Unit 8: Basic Economic Concepts Flashcards
What is the US Fiscal Policy?
The government’s (president and congress) use of spending and taxation to influence economic activity
What determines if there is a National budget surplus or deficit?
Tax Revenue vs. Expenditures
What is the US Monetary Policy?
The central bank’s (controlled by Feds) actions that affect quantity of money and credit in an economy to influence economic activity
What does it mean if the economy is expansionary vs. contractionary, in terms of the Monetary Policy?
Expansionary: Loosening of the economy by the Feds
Contractionary: Tightening of the economy by the Feds
Describe Keynesian Economics
The idea that government intervention is very important. During recession, govt should lower taxes and increase govt spending (run a deficit)
What is the Monetarist Theory?
The idea that money supply determines prices
Describe Classical/Supply-side Economics
Belief in less taxes and less govt regulation
Idea that supply creates demand by providing jobs and wages
What is the Federal Fund rate?
The rate banks charge each other for overnight loans over $1 mil. Barometer of short term interest rates. Highly influenced -but not set- by Feds.
What is the Prime Rate?
The Loan rate set by banks for corporate loans
How do the Feds (Federal Reserve Board) influence the economy?
- Reserve requirements: amount banks must leave with the Feds - raise amount, banks have less money to lend out = higher interest rates
- Discount rate: rate charges by fed to banks borrowing money.
- open market operations: buy/sell US treasury securities - most common Fed tool.
What is GDP?
The market value of all goods and services produce in a country (net exports ^ GDP)
(If the GDP growth rate declines for: 2 qtrs = recession,6 qtrs = depression)
What is GDP?
The market value of all goods and services produce in a country (net exports ^ GDP)
What are the 4 stages of the Business Cycle?
Expansion
Peak
Contraction
Trough
What are some characteristics of an economy in the expansion stage of the business cycle?
Business activity is increasing
UP: inflation, industrial production, stock mkt, property values, GDP growth rate
DOWN: unemployment, inventories
What are some characteristics of an economy in the Peak stage of the business cycle?
Productive capacity has been reached and cannot expand further
DOWN GDP growth rate, slowdown in hiring
UP: inflation
What are some characteristics of an economy in the Contraction stage of the business cycle?
business activity declines
UP: bankruptcies, bond defaults, unemployment,
DOWN: hours worked, consumer spending, home construction, stock market, inflation rate, GDP growth rate
(If the GDP growth rate declines for 2 qtrs = recession, If the GDP rate declines for 6 qtrs = depression)
What are some characteristics of an economy in the Trough stage of the business cycle?
Contraction has leveled off
DOWN: moderate decrease inflation rate
UP: GDP growth rate, overtime/temp workers, unemployment, consumer spending on durable goods and housing
What are some examples of cyclical industries?
Durable goods like cars, machinery, steel
What are some examples of countercyclical industries?
Gold
What are growth industries?
Industries growing faster than economy as a whole due to technology , consumer tastes, etc.
ex. social media and bioengineering
What are defensive industries?
Industries not heavily influenced by cycle of the economy.
nondurable consumer goods ex. food, pharm, tobacco, energy
What does a balance of payments mean?
Exports vs. Imports
What rate of unemployment reflects full employment
4% Unemployment
What is the yield curve?
The yield curve shows the difference between short and long term interest rates
long term interest rates usually higher - time value of money, reduced buying power b/c of inflation, increased risk of defaults, loss of liquidity in long term investments
