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FNCE 101 Cheat Sheet

# FNCE 101 Cheat Sheet - -Business Cycles from peak to...

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- Business Cycles : from peak to peak/trough to trough; recession->trough- >expansion->peak -comovement: many econ variables move together -procyclical, countercyclical, leading/lagging variable - Inflation : growth rate in the aggregate price level Π t = (p t – p t-1 )/p t-1 -Fisher equation r = i – Π; r e = i – Π e ; (1 + r) = (1 + i)(1 + Π e ) NIPA accounts & economic indicators -GDP: mkt val of final goods newly produced w/i nation GNP = GDP + NFP where NFP = payments to domestically owned factors located abroad – payments to foreign factors located domestically 1) income approach 2) expenditure approach: Y = C + I + G + NX 3) product approach – mkt val of final goods, capital + inv - Savings : income in excess of consumption over a given period of time (flow variable) Private saving = (Y + NFP – T + TR + INT) – C Govt saving = (T – TR – INT) – G National saving = S pvt + S govt = Y + NFP – C – G S pvt = I + (-S govt ) + CA where CA = NX + NFP Use-of-savings: I = S – (NFP + NX) = S pvt + S govt - CA -CA > 0: US net lender to foreigners vice versa -Wealth: sum of total savings at a given point in time (stock variable) -Fama’s fallacy that S govt ↓ crowds out I; false assumption that Spvt and CA don’t change (only stay same during full capacity) Asset prices and economic news -yield curve: term structure of interest rates driven by expect -price of a stock is the present value of the variable dividends it pays out: P t = = + + 1 ) 1 ( s s s t DIV ρ P t = + + + + 1 1 1 t t P DIV = -Gordon’s long-run growth model P stock = DIV/( -g) dividends grow at constant rate g < p -declines with higher discount rate (discounting effect), increases with faster dividend growth (dividend effect)
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