ECO 3223 SPRING 2012 EVANS STUDY GUIDE FOR EXAM 1 CHAPTER 1 1 Know all of the Key Terms from this chapter Aggregate income the total income of factors of production land labor capitol in the economy Aggregate output the total production of all goods and services in the economy Aggregate price level the average price of goods and services in the economy Asset a financial claim or piece of property that is a store of value Banks financial institutions that accept money deposits and make loans Bonds a debt security that promises to make payments periodically for a specified period of time Budget deficit the excess of the government expenditure over tax revenues Budget surplus the excess of tax revenues over government expenditures Central bank the government agency that oversees the banking system and is responsible for the amount of money and credit supplied in the economy Common stock a security that is a claim on the earnings and the asserts of a company E finance a new means of delivering financial services electronically The fed Central banking authority of the United States Financial crises a major disruption in the financial markets that is characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms Financial intermediaries institutions that borrow funds from people who have funds saved and uses them as loans money Financial markets markets in which funds are transferred from people with surplus to people in need of Fiscal policy policy that involves decisions about government spending and taxation Foreign exchange market market in which exchange rates are determined Foreign exchange rate price of one currency in another country GDP the value of all final goods and services produced in the economy during the course of a year Monetary policy management of money supply and interest rates Monetary theory theory that relates changes in the quantity of money to to changes in the economy Money money supply anything that is generally accepted in payment of goods or services or in the Inflation the condition of a continually rising price level Inflation rate the rate of change of the price level usually measured as a percentage change per year Interest rate the cost of borrowing or the price paid for the rental of funds repayment of debits Recession a period where the aggregate output is declining Security a clam on the borrower s future income that is sold by the borrower to the lender Stock a security that is a claim on the earnings and assets if a company Unemployment rate the percentage of the labor force not working 1 2 What role do financial markets play in the economy Financial markets bond stock markets are crucial to promoting greater economic efficiency by channeling funds from people who have excess funds to people in need of funds 3 4 5 6 7 8 9 Know the structure of a balance sheet assets liabilities net worth Assets Liabilities Equity Net worth Owners Equity What is the interpretation of the movement of interest rates depicted in Figure 1 Pg 4 While all three rates tend to move in the same direction the spread among the three rates fluctuates From Figure 2 explain the sharp rise in the DJIA between 1990 2000 the steep declines in 2001 and 2007 Pg 6 1990 2000 The internet boom and the influx of new companies making lots of money 2001 stock market collapse aided by 9 11 2007 Housing market bubble burst What is the key piece of information regarding M2 growth and recessions as conveyed by Figure 3 Pg9 The rate of money growth has declined before every recession indicating that changes in the money might be a driving force behind business cycle fluctuations However not every decline in the rate of money growth is followed by a recession We discussed the crossover of M2 and the GDP Deflator depicted in Figure 4 Be able to explain this Pg10 The price level and the money supply generally rise together This data seems to indicate that a continuing increase in the money supply might be an important factor in causing the continuing increase in the price level that we call inflation Under which President did the budget surplus of 1999 2001 occur and why did the budget subsequently shift again into a deficit This happened during President Clinton s term The budget went back into deficit because The terror attacks of 9 11 the war in Iraq and the fiscal stimulus package in 2009 How would you calculate any growth rate t today t 1 a year earlier How would you calculate the real rate of economic growth from one period to the next 04 05 are example deflator should be given Growth Rate xt xt 1 Real econ growth05 Deflator04 x100 nominal05 X xt xt 1 Deflator05 2 You would then take the Xt variable and plug it into the growth rate function to get your answer How would you inflate an historic value to a current value Inflation Current value CPI today Previous historic value X CPI prior year 10 What metric is most widely used to evaluate the U S stock market s performance The DJIA Dow Jones Industrial Average CHAPTER 2 1 Understand all of the chapter s Key Terms Adverse selection problem caused by asymmetrical info the before The people who are most undesirable are people who want to engage in risky activity Asset transformation process of turning risky assets into less risky assets Create sell assets with low risk to gather income to purchase assets with higher risk Asymmetric information the unknown knowledge that each person has during a transaction about the other person Brokers agents for investors match buyers and sellers Capital wealth either financial or physical that is employed to produce more wealth Capital market a financial market in which longer term debt and equity instruments are traded Currency paper money and coins Dealers people who link buyers with sellers by buying and selling securities at stated prices Default a situation where someone who has a debit security cannot pay when the instrument matures Diversification a collection of assets that do not move together reduces risk portfolio Dividends periodic payments made by equities to shareholders Economies of scale the reduction in transaction costs per dollar of transaction as the size of transactions increases Equities claims to share in the net income and assets of a corporation common stock Eurobond bonds denominated in a currency other than that of the country in which they are sold Eurocurrencies a variant of the Eurobond foreign currencies deposited in banks outside the