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Principles of Finance 2e

Summary

Principles of Finance 2eSummary

Summary

3.1 Microeconomics

Microeconomics is the study of individual economic decision makers. In the marketplace, buyers and sellers come together. The buyers are represented by a downward-sloping demand curve; lower prices are associated with a larger quantity demanded. The sellers are represented by an upward-sloping supply curve; higher prices are associated with a large quantity supplied. The point of intersection of the supply and demand curves determines the equilibrium price and quantity.

3.2 Macroeconomics

Macroeconomics looks at the economy as a whole. It focuses on broad issues such as inflation, unemployment, and growth of production. The consumer price index is a common measure of inflation. Unemployment equals the percent of the labor force that is without a job but looking for work. Gross domestic product is a measure of the growth of production and growth of the economy.

3.3 Business Cycles and Economic Activity

The business cycle is the repeated pattern of the economy experiencing expansion, a peak, contraction, and a trough. During the expansion, the economy is growing and real GDP is rising. During a contraction, also known as a recession, the economy is slowing down.

3.4 Interest Rates

The interest rate is the rental price of money. The nominal interest rate is the quoted, or stated, rate of interest. The real rate of interest equals the nominal interest rate minus the inflation rate. Lenders charge a risk premium to compensate them for lending to higher-risk borrowers.

3.5 Foreign Exchange Rates

A foreign exchange rate is the price of a currency in terms of another currency. If a currency will purchase more of a foreign currency than it would previously, the purchasing currency is said to have appreciated. If a currency will purchase less of a foreign currency than it would previously, the purchasing currency is said to have depreciated.

3.6 Sources and Characteristics of Economic Data

One of the most comprehensive sources of economic data is the FRED database, maintained by the Federal Reserve Bank of St. Louis. Over 765,000 time series of data are available. In addition to being viewable in graphical and text form on the FRED site, the data is easily downloaded into an Excel spreadsheet for analysis.

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