Business Administration - Accounting & Financial Planning ECN502 Lecture Notes - Lecture 6: Hyperinflation

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greenmuskrat329

1 Jun 2018

School

Seneca College

Department

Business Administration - Accounting & Financial Planning

Course

Business Administration - Accounting & Financial Planning ECN502

Professor

Sandra Wellman

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The Measurement of Inflation

• Inflation is measured by changes in the index of the

average level of prices.

• Consumer price index: an index that measures changes in

the prices of consumer goods and services.

• Producer price index: an index that measures changes in

the prices of producer goods.

The Measurement of Inflation

• Implicit price deflator: an index that measures changes in

the average level of prices of all final goods and services.

• Core CPI: excludes fuels, vegetables, cigarettes,

mortgage interest and indirect taxes.

The Measurement of Inflation

• Rule of 70: a formula used for determining the number

of years required for a number to double for a given rate

of change.

• N = 70/rate of inflation

• Where N = number of years it takes for the price

level to double.

Degrees of Inflation

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Document Summary

The measurement of inflation: implicit price deflator: an index that measures changes in, core cpi: excludes fuels, vegetables, cigarettes, the average level of prices of all final goods and services. mortgage interest and indirect taxes. Degrees of inflation whether it has been anticipated or not: the effects of inflation depend on the severity and on, creeping inflation ( < 8% annually, galloping inflation (between 15 and 50% annually, hyperinflation (100% or more annually) Winners and losers: winners value has decreased. Debtors: they repay their debt with money whose. Producers: prices tend to increase faster than the. Owners of real assets: the value of real assets cost of inputs increase. Winners and losers: losers owned, the money is worth less. Creditors: when they are repaid the debt they are. People with fixed income: their income does not. Owners of financial assets: the purchasing power of change as inflation takes place. their assets declines.

Related Questions

You are given the following information on the Consumer Price Index (CPI) in three countries: US Japan UK Dec. 2010 138 1205 442 Dec. 2015 163 1335 557 In December 2010 the Yen/$ spot rate was Â¥83.0025/$, and the $/Â£ ex-rate was $1.5595/Â£. a. Calculate the average, annual compounded inflation rate in each country from Dec. 2010 to Dec. 2015, using a time value of money calculation on your financial calculator, based on the formula: PV (1 + i)n = FV. Round to 2 decimal places, e.g. 3.45%. b. If relative Purchasing Power Parity (PPP) is holding, should the USD have appreciated or depreciated against the Yen and Pound during this period? Why? How much per year for each currency? Explain in an essay with full sentences and use the relative PPP equation (from the lecture notes) in your answer: e = %INFus - %INFF c. If relative PPP holds, the ex-rates as quoted above will change annually according to the difference in inflation rates. In that case, what should the Â¥/$ and $/Â£ ex-rates (do not reverse the ex-rates) have been in December 2015? Assume that the exchange rate changes annually at a rate equal to the difference in inflation rates, and use a time value of money calculation on your financial calculator, based on the formula PV (1 + i)n = FV.

QUESTION 3

Suppose the price of X is fixed below equilibrium price. This will lead to

1.
excess supply of X

2.
excess demand of X

3.
no shortage of X

4.
none of the above

2 points
QUESTION 4

Which of the following is an example of positive externality?

1.
a fancy restaurant in a private university

2.
a fancy restaurant in San Diego

3.
a not-so-fancy restaurant in San Diego

4.
subsidized school lunch in public schools of San Diego

2 points
QUESTION 5

Which of the following will not change a demand curve?

1.
price of substitute goods

2.
price of complementary goods

3.
technology

4.
all of the above

2 points
QUESTION 6

Which of the following would increase GDP?
1.
You buy 100 shares of Wal-Mart stock.
2.
Your car is destroyed by a fire, and you purchase a two-year-old car to replace it.
3.
Your car is damaged by a fire, and you hire a mechanic to repair it.
4.
Your car is damaged by a fire and you reduce then number of hours you work to repair the car yourself.
2 points
QUESTION 7

When the expenditure approach is used to measure GDP, the major components of GDP are:
1.
consumption, investment, indirect business taxes and depreciation.
2.
employee compensation, rents, interest, self-employment income, and corporate profits.
3.
employee compensation, corporate profits, depreciation, and indirect business taxes.
4.
consumption, investment, government consumption and gross investment, and net exports.
2 points
QUESTION 8

Suppose that the nominal value of GDP increased by 5 percent during a given year, but real GDP decreased by 3 percent. Which of the following best explains these events?
1.
the money supply decreased by approximately 5 percent.
2.
prices fell by approximately 5 percent.
3.
prices increased by 2 percent.
4.
the real productive capacity of the economy increased by approximately 5 percent.
2 points
QUESTION 9

The Consumer Price Index
1.
Is calculated once a quarter
2.
measures the cost of a market basket of goods and services that is consumed by a typical urban household
3.
uses a base year of 2005
4.
measures a market basket of goods and services that is updated annually

Question 18

1. Which of the following does an efficient portfolio do?

1. Maximizes risk for a given return.

2. Minimizes risk for a given return.

3. Maximizes return for a given level of risk.

4. Minimizes return for a given level of risk.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 19

1. The security market line does not:

	a.	Indicate the relationship between risk and return.
	b.	Relate the market return and beta to a stock's return.
	c.	Identify the optimal portfolio for the investor.
	d.	Use beta coefficients as a measure of risk.

3 points

Question 20

1. Mutual funds ____ realized capital gains and income (for example, dividends received):

	a.	Retain.
	b.	Reinvest.
	c.	Distribute.
	d.	Distribute or reinvest.

2 points

Question 21

1. An index fund limits its portfolio to:

	a.	High quality securities.
	b.	Stocks that respond to changes in the consumer price index.
	c.	Stocks included in an aggregate measure of stock prices.
	d.	Stocks of firms in a particular industry.

2 points

Question 22

1. Mutual funds with beta coefficients greater than 1.0:

	a.	Have outperformed the market.
	b.	Have underperformed the market.
	c.	Have more systematic risk than the market.
	d.	Have less systematic risk than the market.

3 points

Question 23

1. Which of the following will tend to cause a stock's price to fall?

1. The firms beta declines.

2. The firms beta increases.

3. The risk-free rate declines.

4. The risk-free rate increases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 24

1. The use of P/E ratios to select stocks suggests that:

	a.	High P/E stocks should be purchased.
	b.	Low P/E ratio stocks are overvalued.
	c.	A stock should be purchased if it is selling near its historic low P/E.
	d.	A stock should be purchased if it is selling near its historic high P/E.

2 points

Question 25

1. What does the efficient market hypothesis require?

1. Financial markets to be competitive.

2. Prices to adjust rapidly.

3. Prices of undervalued securities to fall.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

Question 26

1. Which of the following does the strong form of the efficient market hypothesis suggest?

1. Inside information will not lead to superior investment results.

2. Inside information will lead to superior investment results.

3. Studying financial statements will not lead to superior investment results.

4. Studying financial statements will lead to superior investment results.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 27

1. Which of the following is the least broad-based measure of stock prices?

	a.	NASDAQ market index.
	b.	Dow Jones industrial average.
	c.	S&P 500 stock index.
	d.	AMEX market value index.

3 points

Question 28

1. What is dollar-cost averaging?

	a.	Periodically buying a round lot of stock.
	b.	Periodically investing a specified dollar amount in a stock.
	c.	A means to increase the average cost basis.
	d.	A means to ensure a positive return.

2 points

Question 29

1. Stock dividends cause:

	a.	The price of a share of stock to rise.
	b.	The price of a share of stock to fall.
	c.	The value of the firm to rise.
	d.	The value of the firm to fall.

2 points

Question 30

1. Which of the following occurs when a stock has a two-for-one split?

	a.	The price of the stock doubles.
	b.	The firm's assets increase.
	c.	The firm's liabilities decrease.
	d.	The par value of the stock is reduced.

3 points

Question 31

1. Dividend reinvestment plans offer which of the following advantages?

1. Deferment of federal income taxes.

2. A convenient means to accumulate shares.

3. Dollar-cost averaging.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	2.

3 points

Question 32

1. When the Federal Reserve seeks to expand the money supply, it:

	a.	Sells securities.
	b.	Buy securities.
	c.	Runs a deficit.
	d.	Runs a surplus.

2 points

Question 33

1. The sum of cash, currency, and demand deposits is:

	a.	M1.
	b.	M2.
	c.	M3.
	d.	M4.

3 points

Question 34

1. If the Federal Reserve lowers the target federal funds rate:

	a.	The discount rate rises.
	b.	Liquidity in the banking system is increased.
	c.	Security prices fall.
	d.	Required reserves are also decreased.

3 points

Question 35

1. The anticipation of inflation suggests that the investor should:

	a.	Buy bonds.
	b.	Anticipate higher interest rates.
	c.	Avoid real estate investments.
	d.	Sell stocks of gold companies.

3 points

Question 36

1. The current ratio is unaffected by:

	a.	Using cash to pay a dividend.
	b.	The collection of an account receivable.
	c.	Selling inventory for a profit.
	d.	Selling bonds and using the funds to finance inventory.

2 points

Question 37

1. Which of the following are true as the debt ratio increases?

1. Fewer assets are debt financed.

2. More assets are debt financed.

3. The ratio of debt equity increases.

4. The ratio of debt equity decreases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

2 points

Question 38

1. The technical approach suggests that future stock prices are forecasted by:

	a.	Past stock rates.
	b.	Financial ratios.
	c.	Accounting statements.
	d.	Monetary policy.

2 points

Question 39

1. The Dogs of the Dow strategy:

	a.	Forecasts the direction of the Dow Jones averages.
	b.	Suggests buying the Dow stocks with the highest dividend yields.
	c.	Outperforms the S&P 500.
	d.	Suggests buying the lowest-priced Dow stocks.

3 points

Question 40

1. Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?

	a.	Accounting and finance.
	b.	Finance and psychology.
	c.	Physics and finance.
	d.	Finance and marketing.

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Business Administration - Accounting & Financial Planning ECN502 Lecture Notes - Lecture 6: Hyperinflation

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