Commerce Economics and Investment Revision

Comprehensive practice flashcards covering fundamental economic concepts, the circular flow model, government intervention, investment mechanisms, and financial regulations.

How is scarcity defined in economics?

Not having enough of a resource to satisfy the economy.

What three core questions must be addressed in every economy?

What to produce, how to produce, and whom to produce.

What are the four primary factors of production classified as scarce resources?

Land, Labour, Capital, and Enterprise.

What is meant by opportunity cost when choosing how to allocate limited resources?

The alternative forgone when sacrificing the opportunity to do something else.

In the Circular Flow of Income model, what is the role and effect of leakages versus injections?

Leakages remove money from the circular flow and decrease economic activity, whereas injections add or insert money and increase economic activity.

Which groups make up the private sector and domestic sector in the Circular Flow of Income model?

The private sector consists of Individuals/Households, Businesses, and Financial Institutions; adding Governments (Public Sector) forms the domestic sector.

What causes a movement along a curve versus a movement of the curve (shift) in supply and demand?

A movement along the curve is caused by a change in price (described as expansion or contraction), whereas a movement of the curve is caused by other factors (described as increase or decrease).

What formula is used to calculate Gross Domestic Product (GDP)?

$\text{GDP} = C + I + G + X$, where $C$ is household consumption, $I$ is investment, $G$ is government expenditure, and $X$ is net exports.

What constitutes a recession according to the notes?

$2$ consecutive quarters ($6\text{ months}$) of negative economic growth.

What three effects can economic growth have in Australia?

Higher inflation (rising prices and larger wage claims), increased demand for imports (a leakage), and rising inequality over time as economic growth flows toward higher income earners.

What is the difference between expansionary and contractionary fiscal policy?

Expansionary fiscal policy occurs when government spending exceeds taxation ($G > T$) to inject money, whereas contractionary fiscal policy occurs when taxation exceeds government spending ($G < T$) to withdraw money.

How does the Reserve Bank of Australia (RBA) conduct monetary policy through interest rates?

Lower interest rates lead to cheaper loans and more spending (stimulating growth and employment), while higher interest rates raise borrowing costs and lessen spending (slowing inflation).

What are the five main reasons for government intervention in the Australian economy?

Correcting market failure, promoting economic stability, redistributing income and wealth, protecting consumers and workers, and encouraging sustainable development.

What examples are provided for the direct government provision of essential goods and services?

Public healthcare services such as Medicare and the Pharmaceutical Benefits Scheme (PBS).

How is wealth defined in the investment decisions topic?

The total value of everything you own (your assets) minus what you owe (debts).

What specific income streams or returns are paid by bank accounts, shares, property, and managed funds?

Bank accounts pay interest, shares pay dividends, property pays rent, and managed funds pay distributions.

What is a bond?

A loan made to a government or company where they agree to pay regular interest and repay the original investment at a set date in the future.

What are the mandatory superannuation rules in Australia noted in the text?

Long-term retirement savings are mandatory for workers aged $18$ and over, requiring employers to contribute $12\%$ of an employee's ordinary time earnings into their superannuation fund.

What is lease/hire purchase financing, and what purchases is it best suited for?

Acquiring an income-producing asset by paying for it over time rather than upfront (with ownership potentially transferring after the final payment); it is best for cars, machinery, and expensive equipment.

What does a home loan equity option entail, and what is it best for?

Borrowing against the value (equity) built up in a home; it is best for funding large investments, such as renovating a property.

What distinguishes blue chip shares from growth shares?

Blue chip shares come from large, stable companies offering low risk and steady dividends, whereas growth shares reinvest profits to grow rapidly, offering returns through share price increases instead of dividends.

How do cyclical shares differ from defensive shares?

Cyclical share prices rise and fall in direct sync with the health of the economy, while defensive shares stay stable during economic downturns because they provide essential goods and services.

What is the difference between a market index and an Exchange Traded Fund (ETF)?

An index is not an investment you buy but a measure of how a group of investments performs, whereas an ETF is a fund tracking an index, commodity, or group of assets that trades on an exchange.

What core financial principle governs the relationship between risk and return?

Higher returns require accepting higher risks.

What is a green bond?

A loan to a government, company, or organisation where the money raised must be used to fund environmentally sustainable projects.

What is diversification in portfolio planning, and what does it do to risk?

Spreading investments across different asset types (shares, bonds, property); it does not eliminate risk, but spreads it.

How do protective tools such as stop-loss orders help mitigate investment risk?

They automatically sell an asset if its value drops to a set price, successfully capping potential losses.

Which specific law must lenders comply with regarding legal and regulatory requirements?

The National Consumer Credit Protection Act.

What are the primary professional responsibilities of financial advisors?

Understand client needs, provide suitable advice, disclose fees and conflicts of interest, act in the client's best interest, stay compliant with regulations, and keep client information confidential.

What are the three core regulatory roles of the Australian Securities and Investments Commission (ASIC)?

Regulating companies and financial markets, licensing and monitoring financial service providers, and protecting consumers and investors against scams, misleading conduct, and fraud.