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Definition
The efficient allocation of resouces or the efficient exchange of goods or services. |
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Explain how the economy is measured |
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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.
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Define Economic Indicators |
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Definition
Help understand past, current, or future economic conditions.
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Four Categories of Economic Indicators |
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Definition
- Broad
- Consumption
- CPI (Consumer Price Index)
- Production
- PPI (Producer Price Index)
- Inventories
- Employment
- Employment Levels (Unemployment)
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Term
Define GDP and how it's measured |
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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 |
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Real GDP (aka constant or chained) |
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Definition
Adjusted for inflation by using a price deflator
Real GDP = Nominal GDP * GDP deflator base
GDP deflator current
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Definition
Measure of production that is NOT adjusted for inflation |
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Definition
Gross National Prodcut, market value of final goods & services produced by a nation worldwide. |
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Define Inflation and how it is measured |
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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 |
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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).
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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. |
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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 |
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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) |
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Three types of Unemployment |
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Definition
- Frictional
- Structural
- Cyclical
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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. |
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Represents changes in the economy, for example you work at a typewriter plant and it shuts down due to evolution of computers. |
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“worst kind” due to a poor economy such as the 2008 financial crisis. Difficult for business to thrive leading to businesses shutting down. |
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Four Stages of the Economic Cycle |
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Definition
- Contraction (recession)
- Recovery
- Expansion (growth)
- Decline
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Term
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Definition
Two consecutive quarters of negative growth as determined by the National Bureau of Economic Research. |
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Three classifications of Economic Indicators |
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Definition
- Lagging
- Coincident (or current as Aubi said in class)
- Leading
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Term
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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.
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Coincident (Current) Indicator |
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Definition
comes out as the economy is shifting |
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Definition
comes out after the fact, measurement of what really occurred historically
Ex. GDP comes out quarterly
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Term
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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"
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Term
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Definition
- Mandate Price ability (stable price)
- Maximize levels of employment
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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
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Term
List two types of Monetary Policy |
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Definition
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Term
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Definition
is the policy around government spending and government revenue collection.
Ex. Stimulus packages
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Term
Expansive Monetary Policy |
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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. |
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Term
Restrictive Monetary Policy |
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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. |
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Term
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Definition
Federal Reserve System (FED)
Bank of England (BoE)
European Central Bank (ECB) |
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3 Tools to implement Monetary Policy |
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Definition
- Discount Rate (least effective)
- Reserve requirements (used less often)
- Open Market Operations (OMO)
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Term
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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” |
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Term
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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) |
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Term
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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. |
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Definition
Personal consumption expenditure
...deflator |
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Term
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Definition
Last effort to revive economy when OMO just isn't doing enough. |
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