MacroEcon Exam 2 Study Guide

Question 1

What are firms responsible for organizing in a market system?

Answer 1

• Land
• Capital
• Labor
• Entrepreneurship

Question 2

Why do people start firms?

Answer 2

To make profit

Question 3

What is a sole proprietorship?

Answer 3

A firm owned by a single person
- Unlimited liability
- All assets belong to the owner

Question 4

What is a partnership?

Answer 4

A firm owned by two or more people?
- each partner has unlimited liability for debts

Question 5

What is a corporation?

Answer 5

A legal form of a business that provides owners with protection from losing more than their investment should the business fail
- Owners have limited liability
- Can issue stock and bonds, (money is easier to raise)

Question 6

What is limited liability?

Answer 6

Means that only business assets will be sold to pay off debt if the business fails.

Question 7

What is unlimited liability?

Answer 7

Means that business and personal assets will be sold to pay off debt if the business fails

Question 8

What is corporate governance?

Answer 8

the way a corporation is structured and the effect it has on the firms behavior

Question 9

What is the main difference between a sole proprietorship and a corporation?

Answer 9

The owner of a sole proprietorship is usually involved in day to day operations. Where as a corporations has separation between management and operations.

Question 10

What is the principal agent problem?

Answer 10

A conflict caused by an agent pursing his own interest rather than the interests of the principal who hired the agent.

Question 11

How do small business raise funds?

Answer 11

• Retained earning: profits are reinvested in the firm
• Recruit additional owners: increase the firms financial capital
• Borrow: from institutions, friends and family

Question 12

What is indirect finance?

Answer 12

A flow of funds from savers to borrows through financial institutions (banks, credit unions etc..)

Question 13

What is direct finance?

Answer 13

• Borrowers borrow funds directly from lenders in a financial market by selling stock and bonds
• Must be a big business

Question 14

What is a bond?

Answer 14

a contractual agreement by the borrower to pay the holder a interest and the principal amount until a specified date

Question 15

What are the two payments received from a bond?

Answer 15

• Interest Payment
• Final Payment

Question 16

What is the difference between a Short Term, Long Term, and Intermediate bond?

Answer 16

• Short Term: last less than a year
• Intermediate: 1-10 years
• Long Term: 10 years

Question 17

What is common stock?

Answer 17

• part ownership in the company
• Receives dividends
• Long term securities because they have no maturity date

Question 18

When giving out interest payments and dividends, are bond holders or shareholders paid first?

Answer 18

Bond Holders

Question 19

What are mutual funds?

Answer 19

• investments in a portfolio of assets and shares.
• Can only be sold back to the company
• Traded only once a day

Question 20

What are exchange traded funds?

Answer 20

passively managed funds that invest in a portfolio of assets and shares.
- These can be traded directly between investors
- Can be traded multiple times

Question 21

What must a firm do before selling new stock, bonds, or obtain a loan?

Answer 21

Provide investors, financial regulators, and bands with information about its finances

Question 22

What does the SEC require publicly traded firms to do?

Answer 22

• Report performances via income statements and balance sheet
• Disclose financial statements in periodic filings to the federal government and shareholders

Question 23

What is an income statement?

Answer 23

• shows a firms revenue, costs, and profit over a period of time

Question 24

What are the two equations for Economic Profit?

Answer 24

• Revenue - Explicit Costs - Implicit Costs
• Accounting Profit - Implicit Costs

Question 25

What is the equation for Accounting Profit?

Answer 25

Revenue - Explicit Costs

Question 26

What is a balance sheet?

Answer 26

- Shows a firms financial position on a particular day

Question 27

What is the Sarbanes-Oxley Act of 2002?

Answer 27

- Require CEO's to personally certify the accuracy of financial statements - Require Analysts and Auditors to disclose any conflicts of interest that would limit independence in evaluating a firms finances

Question 28

What is the future value formula?

Answer 28

Future Value= PV(1+r)^n - Present Value (1+ annual interest rate)^ number of periods interest held

Question 29

What is long term economic growth?

Answer 29

the ability of a country to produce more goods and services from one year to the next

Question 30

What's the equation for GDP per Capita

Answer 30

GDP/Population

Question 31

What's the equation for Growth Rate?

Answer 31

Current Year-Previous Year over previous year *100

Question 32

What's the equation for Average Annual Growth Rate?

Answer 32

Real GDP Growth Rates over # of Years

Question 33

Whats the equation for Present Real GDP?

Answer 33

Past Real GDP * (1+g)^n

Question 34

What does real GDP per capita rely on?

Answer 34

Increases in labor productivity

Question 35

What is the equation for Rule of 70?

Answer 35

70/Growth Rate

Question 36

What is the purpose of the Rule of 70?

Answer 36

to measure the number of years to double GDP

Question 37

What is capital?

Answer 37

manufactured goods that are used to produce other goods and services

Question 38

What are property rights?

Answer 38

legal rights that define how people can own and use resources

Question 39

What is potential GDP?

Answer 39

the amount of goods and services a country could produce at max productivity

Question 40

What are financial markets?

Answer 40

where financial securities such as stocks and bonds are traded

Question 41

What is risk?

Answer 41

the chance that the value of a financial security will change relative to what you expect.

Question 42

What is liquidity?

Answer 42

the ease with which the financial security can be exchanged for money

Question 43

What is the GDP formula?

Answer 43

Y=C+I+G+NX - only applies to open economies - Consumer spending (C) - Business Investment (I) - Government Spending (G) - Net Exports (NX)

Question 44

What is the GDP formula of a closed economy?

Answer 44

Y= C+I+G

Question 45

What is the formula for private savings (S,private)?

Answer 45

Y+TR-C-T Y= Total Income TR= Transfer Payments from government C= Consumer Spending T= Taxes

Question 46

What is the formula for public savings (S,Public)?

Answer 46

T-G-TR Taxes (T) Government Spending (G) Transfer Payments from Government (TR)

Question 47

What is the equation for total savings?

Answer 47

(S,Private)+(S,Public) (Y+TR-C-T)(T-G-TR)

Question 48

The interaction of borrowers and lenders determines what?

Answer 48

market interest rate and quantity of loanable funds exchange