Economics Cfa Level 1

Front 1

Stages of business cycle

Back 1

Recession, recessionary trough, expansion, peak

Front 2

Unemployment rate (equation and measurement problems)

Back 2

= # unemployed / # in labor force

Problems -
Laid off workers awaiting recall are counted as unemployed
Discouraged workers that have given up job search are not counted as unemployed
Part time workers that want full time jobs are not counted as unemployed

Front 3

Frictional, cyclical, structural unemployment

Back 3

Frictional - Job seekers have difficult time finding job openeings
Cyclical - change in general level of output in economy (less than full capacity = positive level of cyclical unemployment)
Structural - Changing economy does away with some jobs and opens new ones in which unemployed are not qualified

Front 4

Keynesian view fiscal policy

Back 4

Keynesians believe that Demand drives economy. They beleive that fiscal policy IS effective in smoothing economic instability. During recession, Govt. should create budget deficit to increase spending and demand. This will raise prices, output, inflation and employment .

Front 5

Budget deficit and budget surplus

Back 5

deficit = Tax revenue < spending

surplus = Tax revenue > spending

Front 6

Crowding out

Back 6

Argument against keynesian. Govt. will borrow to finance deficit. This will increase demand for loanable funds and increase interest rates. This will make corporate investments unattractive and cause demand to fall negating some of the gains in output of the deficit.

Front 7

New classical economists

Back 7

Fiscal policy is not effective in smoothing business cycle. This is because consumers will expect future tax rates to rise and will save money now to pay for this future increase.

Front 8

Automatic stabalizers

Back 8

1. Unemployment compensation
2. Corporate profit tax
3. increasing tax brackets

Front 9

Supply side economists

Back 9

Fiscal policy should focus on reducing tax rates as this gives individuals incentive to avaid liesure/tax avoidance schemes in order to work harder to make more money. This will cause supply to increase and will increase output and employment.

Front 10

Monetary policy tools

Back 10

1. Change required reserve ratio - this is the % of funds the bank is unable to loan. Changing this will cause potential change in money supply. Very seldom used.
2. Open market operations - buy and sell Govt. securities. Most used.
3. Change discount rate - this is the rate the Fed charges banks to borrow money. Decreasing this makes it more attractive for banks to borrow money meaning they are more likely to loan excess reserves increasing the money supply

Front 11

Equation of exchange

Back 11

Money supply X Velocity = GDP = Price X real output

Velocity and real output are relatively stationary so increase in price causes similar increase in money supply. (Real GDP may be used for P x Y on test.

Front 12

Anticipated vs unanticipated monetary policy

Back 12

Unanticipated (short run) - inflation, real output, and employment all increase. Nominal inters and real interest rated decline.

Anticipate (SR) & anticipated/unanticipated (long run) - Inflation and nominal interst will increase. All real economic indicators remain unchanged (ie real output, employment, and interest rates)

Front 13

Adaptive expectations vs. rational expectations

Back 13

Adaptive - Uses past performance to predict future (produces systematic errors)

Rational - uses all available information to preduct future. produces unsystematic (random) errors.

Front 14

Adaptive expectations vs. rational expectations (anticipated and unanticipated fiscal or monetary)

Back 14

Fiscal policy pretty much same impact as anticipated and unanticipated monetary policy. Remember that adaptive expectations go with unanticipated policy.

Front 15

Non activist views

Back 15

Monetary policy - maintain stable money supply growth and manage money supply with focus on stable prices
Fiscal policy - pursue balance budget throughout business cycle. (there is no consensus on how to accomplish this).

Front 16

Substitution effect Vs income effect

Back 16

Substitution effect when prices increase is always negative as consumers will use less of X and more of Y. (if given graph, sub effect is change in good X when points fall on initial indifference curve)

Income effect can be positive or negative depending on if good is normal or inferior.

Front 17

Economic Vs. accounting profits

Back 17

Economic profits include both implicit and explicit costs. Accounting profits include only explicit costs and are therefore higher than economic profits.