Business Cycles and the Economy Flashcards
(152 cards)
1
Q
What is economics the study of?
A
Supply and demand
Economics focuses on how resources are allocated and the behavior of markets.
2
Q
What is the regular cycle that the economy fluctuates between?
A
The business cycle
The business cycle includes periods of growth and contraction.
3
Q
What are the four stages of the business cycle?
A
- Expansion
- Peak
- Contraction
- Trough
Each stage represents different economic conditions and indicators.
4
Q
What characterizes a peak in the business cycle?
A
- Very low unemployment
- Slowdown in inflation
- Slowing GDP growth
- Steady consumer demand
A peak is also referred to as prosperity.
5
Q
What are the characteristics of contractions in the business cycle?
A
- Rising bankruptcies and bond defaults
- Higher consumer debt
- Falling stock prices
- Rising inventories
- Decreasing GDP
Contractions indicate a downturn in economic activity.
6
Q
What are the indicators of expansion in the business cycle?
A
- Increased consumer demand
- Increases in industrial production
- Rising stock prices
- Rising property values
- Increasing GDP
Expansion signifies growth in economic activity.
7
Q
Fill in the blank: The period of expansion from a low to the prior high is sometimes called _______.
A
Recovery
Recovery indicates a return to previous economic levels after a downturn.
8
Q
What is the definition of a recession?
A
An extended period of contraction lasting six months or longer
Recession may be mild or severe, as seen in historical examples.
9
Q
How long must a contraction last to be classified as a depression?
A
18 months
Depressions are rare compared to recessions.
10
Q
What is gross domestic product (GDP)?
A
A nation’s annual economic output of all goods and services produced within its borders
GDP includes activity generated by foreign companies within the country.
11
Q
How frequently are GDP figures released in the United States?
A
Quarterly
Released by the U.S. Department of Commerce.
12
Q
What does a positive GDP figure indicate?
A
The economy is growing
A negative figure indicates economic contraction.
13
Q
What is the typical way GDP is reported due to large numbers?
A
As the percent change from one period to the next
This helps in understanding growth rates.
14
Q
What is gross national product (GNP)?
A
Economic activity of citizens and entities of a nation, regardless of location
GNP is less commonly used than GDP.
15
Q
What is the Consumer Price Index (CPI)?
A
A measure of the rate of increase or decrease in a sample of consumer prices
CPI includes prices for food, housing, transportation, etc.
16
Q
How often is the CPI computed?
A
Monthly
It reflects changes in a broad range of consumer prices.
17
Q
What is real GDP?
A
GDP adjusted for inflation or deflation
Reflects actual growth by accounting for price changes.
18
Q
Fill in the blank: GDP is often stated as the percent change in GDP from one period to the _______.
A
next
This method helps in analyzing economic growth.
19
Q
True or False: GNP focuses only on the economic activity within a country’s borders.
A
False
GNP considers activity by citizens and entities regardless of location.
20
Q
What are leading economic indicators?
A
Indicators that typically change direction ahead of the overall economy.
21
Q
How much time can leading indicators lead the economy by?
A
Several months or a few weeks.
22
Q
Give three examples of leading economic indicators.
A
- Money supply (M2)
- Building permits (housing starts)
- Average weekly initial claims for state unemployment compensation
23
Q
What are coincident economic indicators?
A
Indicators that change direction with the economy as a whole.
24
Q
Why are coincident indicators considered good confirmation tools?
A
They are usually published after the time period has passed.
25
List two examples of coincident economic indicators.
* Number of hours worked
* Employment levels (rate of unemployment)
26
What are lagging economic indicators?
Indicators that change direction after the economy has begun a new trend.
27
What is the primary use of lagging indicators?
To serve as confirmation of the new trend.
28
Name two examples of lagging economic indicators.
* Corporate profits
* Average duration of unemployment
29
Fill in the blank: Leading economic indicators may lead the economy by several months or a few _______.
weeks
30
True or False: Coincident indicators are published before the time period they measure.
False
31
What can lagging indicators help analysts differentiate?
Long-term trends and short-term reversals.
32
Fill in the blank: Changes in sensitive materials _______ are an example of a leading economic indicator.
prices
33
List three examples of coincident economic indicators.
* Personal income
* Industrial production
* GDP
34
Fill in the blank: The ratio of inventories to _______ is a lagging economic indicator.
sales
35
What economic indicator is used to measure price movements?
Consumer Price Index (CPI)
## Footnote
The CPI is a key measure for inflation and price changes in an economy.
36
Define inflation.
A general increase in prices
## Footnote
Mild inflation can stimulate business investments, while high inflation reduces purchasing power.
37
What is deflation?
A general decline in prices
## Footnote
Deflation typically occurs during severe recessions when unemployment rises.
38
What does economic stagnation refer to?
Prolonged periods of slow or little economic growth with low inflation and high unemployment
## Footnote
Stagnation can lead to economic challenges as growth stalls.
39
What is hyperinflation?
Extremely high and accelerating inflation
## Footnote
Hyperinflation severely erodes purchasing power and is a rare occurrence.
40
Define stagflation.
The unusual combination of inflation and high unemployment
## Footnote
Stagflation occurs when the economy isn't growing, despite rising prices for goods.
41
True or False: High inflation can encourage economic growth.
False
## Footnote
Mild inflation can stimulate business investments, but high inflation can hurt the economy.
42
Fill in the blank: Deflation usually occurs during _______.
severe recessions
## Footnote
Rising unemployment is often associated with deflation.
43
What typically accompanies economic stagnation?
Low inflation and high unemployment
## Footnote
Economic stagnation indicates a lack of growth in the economy.
44
What happens during hyperinflation?
Purchasing power of currency severely erodes
## Footnote
Investors often move cash away from the nation experiencing hyperinflation.
45
In stagflation, does inflation need to be high?
No, it just needs to be present
## Footnote
Stagflation can occur even with low inflation, as long as unemployment is high.
46
What are the four broad classes of industries based on their performance during the business cycle?
Cyclical, noncyclical, countercyclical, growth
## Footnote
These classifications help in understanding how different sectors react to economic fluctuations.
47
What characterizes cyclical industries?
Highly sensitive to business cycles and inflation trends
## Footnote
Cyclical industries produce durable goods and raw materials.
48
During which phase of the business cycle do cyclical industries tend to do well?
Expansions
## Footnote
They perform poorly during contractions or recessions.
49
List examples of cyclical industries.
* Steel and other industrial metals
* Autos
* Heavy equipment
* Capital goods (washers, dryers, refrigerators, etc.)
## Footnote
These industries are sensitive to economic changes.
50
What defines noncyclical or defensive industries?
Least affected by normal business cycles
## Footnote
They typically produce nondurable consumer goods.
51
What types of products do noncyclical industries generally produce?
Nondurable consumer goods (consumables)
## Footnote
Examples include food, pharmaceuticals, and tobacco.
52
How do defensive stocks perform during recessions compared to other industries?
Decline less than stocks in other industries
## Footnote
However, they may advance less during expansions.
53
Provide examples of noncyclical or defensive industries.
* Food
* Utilities
* Clothing
* Drugs
* Tobacco
* Liquor
## Footnote
These industries remain stable regardless of the economic cycle.
54
What are countercyclical industries known for?
Performing better when the economy turns down
## Footnote
They produce products that consumers buy for safety.
55
What is a primary example of a countercyclical industry?
Gold mining
## Footnote
People tend to buy gold when the economy is weak.
56
What characterizes growth industries?
Do well regardless of the economy
## Footnote
They continue to grow until they become more established.
57
What is a special situation in the context of industries?
Occurs when a company shows unusual profit potential or downside risk due to nonrecurring circumstances
## Footnote
Examples include hostile takeovers or significant cultural shifts.
58
What does a balance sheet provide?
A snapshot of a company's financial position at a specific time.
59
What are the two main components of a balance sheet?
Assets and liabilities.
60
What is the difference between assets and liabilities called?
Equity or net worth.
61
How is a corporation's equity similar to a homeowner's equity?
It is the difference between the mortgage balance (liability) and the home's market value (asset value).
62
What is the basic balance sheet equation?
Assets – Liabilities = Net Worth.
63
What are the three categories of assets?
* Current assets
* Fixed assets
* Other assets
64
Define current assets.
Cash and assets that may be easily converted to cash.
65
Give examples of current assets.
* Securities
* Accounts receivable
* Inventory
66
Define fixed assets.
Assets that are difficult to liquidate.
67
Give examples of fixed assets.
* Real estate
* Furniture
* Equipment
68
What are other assets also called?
Intangibles or goodwill.
69
Give examples of other assets.
* Trademarks
* Copyrights
* Reputation
* Intellectual property
70
What are the two categories of liabilities?
* Current liabilities
* Long-term liabilities
71
Define current liabilities.
Liabilities that are due now or in the near future (within 12 months).
72
Give examples of current liabilities.
* Accrued wages
* Accrued taxes
* Accounts payable
* Interest payments
73
Define long-term liabilities.
Debts that will not be paid off in the near future.
74
What does the net worth section include?
* Preferred stock
* Common stock
* Capital in excess of par
* Retained earnings
75
What is working capital?
The amount of money that a company can spend (or lose) and remain operational.
76
What is the formula for working capital?
Current assets – Current liabilities = Working capital.
77
What does the current ratio measure?
The liquidity of companies.
78
What is the formula for current ratio?
Current assets / Current liabilities.
79
What is the acid-test ratio also known as?
Quick ratio.
80
What is the formula for acid-test ratio?
(Current assets – Inventory) / Current liabilities.
81
What does the debt ratio measure?
How much of a corporation's net worth is derived from long-term debt.
82
What does a high debt ratio indicate?
The corporation is highly leveraged.
83
What is the formula for debt ratio?
Long-term debt / (Long-term debt + Net worth).
84
True or False: A higher debt ratio indicates more long-term liquidity.
False.
85
What is another term for the income statement?
P&L or Profit and Loss statement
## Footnote
The income statement summarizes revenues and expenses for a fiscal period.
86
What does the income statement summarize?
A corporation's revenues and expenses for a fiscal period
## Footnote
A fiscal period is usually one quarter, year to date, or the full year.
87
What is the purpose of the income statement?
To compare revenue with costs and expenses during the period
## Footnote
It reflects business activity over a specific time period.
88
Who uses the income statement to judge a company's efficiency and profitability?
Fundamental analysts
## Footnote
They analyze the performance of a company's operations.
89
What are retained earnings?
Earnings available to the common shareholder but not distributed
## Footnote
These earnings are retained by the company.
90
What is operating income also known as?
Earnings before interest and taxes (EBIT)
## Footnote
It can rarely be referred to as earnings before interest, taxes, depreciation, and amortization (EBITDA).
91
What are two common income statement formulas?
* Earnings per share (EPS)
* Price-to-earnings (P/E)
## Footnote
These formulas are essential for evaluating company performance.
92
How is EPS calculated?
By dividing the earnings available to the common shareholder by the number of outstanding shares
## Footnote
This gives a per-share profit metric.
93
What does the P/E ratio measure?
The amount of earnings a company makes compared with its current market value (CMV)
## Footnote
It indicates how much investors are willing to pay per dollar of earnings.
94
What is the formula for calculating the P/E ratio?
CMV / EPS = P/E ratio
## Footnote
The result is expressed as a number.
95
Where are earnings found?
On the income statement
## Footnote
The balance sheet, in contrast, has assets and liabilities.
96
What is the value of one currency measured against another called?
Exchange rate
97
How does a decline in the value of the U.S. dollar against another currency affect exports?
Exports will tend to increase
98
How does a decline in the value of the U.S. dollar against another currency affect imports?
Imports will tend to decrease
99
What happens to the price of U.S. products when the dollar declines against another currency?
The price decreases in terms of the foreign currency
100
What happens to exports when the value of the U.S. dollar strengthens against another currency?
Exports will tend to decrease
101
What happens to imports when the value of the U.S. dollar strengthens against another currency?
Imports will tend to increase
102
What is the effect of a strong dollar on the price of imports in the United States?
Imports are less expensive
103
How does a strong dollar affect inflation in the United States?
Helps keep inflation in check
104
What effect does a weak dollar have on the rate of inflation?
Tends to increase the rate of inflation
105
Fill in the blank: A strong dollar means imports are _______ in the United States.
less expensive
106
Fill in the blank: A weak dollar will tend to _______ the rate of inflation.
increase
107
Debits include
* U.S. investments in other countries
* imports
* U.S. banks loaning money to other countries
108
U.S. aid to foreign countries
would be considered a debit
109
* exports
* foreign investment in the U.S.
* foreign banks making loans to the U.S.
credits
110
- believes a nation's government can manage economy;
- increase demand for goods: reduces taxes, increase government spending, or both
- reduce inflation: increase taxes, decrease government spending, or both
- also called Demand-Side economics
Keynesian Theory
111
Too little demand for goods causes _ ; too much demand causes _ .
unemployment; inflation
112
fiscal policy
- refers to the government's budget decisions and tax policy as enacted by the U.S. president and Congress;
- based on assumption that government can control unemployment and inflation by adjusting demand for goods and services
113
- holds that government should allow market forces to determine the prices of all goods
- favors minimal government spending, reduced taxes, and fewer regulatory burdens on business
- free market with less government intervention is better able to control inflation
supply-side theory
114
established the Federal Reserve System as the central bank of the United States to provide the country with a safer, more flexible, and more stable monetary and financial system
Federal Reserve Act of 1913
115
considered the founder of monetarism (or monetarist) theory. Much of the work of the Federal Reserve is based on his theories
Milton Friedman, Ph.D
116
Federal Reserve Board's two most importat duties are:
* Conduct the nation's monetary policy to promote maximum employment.
* Promote a stable price environment, keeping inflation under control.
117
- managed by monetarist theory
- involves the FRB taking actions to control how much money is available for businesses and consumers to spend
monetary policy
118
- used by the Fed to track broad spectrum of economic activity;
- Consumer Price Index, Gross Domestic Product, and employment figures;
- helps predict economic trends
diagnostic tools
119
What is one of the primary direct tools used by the Federal Reserve Board to implement monetary policy?
Open market operations.
120
True or False: The Federal Reserve can directly set the federal funds rate.
False.
121
Fill in the blank: The _____ rate is the interest rate at which banks lend reserves to each other overnight.
federal funds
122
Which direct tool of the Federal Reserve involves the buying and selling of government securities?
Open market operations.
123
What is the effect of increasing the reserve requirement on the money supply?
It decreases cash and credit availability in the economy.
124
- FRB tactic employed to expand credit during recession to stimulate economic growth
- buys government securities in open market
- lower the discount rate,
- lower reserve requirement
Easy Money Policy
| Open Market Operations
125
Describe a 'Tight Money Policy'
Policy implemented by FRB to tighten credit and slow economic expansion and prevent inflation.
- selling of government debt securities in the open market
- raising of the discount rate
- raise reserve requirements
| Open Market Operations
126
What is the federal funds rate?
The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight.
127
True or False: The prime rate is typically lower than the federal funds rate.
False
128
Fill in the blank: The ________ rate is used as a benchmark for various loans and is often set at a margin above the federal funds rate.
prime
129
What is the broker call loan rate?
The broker call loan rate is the interest rate charged by banks to brokerage firms for loans that are callable on demand.
130
How does the discount rate relate to the federal funds rate?
The discount rate is the interest rate charged by the Federal Reserve to commercial banks for short-term loans, and it typically serves as a ceiling for the federal funds rate.
131
What does M1 measure?
Most readily available cash to be spent, including money in checking accounts
## Footnote
M1 represents liquid money that can quickly be used for transactions.
132
What is included in M2?
M1 plus consumer savings deposits, which consist of savings accounts, retail CDs, and short-term deposits
## Footnote
M2 includes assets that can be easily converted to cash for spending.
133
What are the components of M3?
M2 plus large time deposits, negotiable CDs, and multiday repos
## Footnote
M3 includes assets that are more difficult to convert into checking accounts.
134
Fill in the blank: M1 includes money in _______.
checking accounts
135
True or False: M2 is less liquid than M1.
True
136
What does M3 add to M2?
Large time deposits, negotiable CDs, and multiday repos
## Footnote
These components make M3 the broadest measure of money supply.
137
Fill in the blank: M2 includes assets that are easily moved to _______ accounts.
DDA
138
What type of deposits are included in M2?
Savings accounts, retail CDs, and short-term deposits
## Footnote
These are considered consumer savings deposits.
139
What distinguishes M3 from M2?
M3 includes larger and less liquid assets
## Footnote
This makes M3 less accessible for immediate spending compared to M2.
140
What does the FRB do to ease its monetary policy?
The FRB can lower the discount rate.
141
What is the discount rate?
The rate charged by the FRB to its member banks for short-term loans.
142
What is the federal funds rate?
The rate that commercial-money-center banks charge each other for overnight loans of $1 million or more.
143
How is the federal funds rate viewed in relation to interest rates?
It is considered a barometer of the direction of short-term interest rates.
144
What type of industry is heavy equipment classified as?
Cyclical industry.
145
What type of industry are precious metals considered?
Counter cyclical.
146
What are food and fuel classified as in terms of industry types?
Defensive industries.
147
How is EPS calculated?
Earnings available to common shareholders divided by the number of outstanding shares.
148
What is not used in the EPS calculation?
The stock's current market value.
149
What happens when the dollar is strong?
U.S. consumers can buy more foreign goods, increasing U.S. imports.
150
What effect does a strong U.S. dollar have on the balance of payments?
It leads to a balance of payment deficit.
151
What does a high acid test ratio indicate?
A company can meet immediate liabilities without relying on inventory sales.
152
What does a company with high current assets excluding inventory represent?
A high acid test ratio.
