lecture8-partii
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ASB-‐3215-‐ Advanced Investment
Theory and Practice Lecture 8-‐ Part II Macroeconomic and Industry Analysis
Dilek Ulu
Bangor Business School
2013/2014
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Key Economic Statistics
Ê GDP, is the measure of the economy’s total production of goods and services.
Ê Unemployment rate, is the percentage of total labor force yet to find work.
Ê Inflation, is the rate at which the general level of prices rise.
Ê Budget deficit, is the difference between government spending and revenues.
Ê Interest rate, is the price of money.
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Fiscal and Monetary Policy
Ê Fiscal Policy refers to the government’s spending and tax actions to stimulate or slow the economy.
Ê Monetary Policy refers to the manipulation of the money supply to affect the macroeconomy through money supply’s impacts on interest rates.
Ê Monetary Policy Tools Ê Open Market Operations (OMO)
Ê Discount Rate Ê Required Reserves
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Monetary Policy Tools
Ê Open Market Operations: Central bank changes the money supply by buying or selling securities for its own account.
Ê Discount rate: is the interest rate Central Bank charges banks on short term loans. Reduction in the discount rate signals a more expansionary policy.
Ê Required Reserves: Central Bank can change the effective money supply by changing the reserve requirements of the banks. For example , in case of a reduction in required reserves, banks make more loans which in turn increases the money supply.
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The Business Cycle
• A peak is the transition from the end of an expansion to the start of a contraction.
• A trough occurs at the bottom of a
recession just as the economy enters a recovery.
• If sales of an industry is sensitive to macroeconomic conditions, those industries are called cyclical industries.
• In contrast to cyclical industries, defensive industries have little sensitivity to the business cycle.
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Sensitivity to the Business Cycle
Ê Sensitivity of Sales
Ê Operating Leverage (division between fixed and variable costs) – Firms with high fixed costs can have large swings in their profits in response to change in business conditions.
Ê Financial Leverage (the use of borrowing). High interest payments increase the sensitivity of profits to business conditions.