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The Stock Market and the Economy
age?
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Bonds
Bonds have several properties:
Face value, or the amount the buyer
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Bonds
Bonds have several properties:
Maturity date, or the date when the
funds are paid back to the lender (although the lender may sell the bond before maturity).
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Bonds
Bonds have several properties:
A fixed payment, known as a coupon,
known in advance, no matter what happens to interest rates, stock prices, and so on.
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Bonds
Bonds have several properties:
Instead of the coupon responding to a
change in the interest rate, it is the price of the bond that changes.
The bond is worth less when interest
rates rise.
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Bonds
15-yr. Bond Face Value: $10,000 Coupon rate: 10% Bank Account requires only: $5,000 with interest rate of 20%
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Stocks
A stock is a certificate that certifies ownership of a certain portion of a firm. When a firm issues new shares of stock, it does not add to its debt. Instead, it brings in additional owners who supply it with funds.
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Stocks
Stockholders have a right to select the management of the firm and to share in its profits. Unlike bonds or direct borrowing, stocks do not promise a fixed annual payment. Returns depend on company performance. If profits are high, the firm may pay dividends.
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Stocks
A capital gain is an increase in the value of an asset. A realized capital gain occurs when the owner of an asset actually sells it for more than he paid for it.
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Stocks
Most stocks bought and sold on the stock market daily are not newly issued but issued long ago, when the firm goes public.
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will be
When the dividends are expected to be
paid
The amount of risk involved
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30 actively traded large companies. The oldest and most widely followed index of stock market performance.
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over 5,000 companies traded on the NASDAQ stock market. The NASDAQ market takes is name from the National Association of Securities Dealers Automated Quotation System.
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the largest 500 firms traded on the New York Stock Exchange, the NASDAQ stock market, and the American Stock Exchange.
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The value of stocks in the United States fell by about a trillion dollars between August 1987 and the end of October 1987. If the multiplier is 1.4, the $1 trillion decrease in wealth in 1987 implies a $40 billion lower level of spending in 1988, or about 1.4 percent of GDP.
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However, as the life-cycle theory of consumption predicts, households smooth their consumption over time, which means that the decrease in wealth would not have reduced consumption in the current year by the full amount of the decrease in wealth, but by cutting consumption a little each year.
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The stock market crash of 1987 did not result in a recession in 1988 because households and business firms did not lower their expectations drastically. Since the initial decrease in wealth turned out to be temporary, the negative wealth effect was not as large as anticipated.
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prices leads to a $0.04 increase in consumption and investment, and a multiplier of 1.4, then: 0.04 x $2.5 trillion x 1.4 = $140 billion increase in GDP, or 1.5% of GDP.
The growth rate of GDP would have been around 2.8% instead of 4.5%
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government surplus would not have been as high, since taxable income and profits would have been less.
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been no stock market correction in 2001 and 2002, and the growth rate of real GDP would have been higher.
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rate would have remained at about 5.5 percent. It was 4% during the boom.
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bill rate and interest rates as a whole would have been lower.
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the stock market to the extent that the market affects the things that it ultimately cares about, namely output, unemployment, and inflation.
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