. that slows down the economy
Borrowing becomes more expensive, leading to a decrease in borrowing: is the correct answer.
When the central bank raises interest rates, borrowing costs increase, which tends to reduce consumer and business borrowing. This leads to lower spending and investment, which can slow down the economy. Additionally, higher interest rates make savings vehicles like GICs more attractive, encouraging people to save rather than spend.
17
Q
Which of the following is most likely to happen when interest rates are lowered by the central bank?
a) Consumer spending and business investment increase.
b) The value of the currency strengthens.
c) Inflation decreases significantly.
d) Unemployment rates rise.
A
a) Consumer spending and business investment increase is the right answer.
When the central bank lowers interest rates, borrowing becomes cheaper. This encourages consumers and businesses to borrow more money, leading to increased spending and investment. As a result, economic activity tends to pick up, stimulating the economy.
Regarding inflation and unemployment, lowering interest rates can sometimes lead to higher inflation due to increased demand, and it may lower unemployment as businesses expand and hire more workers.
18
Q
How does a rise in interest rates typically affect bond prices?
A
Bond prices fall because higher rates make new bonds more attractive.
When interest rates rise, newly issued bonds offer higher coupon rates, which makes existing bonds with lower rates less attractive. As a result, the prices of existing bonds tend to fall in the market to adjust for the higher yields offered by new bonds.
19
Q
how does increasing interest rates affect inflation?
A
When the central bank raises interest rates, borrowing becomes more expensive, which leads to reduced consumer and business spending. This reduction in demand helps lower inflation, as there is less pressure on prices to rise.
20
Q
what does expansionary and contractionary refer to?
A
both are methods for fiscal and monetary policies, for stimulating or slowing the economy, respectively (expansionary for stimulating, contractionary for slowing)
21
Q
how does the government expand economy?
A
- lower taxes
- increase government spending
22
Q
how does the government slow economy?
A
contracting the economy controls inflation
Actions: Raise taxes, cut government spending.
23
Q
how do banks expand the economy?
A
Expansionary = “Easy money” (this reminds you that when the central bank is trying to boost the economy, it makes borrowing easier).
Actions: Lower interest rates, increase money supply.
24
Q
how do the banks slow down economy?
A
Contractionary = “Curb the cash” (this reminds you that contractionary policies reduce borrowing and spending to control inflation).
Actions: Raise interest rates, reduce money supply
also: encourage saving by increasing returns on savings accounts
25
whats the calculation for inflation?
(current cpi - previous cpi) / previous cpi x100%
26
what is inflation a measure of?
purchasing power (inversely proportional : if inflation goes up, purchasing power goes down)
27
can cpi or inflation be negative?
yeah its called deflation, but it's super rare, only during extended recessions, where your dollar can buy more stuff at the end, but its bad for the economy and overall mood, and less spending and more blah. so the government tries to keep inflation at a steady increase around 2% so that no one is caught off guard as much as possible, and the economy grows steadily, and people can plan for it with budget increases and wage increases.
28
what are the distributive effects of inflation?
Distributive Effects of Inflation:
- Lenders lose out because the money they receive has less real value.
- Borrowers benefit because they repay loans with "cheaper" dollars.
The term "distributive effects" refers to how something, like inflation, affects different groups of people differently. In this case, it explains how unanticipated inflation changes the real income (or purchasing power) between two groups: lenders and borrowers.
29
are unemployed people included in the "labour force"?
yes, the ones who are looking for work anyway
30
how do you measure unemployment rate?
unemployed / # labour force x 100%
31
whats the relationship between GDP and unemployment?
inverse
aka when people have jobs, they buy more stuff
32
whats a business cycle?
Alternating periods of economic expansion and contraction
33
how do you define a recession?
Recession: At least 6 months of economic contraction.
34
what happens to GDP during a recession?
During a recession, the economy contracts, meaning businesses may make fewer sales and profits, leading them to reduce hiring, cut wages, or even lay off workers to cope with the economic slowdown. This typically results in higher unemployment.
if people have less jobs, they will not buy as much stuff, so GDP falls.
35
what is unemployment rate?
% of ppl without work looking for work
36
what happens to stock prices during an economic expansion?
they go up usually
stock prices tend to rise as businesses grow and profits increase, which usually boosts investor confidence.
37
are retired people included in labour force? aka people who used to work and are now retired
no, children either :), but unemployed people are included! (if they are actively looking for work)
38
how does the government know how many people are actively looking for work?
The government tracks how many people are actively looking for work through surveys conducted by organizations like Statistics Canada. They use a survey called the Labour Force Survey (LFS), which is done monthly.
In this survey, individuals are asked if they are employed, looking for work, or if they are not in the labor force (for reasons like retirement, schooling, or not wanting a job). Specifically, they define someone as "actively looking for work" if they:
Have made specific efforts to find a job within the last four weeks, such as applying for jobs, attending interviews, or networking.
Are available to work.
This helps the government get a snapshot of the unemployment rate and understand the health of the labor market.
39
whats the full employment rate in canada and what does that mean?
The full employment rate refers to the lowest level of unemployment that is considered healthy for an economy. It's not zero unemployment, but rather a level where:
* Most people who want to work can find jobs.
* The unemployment rate includes people who are between jobs (frictional unemployment) or transitioning to new roles, but doesn't include large numbers of people who are unable to find work because of economic downturns or structural issues.
In Canada, full employment is typically considered to be an unemployment rate below 6%.
This means the economy is performing well, and nearly everyone who wants a job has one, with only a small percentage in transition between jobs or retraining.
40
how is economic contraction measured?
its when the GDP declines
41
whats unexpected inflation and how does it affect lenders and borrowers?
its when the inflation rate is higher than expected
when inflation is higher, the value of your dollars decreases
so a borrower benefits (BB) because the money they pay back is worth less
and the lender loses (LL) because the money they get back is worth less
42
what is "real" value of money
it's the nominal (dollar bills received) minus the inflation rate...
so if you borrow 100$, and the inflation is 5%, then when you pay it back your 100$ (nominal)'s "REAL" value is 95$ (after a year)
43
what kind of things affecting businesses could cause inflation?
inflation means the costs of things go up.
when costs of things go up, it's usually because it costs more for the raw materials, or it costs more to pay your employees.
business try to keep their profit margins the same, so it wouldn't be because of an decrease in profit margin (if that happened, it would just be temporary)
44
whats the Labor force participation rate
Measures the percentage of the working-age population that is either employed or actively looking for work
45
economic expansion is greated when government takes on more debt and the inflation goes up, but can there be too much debt or too high inflation?
yes and yes. too much of debt or inflation can be destabilizing and there might not be equilibrium with other economic factors. there might be unstability, uncertainty. "ovrheating" economy
46
how do interest rates typically respond with increasing inflation?
the value of money decreases therefore interest rates typically go up (think of how the lenders lose with inflation, banks want its money back with higher rates!)
47
whats the link between inflation and unemployment?
they are not directly correlated
48
in economic expansion, do businesses also typically spend more?
yes
When the economy is growing, businesses tend to invest more in their operations, products, and services to meet rising demand.
49
what does policy mean and since when does a policy have a goal
A policy is a set of rules, guidelines, or principles that are designed to guide decision-making and actions in a specific area. It outlines how to approach certain situations or problems and sets the direction for handling them.
In the context of economic policies, such as fiscal or monetary policy, these are strategies created by governments or central banks to manage the economy. A policy has goals because it is designed to achieve certain economic outcomes, such as controlling inflation, reducing unemployment, or stimulating growth
For example:
Fiscal policy has the goal of influencing the economy by adjusting government spending and tax rates.
Monetary policy has the goal of controlling inflation and stabilizing the currency through the management of interest rates and money supply.
The "goal" of a policy helps ensure that it addresses specific issues and achieves the intended economic or social results.
50
whats the general goal of both fiscal and monetary policies?
Both fiscal policy and monetary policy aim to control and influence the economy, but they do so in different ways:
Fiscal policy (handled by the government) controls the economy through taxation and spending. For example, during a recession, the government might lower taxes or increase spending to boost economic activity.
Monetary policy (handled by the central bank, like the Bank of Canada) controls the economy by managing the money supply and interest rates. For example, during inflation, the central bank might raise interest rates to cool down the economy.
Both are tools used to stabilize and guide the economy, helping to manage growth, control inflation, and reduce unemployment, but they focus on different methods.
51
fiscal: how does the government control the economy:
- taxes (from individuals and businesses)
- gov spending on goods and services
- transfer payments (Payments made without any exchange of goods or services (e.g., unemployment benefits, subsidies, social security).)
52
when the government gave extra EI benefits during covid, was that to stimulate or to slow the economy?
stimulate. That's in the category of "transfer payments" which increases during expansionary fiscal policy
53
what does the monetary policy have control over?
short term interest rates and the supply of money (printing bills)
54
who is in charge of monetary policy?
bank of canada
55
what are the goals of monetary policy?
- Maintain price stability.
- Influence levels of production, trade, prices, and employment.
- Ensure the Canadian dollar is protected.
56
what tools does Bank of Canada to affect economy?
Tools of Monetary Policy:
1. Bank Rate: The interest rate set by the Bank of Canada for loans to commercial banks. Adjusting this rate can influence borrowing costs in the economy.
2. Open Market Operations: Buying or selling government treasury bills to influence the money supply.
3. Government Deposits: Adjusting deposits with chartered banks.
57
whats the primary goal of monetary policy (not the how, but the why)
The primary goal of monetary policy is to regulate the supply of money to manage economic stability, including controlling inflation and influencing interest rates
Monetary policy involves actions by the central bank, such as adjusting interest rates, changing the bank rate, or engaging in open market operations
58
what are examples of transfer payments?
Examples of transfer payments include:
Unemployment benefits: Payments made to individuals who are temporarily unemployed.
Social security payments: Regular payments made to individuals, such as retired people or those with disabilities.
Welfare benefits: Financial assistance for those in need.
Child benefits: Payments to families with children to help with the cost of raising them.
Subsidies: Payments or financial aid to support businesses or individuals in specific sectors, like agriculture or healthcare.
These payments are made without the recipient providing goods or services in exchange. They're a way for the government to redistribute wealth and support individuals or businesses.
59
Which of the following is a goal of monetary policy?
a) To regulate the exchange rate of the Canadian dollar
b) To influence the level of production, trade, prices, and employment
c) To reduce government debt
d) To increase government spending
the correct answer is b) To influence the level of production, trade, prices, and employment.
Monetary policy aims to manage the economy by controlling the money supply and influencing short-term interest rates. This affects production, trade, prices, and employment, ultimately aiming for economic stability.
Option a), regulating the exchange rate of the Canadian dollar, is not the primary goal of monetary policy but rather a byproduct of other factors such as global trade or fiscal policy.
60
what are the key pillars of the canadian economy (bank of canada)?
stability and security
...of the economy, of the canadian dollar, of the labour market etc.
61
name some types of financial markets:
Examples of financial markets include:
Stock Markets – Where stocks (equity securities) are bought and sold (e.g., the Toronto Stock Exchange or the New York Stock Exchange).
Bond Markets – Where bonds (debt securities) are issued and traded.
Money Markets – Where short-term borrowing and lending take place, usually in the form of certificates of deposit, Treasury bills, and commercial paper.
Foreign Exchange Markets (Forex) – Where currencies are traded.
Derivatives Markets – Where financial instruments like futures, options, and swaps are traded.
Commodities Markets – Where raw materials and primary products like oil, gold, and agricultural products are traded.
These markets facilitate the transfer of capital between suppliers (those with surplus money, like savers and investors) and those who need capital (such as governments and businesses).
62
How does supply relate to price?
According to the law of supply, as the price of a good or service increases, the quantity supplied also increases because producers are willing to produce more at higher prices to earn greater profit.
63
what happens when demand > supply?
When demand exceeds supply, prices generally rise as buyers compete for the limited quantity available. This reflects that high demand pushes prices upward
64
What is the role of financial markets in the economy?
A) To channel funds from lenders to borrowers.
B) To facilitate the timing of purchases.
C) To provide a mechanism for government policy.
D) All of the above.
D) all of the above
65
what does supply and demand explain?
The forces of supply and demand in a particular market determine the price at which goods and services will change hands. Just about any situation in economics can be explained in terms of supply and demand.
66
whats the supply curve?
The supply curve represents the quantity of goods that producers are willing to sell at different prices.
67
What happens when demand increases in a financial market?
a) The price of the investment decreases
b) The supply curve shifts left
c) The price of the investment rises
d) The demand curve shifts left
the correct answer c) The price of the investment rises reflects the basic law of supply and demand: as demand increases, prices typically rise if supply doesn't increase at the same rate.
about the other (incorrect) choices:
a) The price of the investment decreases
This is incorrect because when demand increases, it typically drives the price up, not down. More buyers willing to purchase the investment will make it more valuable, raising the price.
b) The supply curve shifts left
This is incorrect because an increase in demand doesn't directly shift the supply curve. The supply curve represents the willingness of sellers to supply goods at various prices. Changes in demand affect the demand curve, not the supply curve directly.
d) The demand curve shifts left
This is incorrect because when demand increases, the demand curve shifts to the right, not the left. An increase in demand means that more people are willing to buy at each price, which moves the demand curve to the right.
68
what's supply?
Supply is the quantity of goods or services supplied at a particular price per unit. The quantity increases if sellers can charge a higher price per unit.
(because the price increases when there is a higher demand, so the seller is willing to sell more of it, to make more of a profit) (because it might not be worth the extra manufacturing cost for the supplier if they aren't going to make money off it)
69
whats the supply curve and how does it look?
Supply is the quantity of goods or services supplied at a particular price per unit. The quantity increases if sellers can charge a higher price per unit.
the x axis is quantity to sell and the y axis is the price per item (sales price)
70
what is demand and what does the demand curve look like?
Demand is the quantity of goods or services that buyers want to purchase at a given price per unit. Buyers demand more goods or services if the price decreases.
The demand curve slopes downwards to the right because buyers tend to buy more when prices decline. (x axis is quantity, y axis is price of the product)
71
what is market equilibrium?
Market equilibrium is the point where the supply curve and demand curve intersect.
aka when the supplier and the buyer are both willing to sell/buy that amount of product for that amount of price.
72
what is a financial market?
A financial market is a market in which financial assets are traded. In financial markets there are suppliers of capital and consumers of capital. Just as in other markets financial market prices reflect supply and demand
73
where does the supply come from for financial markets?
The supply of capital in the Canadian financial markets comes from the following sources:
* household savings
* retained earnings that corporations have not paid out as dividends
* budget surpluses in the government sector
* savings from abroad
74
why are lenders a source of capital supply?
they are willing to lend out capital to some entity with the expectation of profit in return
75
who are the "demanders" (buyers) in the financial market?
The demand for investment capital comes from the spending decisions of the following:
* governments (federal, provincial, municipal) * corporations
* Canadian households
* foreigners interested in the Canadian financial markets
These consumers of capital are commonly referred to as borrowers. For example, if a government needs to borrow funds it issues bonds. Investors purchase those bonds and act as lenders to the government.
76
in the financial market, what happens when the demand for particular stocks or bonds goes up?
If there is a sudden increase in demand for stocks or bonds, then the cost of those investments rises as the demand curve shifts upwards.
77
what are the 3 characteristics of Investment capital that affect the supply and demand curves in financial markets.
1. Scarcity :There is a limited supply of investment capital and those seeking capital must therefore compete for it.
2. Sensitivity: Sensitivity is the degree to which investment capital is influenced by changes in financial markets and the overall economy. With the growing amount of investment options available and the increased ease of access to information about those investments, investors are becoming more discriminating in their investment choices.
3. Mobility: Improvements in technology have made it possible for capital to move quickly from one part of the world to another. For instance, the foreign exchange markets trade more than $1 trillion every day on a 24 hour a day basis. This mobility has increased efficiency but it also serves to increase financial crises through rapid flow of capital.
78
what does financial supply do?
it can be lent out or invested or used to buy stuff (but that's called invested)
79
explain financial demand
In a financial market, demand refers to the desire or willingness of buyers (or borrowers) to purchase financial assets or borrow capital at various prices. The demand for investment capital comes from individuals, businesses, governments, and other entities that need funds to invest in projects, expand operations, or finance consumption.
80
What does the characteristic of "sensitivity" refer to in financial markets?
a) The ability to move capital quickly across the world
b) The amount of capital available in the market
c) The degree to which investment capital is affected by market changes
d) The stability of long-term investments
c.
a) is mobility
b) is scarcity
d) is n/a
Scarcity – There's a limited amount of capital available, and those seeking it must compete for it.
Sensitivity – Investment capital is influenced by changes in financial markets and the economy.
Mobility – Capital can move quickly across borders, especially with improvements in technology.
81
Mnemonic:
IC SMS ...
(IC = investment capital)
(or CIC: characteristics of investment capital)
(or: CDIC : characteristics DE investment capital) haha
Investment Capital
Scarcity
Mobility
Sensitivity
Scarcity – There's a limited amount of capital available, and those seeking it must compete for it.
Sensitivity – Investment capital is influenced by changes in financial markets and the economy.
Mobility – Capital can move quickly across borders, especially with improvements in technology.
82
can capital be stable?
it can but it depends on the type of investment the capital is invested in, therefore it isnt a characteristic of investment capital, but rather a charactistic of the type of investment, if that makes any sense.
83
who are the buyers in a financial market?
they are called "borrowers" aka the people who need the money
Borrowers: These are the entities seeking to access capital, which can include:
*Governments (e.g., borrowing to fund public projects by issuing bonds)
*Corporations (e.g., issuing stocks or bonds to raise funds for expansion)
*Households (e.g., taking out loans for mortgages, education, or personal consumption)
*Foreigners (e.g., investors or governments outside Canada looking to invest in Canadian financial markets)
84
10 things that affect demand in financial markets:
Here’s a short list of factors that affect demand in financial markets:
1. Interest rates – Higher rates decrease demand, lower rates increase demand.
2. Economic conditions – Strong growth increases demand, recessions decrease demand.
3. Inflation expectations – High inflation can increase demand, low inflation stabilizes demand.
4. Investor confidence – Positive sentiment increases demand, negative sentiment decreases it.
5. Government policy – Fiscal and monetary policies can raise or lower demand.
6. Investment opportunities – Attractive returns increase demand, high risk decreases demand.
7. Political stability – Stability increases demand, uncertainty decreases it.
8. Global factors – International investment and global economic conditions can impact demand.
9. Market liquidity – More liquidity increases demand, tighter liquidity decreases it.
10. Tax laws and regulations – Favorable policies increase demand, stricter laws decrease it.
85
whats the primary source of supply in financial markets?
Household savings and retained earnings (funds that corporations have not paid out as dividends), as well as budget surpluses in the government sector and savings from abroad. These are the sources that lenders (suppliers of capital) provide.
The other options are more related to the demand side of the market—where borrowers (governments, corporations, and investors) seek funds.
86
whats the difference between cost and price?
Price refers to the amount of money required to buy or sell a financial asset, such as a stock, bond, or any other security. It’s the market value of the asset at any given time.
For example, if the price of a bond increases, it means that investors are willing to pay more for that bond.
Cost, in the context of financial assets, often refers to the cost of borrowing or the cost of capital. For borrowers (like governments or corporations), the cost is typically represented by interest rates or the return they need to pay to investors.
In bond markets, if demand increases and bond prices rise, the cost of borrowing (or the yield) decreases, because the issuer is paying a lower rate to attract investors (since the bond's price went up).
87
what's the difference between yield and face value for a bond?
Face value (also called par value) is the amount the bond issuer agrees to repay the bondholder at the bond's maturity date. It's typically $1,000 for many bonds but can be different depending on the bond. (primary market)
Yield, on the other hand, is the effective return an investor earns based on the market price of the bond, and it can fluctuate depending on how the bond's price changes in the market. (secondary market)
face value is determined on the primary market, and yield is based on the market value on the secondary market
88
what parts of the bond changes with demand and which parts dont change?
coupon rate and face value dont change
yield is what changes with the market value, and therefore the price, because you can buy and sell already-issued bonds on the secondary market. yield is calculated based on what you paid and what it's worth, so it fluctuates depending on the market.
89
what item is being desired and given out in a supply / demand financial market?
money itself! (capital)
When financial markets are discussed in the context of demand and supply of capital, they aren't specifically referring to the supply and demand for bonds or other financial products like stocks. Instead, they're talking about the availability of money (capital) itself—basically the funds that investors are willing to lend or borrow.
it's very big picture
90
what is supply of capital
Supply of Capital refers to the availability of money from sources like household savings, corporate retained earnings, and foreign investments. These are the lenders in the financial market who are willing to provide capital in exchange for a return (interest, dividends, etc.)
91
what is demand of capital?
Demand for Capital refers to the need for money by governments, corporations, households, and foreign investors who wish to borrow or invest. These are the borrowers or those seeking to invest capital in various projects or investments (like bonds, stocks, infrastructure projects, etc.)
92
what is capital market?
the capital market is where capital is supplied and demanded.
93
how does the capital market work?
How it Works:
1. Suppliers of Capital (Lenders/Investors):
*These are individuals or entities that have funds they wish to invest.
*They supply capital by purchasing securities in the capital market, such as stocks (equity) or bonds (debt).
*By supplying capital, investors expect returns in the form of dividends, interest, or potential capital gains.
2. Demanders of Capital (Borrowers/Issuers):
*These are entities (corporations, governments) that need capital for funding projects, expansions, infrastructure, or other long-term needs.
*They demand capital by issuing stocks (to raise equity capital) or bonds (to raise debt capital).
*In return, they promise to pay interest on bonds or offer ownership in their company (in the case of stocks).
3. Supply and Demand Interaction in the Capital Market:
*The price or yield of securities (stocks or bonds) in the capital market is influenced by the interaction of supply and demand.
**If demand for a particular bond or stock increases (because investors believe the issuer is a good investment), the price of that bond or stock will rise, and the yield (for bonds) may decrease.
**If supply increases (e.g., more bonds or shares are issued), and demand does not keep up, the price may drop, and the yield may rise.
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Which of the following would be an example of a supplier of capital in the Canadian financial market?
a) A government issuing bonds
b) A corporation issuing stock
c) An investor purchasing stocks or bonds
d) A household withdrawing savings from a bank account
the answer is c
Here’s why the other answers are wrong:
a) A government issuing bonds – This is an example of a borrower, not a supplier. The government is demanding capital by issuing bonds, not supplying it.
b) A corporation issuing stock – This is also an example of a borrower. The corporation is raising capital by issuing shares, not supplying it.
d) A household withdrawing savings from a bank account – When a household withdraws savings, it is not supplying capital to the financial market. In fact, the household is using its own capital, not providing it to others.
An investor purchasing stocks or bonds is an example of a supplier of capital because they are providing funds to the issuer (corporation, government, etc.) in exchange for returns.
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What happens to the price and then the supply when the demand for a financial asset increases in the market?
The price of the asset increases, and the supply increases.
Here’s why:
When demand for a financial asset increases (e.g., stocks, bonds), the price of that asset tends to go up, as buyers are willing to pay more to acquire it.
As the price increases, suppliers (such as corporations or governments) are more likely to increase the supply of the asset. For example, if the price of bonds rises due to increased demand, issuers might be encouraged to issue more bonds to take advantage of the favorable market conditions.
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what's indirect financing ?
Indirect financing occurs when a financial intermediary, like a bank, acts as a middleman between the lender (those with money to invest) and the borrower (those who need capital).
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give examples of direct financing:
A government issuing bonds directly to investors: This is an example of direct financing because the government is borrowing money directly from investors.
A corporation selling shares of stock to the public: This is also direct financing where the corporation is raising capital by directly selling equity (shares).
A household lending money to a neighbor: This is also direct financing, as the household is directly lending money to another individual.
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what are the mechanisms of fiscal policy? and which ones are related to the financial market?
1. Government Spending – Governments can spend money on infrastructure, social programs, defense, and other public goods to stimulate economic activity.
2. Taxation – The government can change tax rates to influence consumer spending and business investments. For example, reducing taxes might stimulate spending, while raising taxes can slow down an overheating economy.
3. Issuing Bonds – the government can raise funds through financial markets by issuing bonds. Investors buy these bonds, and the government uses the funds for various projects (e.g., building infrastructure or supporting public services).
4. Subsidies – Governments may provide financial assistance to businesses or consumers to encourage certain behaviors (e.g., subsidies for renewable energy development or agricultural support).
5. Transfers and Welfare Programs – Programs like unemployment benefits, social security, and healthcare funding can be used to redistribute wealth and help stabilize the economy during downturns.
Of these, which are related to financial market?
* Issuing Bonds – This is directly related to the financial market. When the government needs to raise money for various projects, it issues government bonds. These bonds are bought and sold in the secondary market (like a stock exchange), and the market sets the price and yield of the bonds. This is how the financial market serves as a mechanism for government policy by enabling the government to raise capital for spending.
Example: A government issues a $1 billion bond to fund an infrastructure project. Investors (including institutions and individuals) buy the bond, and the government uses the proceeds for the project.
* Facilitating Government Spending through Financial Instruments – Beyond bonds, financial markets also provide other instruments (such as treasury bills or short-term debt) to help finance government operations.
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what are the mechanisms of monetary policy? and which ones are related to the financial market?
Monetary policy is typically managed by the central bank (e.g., the Bank of Canada, the Federal Reserve in the U.S.), and its goal is to control inflation, stabilize the currency, and promote economic growth. Main mechanisms include:
1. Interest Rates – The central bank can adjust the overnight interest rate, which influences the cost of borrowing. Lower interest rates can stimulate borrowing and spending, while higher rates can reduce inflation by making borrowing more expensive.
2. Open Market Operations – The central bank buys or sells government bonds in the open market to influence the money supply. Buying bonds injects money into the economy, while selling bonds takes money out.
3. Quantitative Easing (QE) – This is a more modern tool where the central bank buys a larger quantity of financial assets (often government or private sector bonds) to increase the money supply and stimulate economic activity.
4. Reserve Requirements – Central banks can require commercial banks to hold a certain percentage of their deposits in reserve, affecting the amount of money banks can lend.
5. Currency Stabilization – If the currency value is fluctuating too much, central banks can intervene in the foreign exchange markets to stabilize it.
These mechanisms are the ways that the financial markets and policy makers (government and central banks) interact to manage the economy. In the case of financial markets acting as a mechanism for government policy, it’s often about providing a platform for issuing bonds or adjusting interest rates, among other things.
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Monetary Policy Mechanisms (related to financial markets):
*Interest Rates and Central Bank Actions – While this is a monetary policy tool, financial markets are affected by the interest rates set by central banks (like the Bank of Canada). The overnight rate or policy rate directly influences the cost of borrowing in the financial markets, and these rates are used to regulate inflation or stimulate economic activity.
*Open Market Operations – Central banks engage in open market operations by buying and selling government bonds in the financial market. This affects the money supply and can influence economic activity by either injecting or withdrawing money from the economy.
Example: If the Bank of Canada buys government bonds, it increases the money supply, making borrowing cheaper and stimulating the economy. When it sells bonds, it reduces the money supply, slowing down the economy.
100
when we're talking about fiscal or monetary policy, which mechanisms are NOT related to the financial market?
What is NOT a mechanism of the financial market:
1. Government Taxation or Setting Income Tax Rates – These are tools of fiscal policy, but not mechanisms of the financial market. Financial markets do not directly handle taxation, though taxation can indirectly influence how much people invest in financial products (e.g., higher taxes may reduce disposable income and therefore the ability to invest).
2. Direct government spending is a fiscal policy tool, but it’s not a mechanism provided by financial markets. However, financial markets facilitate the movement of money when governments borrow funds (e.g., through issuing bonds).
101
what are the two other ends of the market equilibrium called? 1) when demand > supply
2) when supply > demand
1) shortage
2) surplus
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how does increased supply affect price? (if demand is the same)
If the supply of an asset increases, the price tends to fall (if demand stays the same).
103
whats the purpose of the money market?
to buy and sell short term investments
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whats the purpose of the foreign exchange market?
to trade currencies
105
whats the purpose of the pokemon market?
to buy and sell pokemons :)
106
what are derivatives?
Derivatives are financial contracts whose value is derived from the value of an underlying asset, index, or rate. They are typically used for hedging risks or for speculation. Common types of derivatives include:
1. Futures: Agreements to buy or sell an asset at a future date for a price agreed upon today.
2. Options: Contracts that give the holder the right (but not the obligation) to buy or sell an asset at a specific price within a set time period.
3. Swaps: Contracts where two parties agree to exchange cash flows based on different variables (such as interest rates or currencies).
For example, a futures contract on oil derives its value from the price of oil. Similarly, a call option on a stock derives its value from the price of the stock.
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what is underwriting
The process by which investment dealers raise capital on behalf of issuers.
Underwriting refers to the process where investment dealers or bankers raise capital for corporations or governments by selling securities to investors. It’s not about determining a company's market value directly.
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what do securities firms do?
Securities firms perform roles such as underwriting new issues, providing investment advice, and acting as dealers (buying and selling securities for their own account).
the issuing of the stocks is the responsibility of the company
109
whats a 30-day CD and in what market is it traded?
certificate of deposit
money market
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Roles of Securities Firms
securities firms are my BUDs
B: Broker (trades for clients)
U: Underwriting (helps raise capital for new issues)
D: Dealers (buy and sell for their own account)
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what kind of companies are on Exchanges?
Companies are listed and must meet strict rules (the rest go in "OTC" market)
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where do bonds trade?
most bonds trade in OTC markets
113
for this: 1 USD = 1.01 CAD
which one are you selling and which one are you buying?
its assumed that you're selling 1 USD to buy 1.01 canadian dollar
my mnemonic is :
1 Sell = X Buy
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