Personal Finance CH 15

Macroeconomics

The study of economic factors that are reflective of the entire economy, i.e. Inflation rate, GDP, and unemployment rate

Microeconomics

The study of factors that influence individual and business decision-making

Inflation represents _____

an increase in the general level of prices of goods and services

Measures of inflation

Consumer price index (CPI), Producer price index (PPI), Inflation rate

Inflation rate formula

(p1-p0)/p0

Disflation

a slowdown in the RATE of inflation

Deflation

a decrease in the overall price levels of goods and services

Gross Domestic Product (GDP)

The total final output of a country by its citizens and foreigners in the country.

Nominal GDP

Value of goods and services in current prices

Real GDP

Value of goods and services at base year prices

Positive GDP growth =

Expanding economy

Negative GDP growth = 

Contracting economy

Recession

Decline in real GDP for atleast 2 quarters

Interest rate is the price borrowers ____

pay to borrow money

Interest rates are influenced by ____

the demand for and the supply of loanable funds

Inom=

Ireal + IP

unemployed refers to _____

individuals who are 16 and older, not working, and are making an effort to seek employment

Full employment

When approximatly 95% employment of the labor force is employed

Business Cycle

Expansion, Peak, Contraction, Trough

Monetary Policy

established by the chairman of the Federal Reserve and the Federal Open Market Committee (FOMC)

3 goals of the Federal Reserve

1. Maintain price levels 2. Maintain long-term economic growth 3. Maintain full employment

Fiscal Policy

the use of government taxation and spending to influence a nation’s economy.

3 goals of congress (fiscal)

1. Maintain price levels 2. Maintain long-term economic growth 3. Maintain full employment

Tools of Fiscal Policy

Taxes, Spending

Monetary Policy

the process by which a country’s central bank (in the U.S., the Federal Reserve) manages the money supply and interest rates to influence overall economic activity.

4 tools of the Federal Reserve to implement monetary policy

Open Market operations, Reserve requirement, Discount/ Federal funds rate, Excess reserve deposits

Open market operations

Fed sells securities to the open market for cash. Result: Money supply decreases and interest increases. Or they buy back securities and have an inverse result

Reserve requirement

the minimum percentage of customer deposits that a commercial bank is legally required to keep on hand—either in its vaults as cash or on deposit with the Federal Reserve—rather than loaning out.

Discount rate

the interest rate the Federal Reserve charges commercial banks and other financial institutions when they borrow money directly from the Fed’s “discount window.”

Federal Funds Rate

the interest rate at which banks and credit unions lend reserve balances to each other overnight.

Excess Reserves

Financial institutions have an incentive to keep excess reserves on deposit with the FED if the FED increases interest rates paid on those reserves

Tighten excess reserves

increase int. rate pd.

Expand excess reserve

Decrease int. rate

Fiscal tighten

Decrease spending

Fiscal expand

Increase spending

The external Legal Environment / The truth in lending act

a. requires written disclosure of all finance charges and the costs of credit b. MAX liability for a lost or stolen credit card $50 per card

The Fair Billing Act

a. Requires the creditor to mail the bill 21 days prior to the due date b. Timely resolution of billing errors and disputed charges

The Fair Credit Reporting Act

a. Gives us the right to review and correct errors on the credit report b. Corrections must be shared among credit rating agencies c. Entitles consumers to one free credit report per year from each of the 3 big credit bureaus

Fair Debt Collection Practices Act

a. Protects consumers from deceptive or abusive collection practices e.g. debt collector can only contact the consumer between 8 am and 9 pm

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

a. Instituted a “means test” for declaring chapter 7 bankruptcy.

Chapter 7

For wage earners to discharge debts by liquidation

Chapter 11

For companies to reorganize and adjust debts

Chapter 13

For wage earners to repay a portion of debts with income

Assets exempt from creditors

Roth IRAs up to $1 mil, education funds contributed to a qualified tuition plan

Debt not discharged in bankruptcy

Most student loans, child support

The credit card accountability, responsibility, and disclosure act of 2009

a. A cosigner is required to issue a card to anyone under 21 unless they can provide income and assets sufficient to cover a balance. b. Prevents certain rate increase practices c. Easy-to-understand disclosures mandated

Federal Deposit Insurance Corporation (FDIC)

Insures up to $250,000 per depositor, per legal account ownership, per financial institution

4 categories of legal accounts ownership

Individual, Joint, Testamentary, Retirement

Securities Investor Protection Corporation (SIPC)

When a broker-dealer becomes insolvent, they will step in and return the investors’ cash and securities 

Financial Industry Regulatory Authority (FINRA)

A self-regulatory organisation for all security firms (created 2007)

Employee Retirement Income Security Act (ERISA)

Designed to protect employee savings from creditors and the plan from sponsors (employees)