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fundamental analysis

the analysis of determinants of value such as earning prospects

exchange rate

rate at which domestic currency can be converted into foreign currency

gross domestic product

the measure of the economy's total production of goods and services (market value of g/s produced over a period of time)

unemployment rate

ratio of the number of people classified as unemployed to the total labor force; measured extent to which economy is operating at full capacity


rate at which general level of prices for goods and services is rising

budget deficit

the amount by which government spending exceeds government revenues


beliefs influence how much consumption and investment will be pursued and affect aggregate demand for g/s

factors that determine level of interest rates

supply of funds from savers, demands for funds from business, government's net supply and/or demand for funds, expected rate of inflation

nominal interest rate

add expected inflation rate to equilibrium rate

demand shock

an event that affects the demand for goods and services in the economy

positive demand shocks

reductions in tax rates, increases in money supply, increases in gov't spending, increases in foreign export demand

supply shock

an event that influences production capacity and costs in economy

fiscal policy

the use of government spending and taxing for the specific purpose of stabilizing the economy

monetary policy

actions taken by the Board of Governors of the Federal Reserve System to influence the money supply or interest rates

open market operations

Fed buy/sells Treasury bonds for its own account; tool of monetary policy

discount rate

interest rate the Fed charges banks on short-term loans; tool of monetary policy

reserve requirement

the fraction of deposits that banks must hold as cash on hand or as deposits with the Fed; tool of monetary policy

federal funds rate

interest rate at which banks make short-term, usually overnight, loans to each other; tool of monetary polciy

supply side policies

treat the issues of the productive capacity of the economy, goal is to create env in which wokers and owners of capital have max incentive and ability to produce/develop goods, focus on incentives and marginal tax rates

business cycle

recurring patterns of recession and recovery


transition from the end of an expansion to the start of a contraction


transition point between recession and recovery

cyclical industries

industries with above-average sensitivity to the state of the economy

defensive industries

have little sensitivity to the business cycle

leading economic indicators

economic series that tend to rise or fall in advance of the rest of the economy

coincident indicators

indicators that tend to change directly with the economy

lagging indicators

indicators that tend to follow the lag of economic performance

NAICS codes

classification of firms into industry groups using numerical codes to identify industries

operating leverage

division between fixed and variable costs

financial leverage

use of borrowing

sector rotation

investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts

industry life cycles

stages through which firms typically pass as they mature

start up stage

rapid and increasing sales growth; new tech or product; difficult to predict which firms will be industry leaders

consolidation stage

stable sales growth, industry leaders emerge, performance of firms will closely track performance of overall industry

maturity stage

product has reached its potential for use by consumers; slowing sales growth; cash cows

relative decline

minimal or negative sales growth

determinants of competition

threat of entry, rivalry between existing competitors, pressure from substitute products, bargaining power of buyers/sellers

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