Chapter 6 Economic Measurements and Conditions

Question 1

What are Monopolistic Market?

Answer 1

Where most of the market is controlled by just one company

Question 2

What is Oligopolistic Markets?

Answer 2

Where a few companies control the market share in a market segment

Question 3

What is GDP?

Answer 3

National output of goods and services in one year
- Only within the U.S.
- by subtracting the rate of inflation

Question 4

What is Gross National Product (GNP)?

Answer 4

The value of what is produced by a country’s citizen regardless of where they reside
- includes goods and services outside the nations boundaries

Question 5

What is depression?

Answer 5

a decline in real GDP for 6 consecutive quarters, or 18 months

Question 6

What is Recession?

Answer 6

Begins when there are 2 consecutive quarters or 6 months of declining real GDP

Question 7

What is Inflation?

Answer 7

General rise in the level of prices
- More money than products

Question 8

What are the two measures of Inflation?

Answer 8

Consumer price Index & Producer Price Index

Question 9

What effects does Inflation have on Interest Rates on Bond Markets?

Answer 9

The slightest change in interest rate affects long term bondholder the most because of the long period of time
- Inflation Risk / Purchasing power risk

Question 10

What happens when interest rates increase?

Answer 10

Bond prices fall and yields increase

Question 11

What happens when interest rates fall?

Answer 11

Bond prices will rise and yield will decrease

Question 12

What is a Yield Curve?

Answer 12

a plot of interest rates of bonds of the same quality from lowest to highest available maturity

Question 13

What is a positive Yield Curve ?

Answer 13

Upward and outward sloping curve
- Bondholders are willing to pay a higher coupon to get money from the bond for a longer period

Question 14

What is a Negative Yield Curve?

Answer 14

Represents shorter maturities having higher yields than longer maturities

[Short bonds give better returns than bonds with longer maturities]

Question 15

What does the Consumer Price Index do?

Answer 15

Measures the change in consumer prices of a fixed basket of goods and services

[Measures how the prices changes for a product or service ]

Question 16

What does the Producer Price Index measure?

Answer 16

Measures the change in producer or whole pries in manufacturing

[Measure the price difference in producing a product]

Question 17

What is Deflation?

Answer 17

Decrease in general level of prices
More supply of goods and services than prices.

[The opposite of inflation. When prices in general go down. More products than money]

Question 18

What is Elasticity?

Answer 18

Is the way demand for a product changes as a result of price.

[How demand of a product is affected by price ]

Question 19

What is the Business Cycle?

Answer 19

1) Expansion
2) Peak
3) Contraction
4) Trough

Question 20

What is a Leading Indicator?

Answer 20

It shows where the economy is headed
Ex: Stock market, housing, and money supply

Question 21

What are Coincident Indicators.

Answer 21

They are indicators that show what’s currently affecting the economic situation
EX: Personal Income, GDP, Industrial Production

Question 22

What are Lagging Indicators?

Answer 22

Indicators that take effect after the economy has changed
EX: Avg employment duration, reported corporate profits, average prime rates

[These indicators confirm the state the economy was in]

Question 23

What is Cyclical in the Business Cycle?

Answer 23

It follows the business cycle

Question 24

Whats Countercyclical?

Answer 24

It moves in the opposite direction of the business cycle

Question 25

What are Cyclical stocks?

Answer 25

When the economy is doing well the stocks will also perform well Ex: Furniture and clothing, Automobile manufacturing, and construction

Question 26

What are Countercyclical Stocks?

Answer 26

When the stock market declines investors will choose to invest in bonds for safer options like gold or precious metal.

Question 27

What are Defensive Stocks?

Answer 27

These stocks remain stable regardless of the economic condition. Ex: food, utilities, healthcare

Question 28

What are Growth Stocks?

Answer 28

Stocks earnings that are expected to grow at an above avg rate

Question 29

What is the Monetarist Theory?

Answer 29

Federal reserve controls the economic growth by either putting money into the economy or taking it out

Question 30

What is the Keynesian Theory?

Answer 30

The output of the economy is influenced by total spending in the economy

Question 31

What is the Supply Side theory?

Answer 31

Reduced taxes and no government spending allows the economy to progress on its own pace

Question 32

What is the Efficient Market Hypothesis?

Answer 32

It is impossible to beat the market, that it reflects all relevant information.

Question 33

What are index funds?

Answer 33

Open / closed end funds that invest in the same securities that are held by a major index - Have low transaction cost and management fees

Question 34

What is Monetary Policy?

Answer 34

Where the Federal Reserve maintains the stability of the financial system

Question 35

What is Easy Money?

Answer 35

When the FED increases money supply - Easier to get loans and rates are lower

Question 36

What is Tight money Supply?

Answer 36

When the FED decreases the money supply - Harder to get loans and borrowing rates are higher

Question 37

What is Open Market Operations?

Answer 37

Influences the money supply by buying and selling government securities in the open market to select group of banks and primary dealers

Question 38

What is a repurchase Agreement?

Answer 38

Its short term borrowing that uses government securities as collateral Buy securities from bank = easing effect on money supply

Question 39

What is Reserve Requirement?

Answer 39

The percentage of cash that must be retained in a banks vault Reserve requirement falls = interest falls = Increase money supply

Question 40

What is discount Rate?

Answer 40

The rate when FED gives loans to banks for borrowing. Lower discount rate = more lending money to customers

Question 41

What is Margin Requirement?

Answer 41

FED has the power to increase and decrease the margin requirements Low margining req = low interest rate

Question 42

What is moral Suasion?

Answer 42

When market is influenced through speeches, announcements, or statements by FED officials

Question 43

What are the Federal Reserve tools?

Answer 43

D.O.R.M.M D. iscount Rate O. pen Market Operation R. eserve Requirement M. argin Requirement M. oral Suasion

Question 44

What is Federal Income Taxation?

Answer 44

Income that is taxed annually. More tax revenue for federal government

Question 45

How does Federal Spending have an impact on the economy?

Answer 45

Raise taxes and reduce spending to slow the economy Lower taxes and increase spending to stimulate the economy

Question 46

What is the Interbank Market?

Answer 46

Trading between large banks in major international financial centers - Not regulated by SEC

Question 47

What is Currency Exchange Rate?

Answer 47

It how other countries value another countries currency. Where one currency can be exchanged for another (Spot Rate)

Question 48

What does a strong U.S dollar do?

Answer 48

Imports less costly Exports are expensive More profits for importers

Question 49

What does a weak U.S. Dollar do?

Answer 49

Imports are expensive Exports are cheaper More profits for exporters

Question 50

What is the Balance of Payments?

Answer 50

It is the flow of money between other countries

Question 51

What is the balance of Trade?

Answer 51

The difference between the value of a countries imports and exports of merchandises

Question 52

What is form 10k?

Answer 52

Audited ANNUAL financial Statements filed with the SEC within 60 days

Question 53

What is form 10Q?

Answer 53

Audited QUARTERLY financial statements filed with the SEC within 40 days

Question 54

What is form 8k?

Answer 54

Significant event reported within 4 days

Question 55

What is Strong Form?

Answer 55

All information (Private or Public) is reflected in stock prices

Question 56

What is Semi-Strong Form?

Answer 56

Public information is reflected in stock prices, individuals with inside information can be the market

Question 57

What is Weak form?

Answer 57

In-depth analysis can beat the market

Question 58

What happens when inflation rates fall?

Answer 58

Interest falls when inflation rate falls = bond prices to rise