Top- down approach
international economy affects firm prospects
performance in countries and regions can be highly variable
- Political risk
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... [Show More] Exchange rate risk: Changes the prices of imports and exports
Gross Domestic Product (GDP)
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Unemployment Rate
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Inflation Rate
rate at which general level of prices for goods and services is rising
Interest Rates
high interest rates reduce present value of future cash flows
Budget Deficit
Government spending in excess of government revenues
Sentiment
Consumer optimism/pessimism are determinants of economic performance
Supply-Side Policies
government attempts to increase productivity and shift aggregate supply to the right
Assumption: Producers are the engine of economic development
product market policies: deregulation, promotion of free trade, small business grants
labor market policies: education and skill training, income tax rates, unemployment benefits
Demand-Side Policies
government attempts to increase demand and shift aggregate demand to the right
Assumption: Consumers are the engine of economic development.
Fiscal Policies: Use of government spending and taxing
Monetary policies: actions taken by federal reserve to influence money supply or interest rates
How does fiscal policy stimulate economy?
government budget > more spending than taxation > budget deficit > expansionary fiscal policy > more economic growth
government budget > less spending than taxation > budget surplus > contractionary fiscal policy > less economic growth
Federal fund rate
established by the Federal Open Market Committee
serve as base rates
customer can borrow Base + X%
customer can lend at Base - Y%
Current federal fund rate = .12%, assume that X% = 3%, Y% = .10%
What if federal fund rate increases to 2%?
customer can borrow 3.12% (3%+.12%)
customer can lend .02% (.12%->10%)
customer can borrow 3%+2%= 5%
saving increases > customer spending decreases
customer can save 2%-.10% = 1.9%
borrowing decreases > investment decreases
output decreases, inflation may fall
Fiscal policy (government spending and taxation)
a more direct way to stimulate or slow the economy.
Monetary policy (money supply and interest rates
is easier to implement
Discuss tools of government's "demand-side" policy
fiscal policy which is the use of government spending and taxation.
more spending than taxation > more economic growth
less spending than taxation > less economic growth
monetary policy which are actions taken by the federal reserve to influence money supply or interest rates
federal fund rates
NAICS (North American Industry Classification System) or other codes
allow classification of firms into industry groups using numerical codes to identify industries
Sensitivity to the Business Cycle
1. sensitivity of sales: necessities vs. discretionary goods
2. operating leverage
3. financial leverage
Cyclical Industries
have above average sensitivity to state of economy β>1
Defensive Industries
have below-average sensitivity to state of economy β<1
Which of the following are not examples of defensive industries?
A. Food producers
B. Durable goods producers C. Pharmaceutical firms
D. Public utilities
B. Durable goods producers [Show Less]