Unit 8 - The Economic and Legal Environment of Financial Planning Flashcards
What is Supply?
Supply is the amount of a good or Service available for purchase by suppliers at a agiven price. In general the higher the price that can be obtained, the higher the quantity supplied.
The Supply curve
Slopes upward from left to right, with the price being measured on the vertical axis and the quantity supplied being gauged on the horizontal axis.
Shift is Supply curve
With a change in price, there is also a corresponding movement along the supply curve. Example - If ABC Company manufactures printers and cameras and the price of printers increases, resulting in a higher profit margin, ABC company may choose to reduce the supply of cameras and increase the supply of printers to take advantage of increased profits. Thus the supply curve of cameras would shift left.
What is demand?
Demand is the quantity of goods and services consumers want to purchases at a given price. Generally, the higher the level of price the lower the level of demand.
The Demand Curve
Slopes downwards from left to right with price being measured on the vertical axis and quantity being measured on the horizontal axis.
What is the substitution effect?
When the price of a good rises, consumers substitute other similar lower priced goods for it. This is known as the substitution effect.
What is the Income effect?
When the price of a good rises, consumers will discontinue or significantly reduce their use of it, unless their incomes are also rising at a comparable pace.
Shift in Demand Curve
Change in factors other than price may influence the quantitiy demanded at any given price. Example - if it is reported that prices of a product are expected to rise, today’s demand may increase due to anticiipation of a price increase.
What is price elasticity?
the responsiveness of the quantity of a good demanded to changes in the goods price, all other economic forces remaining constant. Goods differ in there elasticity in relation to price. Demand for necessities such and food, or gasoline repond relatively little to price changes; therefore, those types of goods are said to be inelastic in nature. Alternatively, demand for luxuries, such as a new boat, responds relatively more to price changes; therefore, those types of goods are said to be elastice or demonstrate a great deal of price elasticity.
What is equilibrium?
The intersection of the supply and demand curve. Prices should always move to equilibrium unless restricted by outside sources such as government regulation, or by collusion between manufacturers as is the case with cartels.
Define GDP (Gross Domestic Product)
Gross Domestic Products is the total market value of all goods and services produced within the domestice united states over a given year, including income generated domestically by a foreign firm. (E.G. Toyota). GDP is measured in constant dollars, which translates into real GDP after accounting for inflation.
Define GNP (Gross National Product)
Gross National Product is the total market value of all goods and services produced by US residents labor and property. Unlike GDP, which defines production based on a geopraphical location of production, GNP measures production based on ownership.
Define Monetary Policy
Conducted by the Federal Reserve Board (The Fed) and attempts to affect economic activity by raising and lowering short term interest rates because they affect consumer spending, or demand.
Define Fiscal Policy
Conducted by Congress and also attempts to influence consumer demand but does so through governmental policies.
Dicuss the three major tools of Monetary policy used by the Fed
-Lowering or increasing the amount of required reserves that must be held by banking members of the Federal Reserve System -Raising or lowering the Fed’s discount rate (the amount of interest that is charged by one of the 12 federal reserve banks to other banks) -engaging in open market operations, which is the buying or selling of government securites in the open marketplace by the federal reserve board. ***OPEN MARKET OPERATIONS is the most important and frequently practiced by the Fed.
Define the acronym BEST
Buy - Easy Sell - Tight -if the Fed want to expand economic activity, it will buy additional government securites, thereby increasing the money supply and driving down overall interest rates. -If the Fed wantd to contract econimic activity, it wil sell government securities from existing inventory, therefore decreasing the money supply, driving up overall interest rates, and resulting in reduction of prices.
What is the Discount Rate?
The only rate that the Fed directly controls. This is the rate at which bank can borrow from any Federal Reserve Banks. When the Fed raises the discount rate it increases the borrowing ocsts and discourages member banks from borrowing funds, resulting in the contraction of money supply. When the Fed lowers the discount rate banks are able to borrow funds at lower rates and tend to lend more money thus increasing the money in circulation and stimulating demand.
What is the Federal Funds Rate?
The Fed does not directly control. The interest rate charged in short term borrowing (often overnight to fulfill reserve requirements) between banks.
Economic Evironment - Expansion vs. Contraction Factor Movement Chart
Economic Environment - Peak Vs. Trough Factor movement
