Series 86 Chapter 1
EZ Games Inc. intends to decrease the price of its adventure game products by 11% to increase sales. At the same time, EZ would like to increase revenues by 6%. What percentage increase in the number of units sold is necessary to produce these results?
1.06 - (100% - 11%) (100% - 11%)
A review of regression analysis indicates that Unit sales of product XYZ are correlated to a complementary industry's total sales, where current data indicates: Slope = 0.82Intercept = 426X Value = 3560 (complementary industry's current sales) If the complementary industry is expected to grow by 6%, what is your estimate for product ABC sales? 2919 3094 3345 3520
3520 To solve the problem,use the general linear regression formula: Y = a + bx Step 1:3560 x 1.06 = 3773.60(you expect 6% industry growth) Step 2:Formula: Y' = a + bXa is the intercept, where X = 0: 426b is the slope: 0.82X is the independent variable: 3773.60 Y' = 426 + (0.82 x 3773.60) = 426 + 3094.35 = 3520.35 (30013)
Elasticity Example: Given a % decrease in price...Find the Increase in Quantity =
= % change in price / complement % change in price
Money Supply: M1
= Currency in circulation + demand deposits + other checkable deposits
Money Supply: M3 = M2
= Large time deposits + term repos at banks and savings and loans + eurodollars
Money Supply: M2 = M1
= money market deposit accounts + saving and relatively small time deposits + balances at money funds + overnight repos at banks
Elasticity Example: Given a % decrease in price...Find the % increase in sale to get a % change in Revenue =
=((1 + % change in revenue) - complement % change in price) / complement % change in price
Exchange Rate Demand Curve
A demand curve for Euros is illustrated in Figure 11a. As the price moves down from point A to point B, note that the quantity demanded will increase. This is because cheaper Euros mean that Americans will perceive goods denominated in Euros as less expensive. Since they will tend to buy more goods at these lower prices, the demand for Euros will increase (as the basis of payment for the products).
A weak U.S. dollar is ____________ for U.S. imports.
A weak U.S. dollar is inflationary for U.S. imports.
Intermediation and Disintermediation
Banks can only create money if they're able to attract deposits and subsequently make loans.
The United States is experiencing a severe economic downturn. The Fed reacts and cuts rates 400 basis points. Which industry will outperform in the downturn? Building supplies Big pharmaceutical Capital equipment Video games
Big pharmaceutical The pharmaceutical stocks are defensive and sales will be maintained during an economic downturn. The other choices have cyclical characteristics. Home building and construction will fall off. Eventually the interest rate change will benefit building supplies and capital equipment makers but during the downturn those sectors will suffer.
Setting margin requirements
By increasing margin requirements, the FRB reduces the amount brokers and banks may lend, causing the money supply to tighten. Changing the margin requirement is the least effective method that the FRB uses to control credit because it only affects securities market transactions.
How is Marginal Cost calculated?
Change in Total Costs ÷ Change in Output
Which of the following choices is considered a leading economic indicator? Changes in wholesale prices of raw materials Industrial production Average duration of unemployment Commercial and industrial loans outstanding
Changes in wholesale prices of raw materials
In which of the following situations would an analyst expect regression analysis to be the LEAST useful? Rainy days and retail sales Computer printer sales and auto sales GDP and alcoholic beverage consumption New business formation and landline communications
Computer printer sales and auto sales In regression analysis, the emphasis is on predicting one variable from the other. Historical data is used, but there is an attempt to determine to what extent one variable depends on the other. It is unlikely that computer printer sales and auto sales depend on one another. Rainy days influence retail sales (e.g., one would expect limited retail activity during a hurricane). General economic growth influences most types of consumption. Business formation enhances the need for communications links.
What is the definition of M1 Money Supply?
Currency in circulation + demand deposits + other checkable deposits
All of the following are TRUE of cost analysis, EXCEPT: Over the long-term, all costs are variable Average total cost is equal to average fixed costs plus average variable costs Diminishing returns occur when average variable costs exceed average fixed costs Diminishing returns will not occur as long as average variable costs is greater than marginal costs
Diminishing returns occur when average variable costs exceed average fixed costs Average variable costs plus average fixed costs equal average total cost. Diminishing returns occur when average total costs begins to rise.
Coincident Economic Indicators
Employees on non-agricultural payrolls Personal income less transfer payments (Transfer payments represent aid for individuals in the form of Medicare, Social Security, and veteran's benefits, to list a few.) The Index of Industrial Production Manufacturing and trade sales
Short Run
Fixed and variable costs
Inflationary Risks to Securities
Historically, equity securities or other related products, such as equity mutual funds and equity ETFs, have provided the best protection against inflation. Historically, equity securities or other related products, such as equity mutual funds and equity ETFs, have provided the best protection against inflation.
A U.S. company owns a French manufacturing subsidiary that sells machine tool parts throughout Europe. Recently, the euro has appreciated against the U.S. dollar. Assuming no other changes in the company's business, what effect will this currency movement have in dollar terms on the company's consolidated income statements? Revenues will increase Revenues will remain unchanged Operating profit margin will decrease Operating profit margin will remain the same
I and IV only The appreciation of the euro will cause an increase in gross revenue in dollar terms. The profit margin, however, will remain the same since the company's manufacturing costs are also in euros.
Interest rates should rise if: The supply of money increases The supply of money decreases The demand for money increases The demand for money decreases
II or III only Interest rates are the price of money. The price of any item in limited supply will rise when either the demand for that item increases, the supply falls, or both. Therefore, in this case, interest rates will rise if the demand increases or the supply falls.
If the FRB is tightening credit, U.S. interest rates would be expected to _____ and the U.S. dollar to __________.
If the FRB is tightening credit, U.S. interest rates would be expected to rise and the U.S. dollar to strengthen
Exchange Rate Supply Curve
If the price of the Euro (in dollars) increases in going from point C to point D, the quantity of Euros supplied to the market will increase. Since Euros are more expensive, the dollar is therefore cheaper. U.S. goods will look less expensive to some Europeans, who will tend to buy more American products. To pay for them, they will exchange more Euros for dollars, increasing the supply of Euros in the market
Which of the following statements is TRUE of an industry with zero economic profit? The industry will eventually cease to exist. Individual companies may still generate normal profits. Capital expenditure exceeds normal profit. Revenues exceed costs.
Individual companies may still generate normal profits. Normal profit is considered a cost in economic terms, specifically, the cost of entrepreneurial effort. Economic profits are excess earning over and above capital expenditures and normal profit.
Inflationary periods are typically characterized by ______ interest rates which ______ discount rates.
Inflationary periods are typically characterized by rising interest rates which expand discount rates.
Economies of scope are realized through:
Integration of related product distribution
Inflation changes represent a two-pronged risk for bondholders
Interest rates rise causing the market price of holdings to fall while the purchasing power of interest payments also decreases.
What are lagging economic indicators able to confirm?
Lagging economic indicators confirm the business cycle.
The U.S. economy is slowing and forecasters predict a mild hurricane season. Economists expect emerging market economies to show strong growth a year from now. What are the implications for the price of oil? No change Lower short term but rising long term Dwindling supplies are bullish in both the short and long term Electric cars will cut demand for fossil fuels; bearish
Lower short term but rising long term Oil is economically sensitive. In a recession there is lower demand and prices fall. A mild hurricane season will not have a significant effect on drilling, so supply is less likely to be disrupted, and not likely to affect prices. However, if emerging market economies are expected to experience strong growth in the future, demand for oil will rise in the long-term causing prices to increase.
Cyclical changes in the business cycle would most likely have the greatest effect on the stock of a: Utility company Food retailer Brewery Machine tool company
Machine tool company The stock price of a machine tool company is cyclical and fluctuates with the business cycle. The other choices are necessities or staples and are considered defensive due to their resistance to a recession.
GNP
Measures the total value of all goods and services produced by a national economy Includes goods and services produced inside US borders as well as those produced overseas by a US-based company
Setting reserve requirements
Member banks are required to keep a portion of their deposits on reserve with the FRB If reserve requirements are lowered, the banks are able to extend more credit. Therefore, the money supply increases. The opposite effect occurs with an increase in reserve requirements.
Economies of Scope
Minimizing the product line costs of production, marketing, and/or distribution
How Money is Created
Money, as measured by M1, consists of currency plus checking account balances. While the FRB prints currency, the commercial banking system creates checking accounts. Banks make a profit if they can attract deposits and lend those funds at a higher rate of interest.
A corporation based in the United States imports components from a company based in China. The importer uses these components to assemble a finished product that it exports back to China. The U.S. dollar has recently been devalued against the Chinese yuan. All of the following items will increase in value, EXCEPT the: Operating expenses Revenue Operating profit margin Cost of goods sold
Operating expenses The operating expenses of the company would be expressed in U.S. dollars. These expenses are unaffected by a devaluation of the dollar against the yuan. The cost of goods sold will increase since the dollar has declined in value against the Chinese yuan. The decline of the dollar, however, will also increase the revenue the company will receive once the yuans (received for the sale of the finished products) are converted into U.S. dollars. A portion of the cost of goods sold (assembly of the finished product) is payable in U.S. dollars. The devaluation of the dollar will not impact this portion of the cost of goods sold. Since the increase in the revenue would be a greater percentage than the percentage increase in cost of goods sold, the profit margin will increase.
Which of the following is an example of economies of scope? Reaching a critical production size Product bundling Cost leveraging Training management to be more specialized
Product bundling
Long Run
Prop equip etc. All costs are variable ATC curve is subject to the law of diminishing returns
Ed >1 = Elastic
Quantity demanded will change by a LARGER % than the price change For example, a 1% decline in price might produce a 2% increase in the quantity demanded Ex. A price decrease will increase total revenue, since the lower price is more than offset by the larger percentage change in the quantity demanded. Likewise, a price increase will decrease total revenue when demand is elastic
Ed <1 = Inelastic
Quantity demanded will change by a LESSER % than the price change Ex. Price decreases will decrease total revenue while price increases will increase total revenue
Elasticity Formula
Shows if a price change will dramatically affect the quantity demanded of that product The more the change in price affects demand, the more elastic
Which company would benefit the most from a high GDP and economic growth? Large cap technology Small cap consumer staples Large cap banking Small cap industrial
Small cap industrial The answer should be oriented toward a cyclical company that may be able to expand its sales by penetrating new markets. That gives the small cap industrial an edge over the large cap technology.
Setting the discount rate
The FRB was originally established to aid the banking system in emergency situations by acting as a banker's bank. The FRB always stands ready to lend money to its members. It fulfills that function through its discount window. The rate charged for loans is called the discount rate.
Utilizing moral suasion
The Fed exerts its influence through the public media or through the examiners sent to member banks. Its efforts to control the money supply by these means are limited by the extent to which they can elicit cooperation from these institutions.
In the foreign exchange markets, what is required to correct a trade deficit in the U.S.?
The U.S. dollar would need to weaken
Lagging Economic Indicators
The average duration of unemployment The relationship of inventories to sales, manufacturing, and trade Labor cost per unit of output for manufactured goods The average prime rate charged by banks Commercial and industrial loans outstanding The relationship of consumer installment credit to personal income The consumer price index for services
Leading Economic Indicators
The average workweek for production workers in manufacturing The average weekly initial claims for state unemployment insurance New orders for consumer goods and materials Vendor performance (companies receiving slower deliveries from suppliers) Contracts and orders for plant and equipment New building permits for private housing units The prices for the S&P 500 common stocks The Money Supply (M2) The change in credit outstanding for business and consumer borrowing Interest rate spreads, 10-year Treasury bonds less federal funds The index of consumer expectations
Balance of Trade:
The balance of U.S. exports of merchandise against U.S. imports of merchandise
Name the schedule that summarizes foreign exchange markets as well as import-export transactions.
The balance of payments
The elasticity of demand for laptop computer flash memory is 1.8. If the price of this product increases by 6%, which of the following results would be expected? The demand for the product would increase by 10.8% The demand for the product would increase by 18% The demand for the product would decline by 10.8% The demand for the product would decline by 18%
The demand for the product would decline by 10.8% 10.8% = (1.8 x 6% = 10.8%).
If goods are produced in the U.S. and sold in Switzerland, and the dollar weakens: The gross margin percentage falls The gross margin percentage rises The operating margin falls Net income falls
The gross margin percentage rises The weakening dollar will cause top-line growth as Swiss francs will convert into higher sales denominated in dollars. Since costs are incurred in the U.S., the gross margin will increase.
Non-price Factors of Demand
The income of buyers The number of buyers Preferences (tastes) of buyers Buyers' expectations regarding future events Prices of related items A change in these factors will change the position of the entire curve Ex. Larger market with more buyers = Move curve out because even though the prices are the same, their are going to me of all prices sold, due to higher demand
Non-price Factors of Supply
The number of sellers The price of raw materials and other resources Technology Taxes and subsidies Sellers' expectations regarding future events Prices of related items
GDP
The output of goods and services produced by labor and property located in the USA, without regard to the origin of the producer
Ed = 1 is called unit elasticity
The percentage change in demand will equal the percentage change in price Ex. Price changes have no effect on total revenue.
The price point at which supply and demand curves intersect is referred to as the ___________ or _______________ price.
The price point at which supply and demand curves intersect is referred to as the equilibrium or market clearing price.
Real Interest Rate
The rate an investor in fixed-income securities actually receives once inflation is taken into account For example, if a 10-year bond is yielding 7% when the inflation rate is 3%, the real interest rate is 4%. The 7% is composed of a 4% real interest rate plus a 3% inflation premium.
FED Funds Rate:
The rate of interest charged on these loans is called the federal funds rate The federal funds rate is determined by supply and demand. Since federal funds are short-term (overnight), they're considered money-market instruments. Due to the short duration of the loan, the fed funds rate is normally considered to be the most volatile interest rate. The effective federal funds rate is published daily and shows the average rate charged the previous night for federal funds.
If leading indicators are rising in April, May, and June; The lagging indicators should follow suit Interest rates are falling The second half of the year could be strong Fiscal policy is expansive
The second half of the year could be strong
MES: Minimum efficient scale:
The smallest level of output at which a firm can achieve minimum ATC
Keynesian Economics
The theory states that government intervention in the economy is necessary for sustained economic growth and stability
The FRB attempts to control the extension of credit in order to purchase securities by using what regulations?
Through Regulation T (for broker-dealers) and Regulation U (for banks and other lenders)
Main factor of supply elasticity?
Time
When the demand curve moves to the right, this is probably due to: Changing elasticity Supply constraints Unavailability of substitute goods Lower prices
Unavailability of substitute goods When the demand at any price increases, this is called a shift in demand. This could be attributable to the unavailability of substitute goods. The lower price of a good does not cause a demand curve to shift; instead, we move along the existing demand curve to obtain the higher quantity of goods demanded. For example, if the retail price of bananas were to increase dramatically, the demand for other fruits would increase, causing the demand curve for apples and oranges to shift to the right.
Open Market Operations
Unlike the previous tools (reserve requirements and the discount window) that entail very public moves on the part of the FRB, open market operations can be implemented very quietly, without disrupting the financial markets.
Balance of Payments
When American goods are sold abroad, the demand for U.S. dollars increases. The foreign importers must exchange their currency for dollars in order to pay for the transaction. A U.S. bank that facilitates the exchange will have a deposit of foreign currency that's exchanged for the deposit of U.S. dollars now owned by its customer, the exporter. Note that this results in an increase in the U.S. money supply and also makes a deposit of foreign currency available (owned by the U.S. bank) that could be sold to those who might need it.
Discount Rate:
When members of the Fed borrow using the discount window, new money is injected into the system
When the FOMC sells securities, it is pursuing a(n) _____ money policy in an attempt to ______ credit.
When the FOMC sells securities, it is pursuing a(n) tight money policy in an attempt to reduce credit.
Stagflation
a prolonged period of a high rate of inflation at the same time as a high rate of unemployment.
Capital Account:
deals with long-term transactions, usually involving property or financial assets. For example, a U.S. corporation investing in a factory in a foreign country would represent an outflow, while the purchase of U.S. common stock by a foreign investor would represent an inflow of capital. Borrowing by U.S. businesses in foreign markets and by foreign companies in the U.S. market is also reflected.
Supply-Side Economics
places an emphasis on reducing taxes and the size of government to stimulate the economy. Reducing the size of government will allow for lower tax rates. By reducing taxes, individuals and corporations will have more money to invest, thereby stimulating increased economic activity.
Intermediation:
refers to the ability of financial intermediaries (such as banks) to attract deposits and, in turn, extend credit
Current Account:
shows the results for trade transactions completed in the current year
Disintermediation
the process by which investors withdraw funds from banks and seek higher-yielding investments elsewhere. For example, if money-market mutual funds were yielding 4% while time deposits at banks were yielding 2%, investors may invest money in the funds with bank withdrawals. The higher mutual fund yield may affect the bank's ability to attract and keep deposits.
