Econ chapter 15,17,18

A fall in the real interest rate causes:

movement down and to the right along the same IS curve.

An index fund is a...

mutual fund that consists of stocks on a broad market index

Which of the figures correctly represents the shape of the IS curve? The MP curve

Shape B is IS curve, MP is A

What shifts IS curve?

Spending shocks PGCND - Planned investment inc right -Government spending inc shifts curve right -Consumption inc right -Net exports inc right. -Dollar deprecates shift right

what is likely to be TRUE if actual output equals potential output?

The actual unemployment rate equals the equilibrium unemployment rate.

Suppose that an economy is overheating. You would expect to see real GDP:

rise above potential GDP.

If the fundamental value of a stock is above the current market price of the stock, there will be a:

rise in the price and demand of its stock

IS MP equilibrium shows

the state of the economy

If actual output (Y)> AE...

there will be a build-up of inventories in the economy

aggregate expenditure

total amount of goods/services people want to buy across the whole economy

leading indicators

variables that tend to predict the future path of the economy Ex: consumer confidence, stock market, business confidence

bank run

when many bank customers try to withdraw their savings at the same time

speculative bubble

when the price of an asset rises above what appears to be its fundamental value

Which of the following changes could create a more positive output gap in an economy? (i) The GDP of an important trading partner falls. (ii) Defense spending increases. (iii) Consumer wealth increases. (iv) The risk premium decreases.

(ii) Defense spending increases. (iii) Consumer wealth increases. (iv) The risk premium decreases.

Assume the equilibrium unemployment rate is 5%. IF actual output falls to 5 percentage points below potential output how would unemployment rate change?

**** Every one percentage point fall in actual output below potential, unemployment increases by half a percentage point So since the output fell 5 points, half of 5 is 2.5. This means unemployment will increase 2.5 points.

Bonds...? Loans...?

- Bonds allow institutions to borrow large sums of money from many lenders - Loans tend to be relatively smaller and from a single lender

personal finance advice: D D P M L

- Don't pick individual stocks - Diversify your portfolios - Past performance doesn't guarantee future performance -Minimize fees you pay -Low-cost index fund are best to invest in

CHAPTER 17

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CHAPTER 18

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CHAPTER 15 STUFF

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Bonds pay...while stocks pay...? Who gets paid first if there is a bust for stocks and bonds? what are the rights for stocks and bonds?

-Bonds pay certain annual interest payments, while stocks pay uncertain dividends -Bonds are first in line to get paid, stocks are last in line -bonds have no rights to help control company, stock shareholders do

What are the top 10 economic indicators and what are they used for?

1. Real GDP- the broadest measure of economic activity 2. Real GDI- a cross check on GDP 3. Nonfarm payrolls- tell you if the labor market is improving 4. Unemployment rate- indicates labor market performance/excess capacity 5. Initial unemployment- provides a quickly available indicator 6. Business confidence- sees what business managers are planning 7. Consumer confidence- indicates what consumers are thinking 8. inflation rate- whats happening with prices 9. Employment cost index- whats happening with wages and benefits 10. stock market- future expected profits of businesses / future trajectory of economic activity (narrow indicator)

You go to the bank and deposit $1,000. You are told that you will receive 1.5% interest. The bank loans out your money to borrowers at a rate of 5.75%. A year later, how much money has the bank made on your money?

1000*(.0575-.015) =42.50

The median annual growth in the stock index is 7%. Which of the following annual stock index growth rates indicates a particularly strong economy? 5% -3% 8.5% 12.9%

12.9%

liquidity risk

the risk that if you need to sell an asset quickly, you may not be able to get a good price for it

AE equation=

AE=C+I+G+NX C= consumption I=Investment G=government spending (not transfer payments) NX= Net Exports (exports-imports)

Bond A is a five-year bond issued by a company with a very good credit rating. Bond B is a five-year bond issued by a different company in financial distress. Which of the following is likely?

Bond B will have a higher interest rate than Bond A.

After the inflationary period of 1979, Paul Volcker, chair of the Federal Reserve, raised real interest rates sharply. Which of the following shows the correct effect on the IS curve?

C to A

Which of the following is a broad indicator?

CPI and GDP

What does the bond market do? CFSL

Channels funds from savers to borrowers Funds government debt Spreads risk Liquidity is created

When real interest rate decreases...

Consumption, investment, government purchases, and net exports (because US dollar is cheaper) all increase and aggregate expenditure, output and output gap inc

What is an annualized rate?

Data converted to the rate that would occur if the current rate had continued throughout the year

Seasonally adjusted data

Data stripped of predictable seasonal patterns. Ex: ice cream sales

What shifts MP curve

Financial shocks way too mf much - inc in real interest rates shift up -dec in real interest rates shift down -risk-free rate (inc up) and risk premium (inc up) -feds raise rates, shift up

Okun's rule of thumb

For every percentage point that the output gap rises, the unemployment rate tends to fall by half a percentage point.

If government spending rises by $40 billion and GDP rises by $80 billion, then the multiplier in the economy is:

GDP=change in spending*multiplier 80=40*multiplier =2

Which of the following correctly describes the business cycle?

It is the fluctuations of GDP around the potential output.

How do interest rates affect consumption in the economy?

Lower real interest rates imply a lower opportunity cost of consumption, and thus consumption rises.

how long does the average recession and expansion last?

Recession lasts about a year Expansion lasts about 5 years

The Dow Jones Industrial Average rose more than 1,080 points on December 26, 2018. How does a change like this impact the IS curve?

The increase in perceived wealth boosts consumption, which shifts the IS curve to the right.

Which of the following is correct about a financial instrument and its future value, keeping all other things constant?

The longer the time to maturity of the instrument, the higher the future value.

default risk

The risk that your loan won't be repaid at all or in a timely fashion Ex: credit ratings

What is the safest investment?

US government bonds

Does output adjust to meet aggregate expenditure?

Yes, its the equilibrium when AE-output if output exceeds AE businesses will cut back their production. if output is less than AE, businesses will inc production

What causes a movement along IS curve?

a change in IR leads to a movement along the IS curve

deposit insurance

a guarantee that you will get your money back, even if the bank collapses.

For the past several months, per capita output has grown more and more slowly, and unemployment has fallen, but both trends appear to have leveled off. Where in the business cycle is the economy?

a peak

Actively managed vs. mutual funds

actively managed is when a fund is managed by stock pickers mutual funds is one that buys a portfolio of stocks or bonds on your behalf

The IS curve is constructed by:

adding up the level of aggregate expenditure at each real interest rate.

The three major pillars of the financial sector are the:

bank, stock market, and bond market

In the short run...

changes in demand drive changes in output

One of the important tasks that banks perform is to:

create long-term loans from short-term deposits

The MP curve is the:

current real interest rate as determined by monetary policy and the risk premium.

shadow banks

financial firms that are similar to banks but are not regulated like them at risk of bankruns

Output gap= A negative output gap means... A positive output gap means...

he economy's deviations from potential GDP A negative output gap means the economy is producing less than it can A positive output gap means the economy is producing more than its potential

Which of these is an advantage of owning stocks over bonds? I. lower risk II. higher returns III. greater liquidity

higher returns than bonds

what is MP curve?

illustrates the current real interest rate, which is shaped by monetary policy and the risk premium

planned investments inc when...

inc output growth inc business confidence inc investment tax credits inc in ease in lending standards and more cash reserves dec corporate taxes dec uncertainty

consumption increases when...

inc wealth inc consumer confidence inc govt assistance dec taxes dec inequality

lagging indicators

indicators that follow business cycle/path of the economy Ex: unemployment, GDP, CPI

According to the efficient market hypothesis:

it is impossible to predict whether a stock is overpriced or underpriced based on publicly available information.

Mr. Delwar purchased a 10-year bond a year ago. He expected an annual return of 5.25% on it. Last month, he had an unexpected need for money and had to cash in his bond. He received a low price for it. This scenario describes _____ risk.

liquidity

The intersection of the IS curve and the MP curve determine:

macroeconomic equilibrium.

multiplier? and equation

measures how much GDP changes as a result of both direct and indirect effects flowing from each extra dollar spent. Can see how spending and GDP will change. Determines how far IS curve shifts GDP=change in spending*multiplier

Refer to the following table. What was the approximate output gap in 1995? 1999?

output gap= ((3.2-3.3)/3.3)*100 -3% for 1995 ---------------------- output gap= ((4.38-4.3)/4.3)*100 1.9% for 1999

output gap equation....

output gap= ((actual output-potential output)/potential output)*100

Refer to the following table. What was the approximate output gap in 1974?

output gap= (107-100/100))*100 -6.5%

government purchases increase when...

policy makers decide to spend more on goods and services

Real interest rate=

real interest rate =Riskfree real interest rate+risk premium

If the nominal rate of interest is 4.8%, the rate of inflation is 2%, and the risk premium is 0.75%, the MP curve is at:

real=nom-IR 4.8-2=2.8%

What is the IS curve?

shows the link between interest rates, output, and output gap IS curve is downward sloping because low-interest rate boosts output gap a change in IR leads to a movement along the IS curve, change in aggregate expenditure cause IS curve to shift

The efficient markets hypothesis says that:

stock prices reflect all publicly available information about companies' fundamentals; therefore, stocks are neither overpriced nor underpriced.

An index fund is a mutual fund that consists of:

stocks on a broad market index.

If actual GDP is less than potential GDP:

the economy can experience deflation

risk premium

the extra interest that lenders charge to account for the risk of loaning money and is determined by financial markets

An economy's potential output level is:

the output that is possible when all resources are fully employed.

term risk

the risk that arises from uncertainty about future interest rates term connected to the length of the loan