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Eco - Level 1
Material covered on 26FEB2015
37
Economics
Professional
02/28/2015

Additional Economics Flashcards

 


 

Cards

Term
Define the Economy
Definition
The efficient allocation of resouces or the efficient exchange of goods or services.
Term
Explain how the economy is measured
Definition
  • By analyzing the past, present, and possible future balance between Supply and Demand through economic indicators.  
  • Must analyze a group of indicators together in order to draw the best conclusions about future consumption, production, and employment levels.
Term
Define Economic Indicators
Definition

Help understand past, current, or future economic conditions.

 

 

Term
Four Categories of Economic Indicators
Definition
  1. Broad
    • GDP and GNP
  2. Consumption
    • CPI (Consumer Price Index)
  3. Production
    • PPI (Producer Price Index)
    • Inventories
  4. Employment
    • Employment Levels (Unemployment)
Term
Define GDP and how it's measured
Definition

Broadest indicator which measures growth by looking at the total market value of final goods & services produced within a country during a period of time.  

 

It is measured Quarterly Year-on-Year (YoY) and Quarter on Quarter (QoQ)

 

We look at the change in GDP in % terms

Term
Real GDP (aka constant or chained)
Definition

Adjusted for inflation by using a price deflator

 

Real GDP = Nominal GDP * GDP deflator base


                                       GDP deflator current

 

Term
Nominal GDP aka current
Definition
Measure of production that is NOT adjusted for inflation
Term
GNP
Definition
Gross National Prodcut, market value of final goods & services produced by a nation worldwide.
Term
Define Inflation and how it is measured
Definition
Rising prices due to the level of demand  in the economy.  It happens when the purchasing power of our currency declines.  It can be measured by CPI (Consumer Price Index) it is measured monthly
Term
CPI
Definition

Consumer Price Index, measures the % change in prices of a fixed basket of goods that a typical consumer would buy.  Measured monthly as Year-on-Year (YoY) and Month-on-Month (MoM).

 

 

Term
Core CPI
Definition
Investors like to look at Core CPI because it excludes food and energy prices from the basket of goods due to high price volatility.
Term
RPI
Definition
Retail Price Index, another measure of inflation which measures the average change from month to month in the prices of goods and sevices purchased by households
Term
Unemployment Rate
Definition

Represents the number of unemployed persons as a percent of the labor force.  It is measured monthly by Bureau of Labor Statistics.

(economic indicator)

Term
Three types of Unemployment
Definition
  1. Frictional
  2. Structural
  3. Cyclical
Term
Frictional Unemployment
Definition
“best kind” because this is voluntary.  People who have left their job voluntarily and are seeking a new one for whatever reason.  Shows the confidence level of the job market is higher.  It also creates room for other people to fill the position that the person left.  If there was 0% unemployment you would never switch jobs because there are no vacancies.
Term
Structural Unemployment
Definition
Represents changes in the economy, for example you work at a typewriter plant and it shuts down due to evolution of computers.
Term
Cyclical Unemployment
Definition
“worst kind” due to a poor economy such as the 2008 financial crisis.  Difficult for business to thrive leading to businesses shutting down.
Term
Four Stages of the Economic Cycle
Definition
  1. Contraction (recession)
  2. Recovery
  3. Expansion (growth)
  4. Decline
Term
Recession
Definition
Two consecutive quarters of negative growth as determined by the National Bureau of Economic Research.
Term
Three classifications of Economic Indicators
Definition
  1. Lagging
  2. Coincident (or current as Aubi said in class)
  3. Leading
Term
Leading Indicator
Definition

something that changes before the economy changes

 

Ex.  Prices of things such as the S&P 500 which is an index of the top 500 companies, another indicator would be building permits because it’s indicating that something is going to be built which will ultimately wind up affecting the economy.

 
Term
Coincident (Current) Indicator
Definition
comes out as the economy is shifting
Term
Lagging Indicator
Definition

comes out after the fact, measurement of what really occurred historically

Ex.  GDP comes out quarterly 

 
Term
Central Bank Objectives
Definition

Principal monetary authority in a country.  In charge of:

  • Maximum Employment
  • Stable Price
  • Implementing Monetary policy
  • Regulating member banks & providing stability
  • Acts as "lender of last resort"
Term
Fed's Dual Mandate
Definition
  1. Mandate Price ability (stable price)
  2. Maximize levels of employment
Term
Monetary Policy
Definition

is the policy around controlling the supply of money which ultimately drives interest rates. The price of money is an interest rate.

Ex. Lower Interest rates

 
Term
List two types of Monetary Policy
Definition
  1. Expansive
  2. Restrictive
Term
Fiscal Policy
Definition

is the policy around government spending and government revenue collection.

Ex. Stimulus packages

 
Term
Expansive Monetary Policy
Definition

Takes place during contraction (recession) Central banks begin buying gov't securities from their primary dealers in an effort to decrease the yield on bonds

 

Can also lower the interest rates to increase the demand and encourage people to spend, because borrowing would become cheaper.

 

Reduce the reserve requirement of banks so banks will have more money to lend and they'll charge lower rates.

Term
Restrictive Monetary Policy
Definition

Followed during Expansion (growth) to control consumer spending and inflation.

 

Central Banks start selling gov't securities in order to increase yields resulting in expectation of higher int. rates

 

Raise interest rates to stop people from spending too much

 

Increase Reserve Requirements of banks, so banks have less money and charge higher interest rates.

Term
Major Central Banks
Definition

Federal Reserve System (FED)

Bank of England (BoE)

European Central Bank (ECB)

Term
3 Tools to implement Monetary Policy
Definition
  1. Discount Rate (least effective)
  2. Reserve requirements (used less often)
  3. Open Market Operations (OMO)
Term
Discount Rate
Definition

The interest rate owed from the bank who borrowed the money from the FED.  This has the smallest impact on the economy and is rarely done in the financial markets, banks do not want to borrow money from the Fed.

“Lender of Last Resort”

Term
Reserve Requirements
Definition

The amount of money that banks have to deposit in the Central Bank (not interest bearing)

 

lower reserve requirement - means banks have more money to lend (done during contraction)

 

higher reserve requirement - means banks have less money to lend (done during expansion)

Term
Open Market Operations
Definition
The buying and selling of treasury securities to control the fed funds rate.  Has the largest impact on the economy, the Fed dictates the rate at which banks lend to one another.  They set a target rate at which they believe banks should be lending and borrowing.
Term
PCE
Definition

Personal consumption expenditure

...deflator

Term
Quantitative Easing
Definition
Last effort to revive economy when OMO just isn't doing enough.
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