Unit 9: Economics Flashcards
Four Stages, or Phases, of a Business Cycle In order:
Expansion
Peak
Contraction
Trough
Everyone Pleads for Cinnamon Toast
Downturns (contractions) in the business cycle tend to be characterized by:
rising numbers of bankruptcies and bond defaults,
higher consumer debt,
falling stock prices,
rising inventories (a sign of slackeningconsumer demand in hard times), and decreasing gross domestic product
A trough is characterized by:
- high unemployment,
- flat GDP,
- low inflation, and
- low but not decreasing-_consumer demand.
Expansion in the business cycle tends to be characterized by:
increased consumer demand for goods and services, increases in industrial production,
rising stock prices,
rising property values, and
increasing GDP
A peak (prosperity) is characterized by:
- very low unemployment,
- a slowdown in inflation,
a slowing of GDP growth, and - steady consumer demand
Some economists break the expansion phase into two separate phases:
recovery and expansion.
_____ is the period of growth from the trough to the prior peak.
Recovery
_____ is when the economy reaches the prior peak and continues to grow.
Expansion
A more serious inflation period is more likely to occur during the ____ phase of the business cycle
expansion
If unemployment is low, then employment is _____. If unemployment is high, employment is ____.
high
low
When the economy enters an extended period of contraction that continues for _____ or longer, it is called a recession.
six months (two quarters)
If a contraction continues for _____ it is then called a depression.
18 months
_____ is when the economy bottoms out and lays the groundwork for recovery and expansion
Trough
Major Economic Indicators
Gross Domestic Product (GDP)
Consumer Price Index (CPI)
Gross National Product (GNP)
GDP:
A nation’s annual economic output-all the goods and services produced within the nation
In the United States, GDP figures are released ____ by the Commerce Department. A positive figure indicates that the economy is growing. A negative figure indicates that the economy is contracting.
quarterly
The _____ measures the overall change in consumer prices based on a representative basket of goods and services over time. It is the most widely used measure of inflation, closely followed by policymakers, financial markets, businesses, and consumers.
Consumer Price Index
The term constant dollar measurement is sometimes used for ____.
CPI
The CPI is computed each ____.
month
_____ indicators are those indicators that tend to change direction ahead of the overall
economy. The change of direction may lead the economy by a very long time frame (months)
to a very short time frame (weeks), but it has proven to be reliable.
Leading
Types of leading indicators:
Money supply (M2)
* Building permits (housing starts)
* Average weekly initial claims for state unemployment compensation
* Average work week in manufacturing
* New orders forconsumer goods
Machine tool orders
Changes in inventories of durable goods
Changes in sensitive materials prices
Stock prices (as measured by the S&P 500 Index) Changes in business and consumer borrowing
_____ indicators change direction along with the economy as a whole. Because these indicators are often published after the time period has passed, they are good confirmation tools of the leading indicators.
Coincident
Types of coincident indicators:
Number of hours worked (as a proxy for personal income) Employment levels (as measured by the rate of unemployment) Nonagricultural employment
Personal income
Industrial production
Manufacturing and trade sales GDP
_____ indicators are those indicators that change direction after the economy has begun a new trend but serve as confirmation of the new trend.
Lagging
Types of Laggin Indicators:
Corporate profits
Average duration of unemployment
Labor cost per unit of output (manufacturing) Ratio of inventories to sales
Commercial and industrial loans outstanding
Ratio of consumer installment credit to personal income
Measures of Price Movements
Inflation
Deflation
Stagnation
Hyperinflation
Stagflation
_____ is a general increase in prices.
Inflation
Deflation is a general decline in prices.
Deflation
_____ usually occurs during severe recessions when unemployment is on the rise.
Deflation
Economic _____ refers to prolonged periods of slow or little economic growth, accompanied by high unemployment.
stagnation
In _____ , the pace of inflation is extremely high and accelerating. This severely erodes the purchasing power of a currency.
hyperinflation
_____ is the term used to describe the unusual combination of inflation (a rise in prices) and high unemployment. This generally occurs when the economy isn’t growing and there is a
lack of consumer demand and business activity, but prices for goods are still rising.
Stagflation
_____ industries are highly sensitive to business cycles and inflation trends. Most _____ industries produce durable goods, such as heavy machinery and automobiles, and raw materials, such as steel and concrete.
Cyclical
_____ industries are least affected by normal business cycles. Companies in defensive industries generally produce nondurable consumer goods (sometimes called consumables), such as food, pharmaceuticals, and tobacco.
Noncyclical
_____ industries tend to rise when the economy turns down. They are producers of a product that people buy when they are scared and looking for safety. The primary example is gold mining and refinement, though any precious metal
Countercyclical
A _____ industry is one that seems to be disconnected from the business cycle, doing well regardless of the economy. This may apply to an individual company, as well as to an entire industry. Growth industries don’t care about the economy:
growth
The balance sheet provides a snapshot of a company’s financial position at a specific time. It identifies the value of the company’s _____ and ____.
assets and liablities
Balance sheet equation:
assets - liabilities = net worth
_____ are cash and assets that may be easily converted to cash. Securities, accounts receivable, and the company’s inventory are examples of current assets.
Current assets
_____ assets are assets that are difficult to liquidate. Real estate, furniture, and equipment are all examples.
Fixed
____ assets may also be called intangibles or goodwill. This category represents things
that are difficult to value. Trademarks, copyrights, reputation, and intellectual property are examples of this category.
Other
Assets are divided into three categories:
current assets, fixed assets, and other.
Current liabilities are those liabilities that are due now or in the near future (within ____ months).
12
____ liabilities would include accrued wages, accrued taxes, accounts payable, or interest payments
Current
_____ liabilities are debts that will not be paid of in the near future. For a corporation, this will normally be notes and bonds.
Long term
The net worth (shareholder equity) section has several components:
Preferred stock, Common stock, Capital in excess of par, Retained earnings.
The current ratio is a better figure to use when comparing the liquidity of companies. The formula for current ratios is as follows:
current assets / current liabilities = current ratio
The acid test ratio, also called the quick ratio, is the test of a company’s liquidity if everything really goes bad. The formula for acid-test ratios is as follows:
(current assets - inventory) / current liabilities = acid-test ratio
Working capital is the amount of money that a company can spend (or lose) and remain operational. The formula for working capital is as follows:
current assets - current liabilities = working capital
The most common measure of long-term solvency is the _____
debt ratio (or debt to-equity ratio).
The following is the formula for debt ratios:
long-term debt / (long-term debt +net worth) = debt ratio
The ______ (also called a profit and loss, or P8ZL) summarizes a corporation’s revenues and expenses for a fiscal period-usually quarter
income statement
The income statement compares ______ and ______ during the period.
revenue and expenses
There are two calculations you may see on the exam from the income statement:
earnings per share (EPS) and the price-to-earnings ratio (P/Eratio).
EPS is calculated by
dividing the earnings available to the common shareholder (earnings) by the number of outstanding shares.
EPS= earnings / outstanding shares
The P/E ratio is a measure of the amount of earnings a company makes compared with its current market value (CMV, or the stock’s price). The formula for P/E ratios is as follows:
CMV / EPS = P/E ratio
profits that are not distributed to shareholders are called
retained earnings
What is an example a leading economic indicator?
S&P 500 Index
____ refers to the government’s budget decisions and tax policy as enacted by our president and Congress.
Fiscal policy
2 prominent theories for fiscal policy
Keynesian (Demand-Side) Theory and Supply-Side Theory
Supply side Theory:
encourages business activity and reduce business taxes which will result in more job creation and higher wages in order to increase spending
Keynesian theory (Demand-side )
stimulates consumer demand and reduces individual taxes to stimulate the economy buy putting money back into consumers pockets and increasing government spending
_____ sees government spending as encouraging economic activity. _____ sees government spending as an inefficient and temporary approach and advocates that holding down government debt is better overall.
Demand-side
Supply-side
The value of one currency against another is known as the _____. The value of the U.S. dollar against foreign currencies affects the balance of trade.
exchange rate
When the value of the dollar ____ against another currency, the price of
U.S. products decreases in terms of the foreign currency. Exports will tend to increase and imports decrease.
declines
When the value of the dollar _____ against another currency, the price of
U.S. products increases in terms of the foreign currency. Exports will tend to decrease and imports increase.
strengthens
when the US dollar strengthens:
Cost of imports decreases
Imports increase
cost of US exports increase
exports decrease
MEANS A TRADE DEFICIT
When the US Dollar Weakens:
Cost of imports
Imports decrease
Cost of U.S exports decrease
Exports increase
MEANS TRADE IS AT A SURPLUS
Exporters Like a ___ Dollar
weaker
Importers like a ____ Dollar
strong
A weak dollar tends to _____ the rate of inflation.
increase
The flow of money between the United States and other countries is known as the ______.
balance of payments
When debits exceed credits, a _____ in the balance of payments occurs; when credits exceed debits, a ____ exists.
deficit
surplus
Which organization or governmental unit sets fiscal policy?
Congress and the president
Al of the following situations could cause a fatal in the value of the U.S.dollar in relation to the Japanese yen except
A. Japanese investors buying U.S. Treasury securities
B. U.S. investors buying Japanese securities
C. an increase in Japan’s trade surplus over that of the United States
D. a general decrease in U.S. interest rates
A. Japanese investors buying U.S. Treasury securities
The _____ directs the Federal Reserve System.
Federal Reserve Board (FRB) The Fed
The Federal Reserve Act of 1913 established the _____ as the central bank of the United States to provide the nation with a safer, more flexible, and more stable monetary and financial system.
Federal Reserve System
FRB’s (The Fed’s) most important duty is twofold:
*Conduct the nation’s monetary policy to promote maximum employment.
* Promote a stable price environment, keeping inflation under control.
Milton Friedman, PhD, is considered the founder of ________. Much of the work of the Federal Reserve is based on his theories.
monetarism (or monetarist) theory
____ Manages the money supply the amount of cash available within the U.S. economy. This is called monetary policy.
FRB (The Fed)
Though the FRB has several diagnostic tools to measure the health of the economy, one of the most important diagnostic tools ofthe FRB is the measures of ____: M1, M2, and M3.
money supply
_____ is the measure of the most readily available money to spend: cash (actual cash and coinage) and money in demand deposit accounts (DDAs), such as checking accounts. This is the money that is closest to being spent and turned into economic activity.
M1
_____ consists of M1 plus “consumer savings deposits”: those assets that are easily moved
to a DDA and spent. Among the consumer savings deposits are savings accounts, retail (nonnegotiable) CDs, money market funds, and overnight repurchase agreements (repos).
M2
_____ consists of M2 plus “large time deposits”: those assets that are a bit harder to move into a DDA and spend. Examples include negotiable (jumbo) CDs and multiday repos. Again, don’t forget that M2 is part ___ and by extension, so is M1 because it is part of M2.
M3
Direct tools of the FRB (the fed)
Federal Open-Market Operations
Regulation T Deposit Requirement
The Discount Rate
The Reserve Requirement
The _____ is the amount a bank must maintain on deposit with the Federal Reserve.
reserve requirement
Lowering the reserve requirment frees up cash at the banks to fund loan activity, _____ the economy. Raising this number ______ the amount available for loans.
expanding
decreases
Federal Open-Market Operations:
The FRB, acting as an agent for the U.S. Treasury Department, influences the money supply by buying and selling U.S. government securities (Treasury bills, notes, and bonds) in the open market. These actions will expand or contract the money supply, depending on which they are doing (buying or selling). Most common Tool for the fed
When the Fed wants to expand (loosen) the money supply, it _____ securities from banks
buys
When the Fed wants to contract (tighten) the money supply, it ____ securities to banks.
sells
Is part of the FRB’s regulatory authority, the Fed set the minimum amount an investor must deposit when using credit to buy a security. Under _____, the current initial deposit is 50% of the purchase price.
Regulation T
Increasing the amount required at purchase (thus limiting credit) would ____ the economy.
slow
The ____ is the rate the Federal Reserve charges for short-term loans to member banks. The ______ also indicates the direction of FRB monetary policy a decreasing rate indicates an easing of FRB policy, and an increasing rate indicates a tightening of FRB policy.
discount rate
The ____ is the only rate of these four set by a unit of the federal government. The other three are set by the bank that is making the loan.
discount rate
The ______ is the rate that the commercial money center banks charge each other for overnight loans of $1 million or more. It is considered a barometer of the direction of short-term interest rates, which fluctuate constantly, and it can be the most volatile rate in the economy.
federal funds rate
The _____ is the interest rate that large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans.
prime rate
‘The ____ is the interest rate that banks charge broker-dealers (BDs) on money they borrow to lend tomargin account customers.
broker loan rate
Which of the following is added to M2 to arrive at M3?
A. Large time deposits
B. Currency in circulation
C. Checking accounts
D. Gold and silver bars inbankstorage vaults
A. Large time deposits
Which of t h e following actions of the Federal Reserve Board (FRB) would likely have the effect of causing interest rates to increase?
1. The Federal Open Market Committee (FOMC) buying securities
2. Raising the reserve requirements
3. Raising the discount rate
4. Raising the prime rate
2 and 3
GDP is the measure of good and services produced. If U.S. consumers are importing more foreign goods, it is likely that production of U.S. goods will fall off, leading to a ____ in the GDP.
decrease
ABC Corporation’s earnings remained steady while its shares outstanding increased by 5%. How does this impact ABC’s earnings per share (EPS)?
EPS is calculated by dividing the company’s earnings by the number of outstanding shares. If earnings remain the same while the number of shares increase, then the result (EPS) must decrease.
The economy is showing that employment is low, there is little consumer demand, and loans for expansion and retooling are way down, showing a lack of business activity. Yet prices for consumer goods are still rising. Economists would call this a period of
stagflation
If the FRB believes the economy is sluggish and needs to be stimulated, it will attempt to _____ by pursuing an easy-money policy.
lower interest rates
Reports of rising inventories generally occur during which period of the business cycle?
Contraction
The federal government could use which of the following to slow the economy?
A)Raise the federal funds rate
B)Increase government spending
C)Raise taxes
D)Buy Treasury securities from banks
Raise Taxes
During periods of economic decline and contraction, one would expect…
gross domestic product (GDP) to decrease.
An extended period of little or no growth in GDP, wages, and prices is a period of
stagnation
The rate that commercial money center banks charge each other for overnight loans is
the federal funds rate.
Only the ____ rate is set by the Fed. The others are set by the banks.
discount
U.S. exports should _____ when foreigners have greater purchasing power. That occurs when their currency is stronger than the dollar.
increase
According to Keynesian theory, a government can slow the economy by _____ taxes and ______ government spending
Increasing
decreasing
When the FRB wants to contract (tighten) the money supply, it will _____Treasury securities to banks in the open market. The securities go into the economy, and the money comes out of the economy.
sell
When the Federal Open Market Committee (FOMC) directs that Treasury securities be sold in the open market, this ______ the supply of money.
decreases
Considered the most volatile of the benchmark interest rates in the economy would be
the federal funds rate.
The rate at which banks lend to broker-dealers for the purpose of lending money for margin loans is typically
_____ other short-term lending rates.
slightly above (a percentage point or so)
A measure of a nation’s citizen’s economic activity is
gross national product.
The largest component of the U.S. balance of payments is ____
the balance of trade
First Amalgamated Bank of Buffalo, a large commercial bank, is a member of the Federal Reserve System. Should the bank need to increase its reserves, it could do which of these?
1.Borrow from the FRB and pay the discount rate.
2.Borrow from the FRB and pay the federal funds rate.
3.Borrow from another member bank and pay the discount rate.
4.Borrow from another member bank and pay the federal funds rate.
1 and 4
In order to lower the rate of inflation, the Federal Reserve might take which of the following steps?
A) Sell federal debt
B) Decrease the reserve requirement
C) Purchase federal debt
D) Increase the prime rate
A Sell federal debt
Which of the following is an example of a company in a defensive industry?
A)Centipede Equipment, a heavy equipment manufacturer
B)Pan American Aircraft, an airplane producer
C)Major Mills Grain Company, a grain and cereal producer
D)National Motors, an automobile manufacturer
C) Major Mills Grain Company, a grain and cereal producer
The actions taken by the Federal Reserve to manage the economy are based on which of the following economic theories?
A)Sharpe theory
B)Keynesian theory
C)Monetary theory
D)Dickensian theory
C) Monetary theory
A gold mining company is probably an example of what industry?
Counter-cyclical
EBITDA is an acronym referring to
earnings before interest, taxes, depreciation, and amortization.
_____ not a measure of a company’s short-term liquidity?
Debt Ratio
