Chapter 2 Economic Factors

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Consumer Price Index (CPI)

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A measure of the average change in prices paid by consumers for goods and services over time; commonly used to track inflation.

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Economic Cycle

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The natural fluctuation of the economy between periods of expansion (growth) and contraction (recession). Also called the business cycle.

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Gross Domestic Product (GDP)

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The total value of all goods and services produced within a country over a specific period; a key indicator of economic health.

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Economic Indicators

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Statistics used to evaluate the overall health of the economy (e.g., GDP, CPI, unemployment rate, etc.). They can be leading, lagging, or coincident.

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Currency Valuation

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The value of one currency in terms of another, influenced by interest rates, inflation, trade balance, and market supply and demand.

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Balance of Trade

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The difference between a country's exports and imports of goods and services. A trade surplus means exports > imports; a trade deficit means the opposite.

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Supply-Side Economics vs. Keynesian Economics

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Supply-side emphasizes tax cuts and deregulation to boost production; Keynesian economics supports government spending to stimulate demand during downturns.

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Federal Reserve System (The Fed)

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The central banking system of the United States, which manages monetary policy, supervises banks, and helps maintain financial stability.

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Federal Open Market Committee (FOMC)

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A branch of the Federal Reserve responsible for setting U.S. monetary policy, primarily through open market operations (buying/selling government securities).

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Money Supply and Interest Rates

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As the money supply increases, interest rates tend to fall; as it decreases, interest rates rise. The Fed uses this relationship to influence economic activity.