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CFP Review > Fundamentals Ch. 15 - Economics and the External Environment > Flashcards

Fundamentals Ch. 15 - Economics and the External Environment Flashcards

1
Q

What is GDP?

A
  1. Gross Domestic Product

It measures total economic output for a country.

It represents the total final output of a country by it’s citizens and foreigners in the country over a period of time.

If a US citzen owns a business that produces goods in another country and sells those goods in other countries, it would not be included in GDP.

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2
Q

What is GNP

A
  1. Gross National Product

This measures the output of US Citizens whether produced domestically or internationally. A US citizen who owns a business in China would be included in GNP.

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3
Q

Nominal

A

Measurement of current prices

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4
Q

Real

A

Measurement of of the value of goods at a base year price. AKA it accounts for inflation.

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5
Q

What is the GDP deflator

A

Measures current price of goods and services relative to a base year. In otherwords it is a function of nominal GDP/Real GDP.

This could be a measure of price increases or decreases.

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6
Q

Describe Inflation

A

It represents an increase in the price level of goods and services.

Causes a decline in the value of real money.

The primary cause is when the money supply increases faster than growth in real GDP.

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7
Q

Disinflation vs deflation

A

Disinflation means we are still in an inflationary environment, but the pace of inflation is declining.

Deflation means real prices are going down or negative inflation.

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8
Q

Describe CPI

A

Stands for Consumer price index.

Most widely used meaure of inflation.

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9
Q

What are the components of CPI

A 
Group 	Weight
Food 	13.4%
Energy (incl. gasoline) 	8.7%
Commodities (incl. medication and autos) 	21.3%
Housing 	32.3%
Health care 	6.8%
Transportation  	5.9%
Other expenses 	11.6%
TOTAL 	100%
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10
Q

What are the phases of the business cycle

A

Expansion
Peak
Contraction
Trough

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11
Q

Characteristics of expansion

A

GDP, Inflation, and interest rates are rising

Unemployment is decreasing

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12
Q

Characteristics of Peak Expansion

A

GDP peaks
Inflation and interest rates peaking
Unemployment bottoming

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13
Q

Characteristics of Contraction

A

GDP growth rate is slowing
Inflation and interest rates begin declining or coming off of their highs
Unemployment rate begins to increase

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14
Q

Characteristics of trough

A

GDP, Inflation, and interest rates at their lowest levels or bottoming.

Unemployment has peaked or is at it’s highest level

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15
Q

Give 4 examples of leading economic indicators

A

Average workweek of production workers in manufacturing

Initial unemployment claims for state unemployment insurance

Building permits

Stock prices

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16
Q

Give 3 examples of lagging indicators

A

Average duration of employment

ratio of manufacturing and trade inventories to sales

ratio of consumer credit outstanding to personal income

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17
Q

What is monetary policy

A

The means by which the fed controls the money supply and influences interest rates

18
Q

What is fiscal policy

A

The means by which congress controls spending and taxation to influence the money supply and interest rates

19
Q

What are the 3 goals of the fed

A

Maintain price levels/inflation

maintain long term economic growth/gdp

maintain full employment

20
Q

What tools does the fed use to influence the money supply/interest rates

A
  1. Reserve requirement
  2. Discount Rate
  3. Open market operations
  4. Excess reserve deposits
21
Q

How does the reserve requirement impact monetary policy

A

increasing the reserve requirement will decrease the money supply and increase interest rtes.

decreasing the reserve requirment increases the money supply and decreases interest rates

22
Q

Describe open market operations

A

The process by which the fed buys and sells treasury securities to influence the money supply.

To tighten the fed will sell treasuries to the open market. The funds from the open market come onto the fed’s balance sheet thus reducing the supply of money available.

To ease, the fed will buy back treasuries from the market which will have the effect of increasing the money supply which will lower interest rates.

23
Q

Describe open market operations

A

The process by which the fed buys and sells treasury securities to influence the money supply.

To tighten the fed will sell treasuries to the open market. The funds from the open market come onto the fed’s balance sheet thus reducing the supply of money available.

To ease, the fed will buy back treasuries from the market which will have the effect of increasing the money supply which will lower interest rates.

24
Q

What are the goals of congress as it relates to fiscal policy

A
  1. Maintain price levels

2 maintain long term economic growth

  1. maintain full employment
25
Q

What tools does the does congress use to influence fiscal policy

A
  1. Taxation - Will reduce money supply
  2. Spending - Will increase money supply
  3. Debt management - Deficit spending where congress spends more than the tax revenue collected.
26
Q

Demand Curve

A

Price on the y axis, quantity on the x axis. Slopes down to the right. Demand is a function of price. As price decreases consumers will demand more. As prices increase consumers will demand less. Think gas prices. Higher gas prices will discourage travel and reduce demand for gas.

Unfortunately gas is inelastic which means that the demand is likely to remain unchanged or change little in response to price.

27
Q

How does price impact demand

A

Anytime there is a change in price there will be movement along the demand curve. Price alone will not shift the demand curve.

28
Q

What factors cause a shift in the demand curve

A

income
taxes
savings rate
disposable income

29
Q

How does income shift demand curve

A

An increase in income will cause the curve to shift up to the right. AKA prices go up for the same quantity of goods.

30
Q

What causes the demand curve to shift up to the right

A

Higher income
lower taxes,
lower savings rate

All of these things mean that the customer immediately has more discretionary income, or an increase in the money supply which causes higher prices.

31
Q

What causes the demand curve to shift down to the left?

A

Events that cause discretionary income to go down.

Lower income
higher taxes
higher savings rate

32
Q

Describe price elasticity

A

Measures the change in quantity demanded relative to a change in price.

Higher prices mean lower quantity demanded.

33
Q

Explain elastic demand

A

A significant change in quantity relative to price.

Think airline tickets. A lower price will mean more people want to travel. Higher prices will cause fewer peple to travel or take fewer trips.

34
Q

Explain inelastic demand

A

Small or no change to quantity demanded relative to price changes.

Think gas. People must drive to the grocery store or work so a change to the price of gas is unlikely to change the quantity demanded.

35
Q

Describe the supply curve

A

Y axis + price
X axis equals Quantity supplied

If goods or services fetch a higher price then suppliers are willing to supply more of the good or service. The supply curve slopes up to the right.

36
Q

Name the factors that will shift the supply curve

A

technology

competition

anything other than price

37
Q

How does technology shift the supply curve

A

Improvements to technology will shift the supply curve up to the right producing more goods at a lower cost.

38
Q

What are the 3 types of bankruptcy laws

A
  1. Chapter 7 - Relief that is voluntary or involuntary through asset liquidation.
    Some debts are not dischargeable: 3 years back taxes, alimony and child support, student loans

Chapter 11
Relief through reorganization

Chapter 13
Relief through adjusting debts - think payment plan

39
Q

Name the types of non-dischargeable debts

A 
All student loans
Property Liens
3 yrs back taes
Child support
Alimony
Debt obtained through fraud
40
Q

What assets are protected from bankruptcy

A

Traditional and Roth IRAs - Up to 1mm
Rollover IRAs from qualified plans, unlimited amount
Qualified retirement plans, deferred comp, tax deferred annuities
Some personal property, one car, one television
Education funds

41
Q

Explain FDIC insurance

A

250k federal insurance on deposit accounts.

Per depositor, per legal ownership, per financial institution

Legal ownership includes Individual, Joint, Testamentary, and retirement

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