12 stock market chapter 29

7/28/2019 12 Stock Market chapter 29

1/21


2/21


3/21

CHAPTER29:

TheStockMa

rketandtheEconomy

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 3 of 21

STOCKS AND BONDS

BONDS

bond A document that formallypromises to pay back a loan underspecified terms, usually over a specific

time period.


4/21

CHAPTER29:

TheStockMa

rketandtheEconomy


STOCKS AND BONDS

STOCKS

stock A certificate that certifiesownership of a certain portion of a firm.

capital gain An increase in the value ofan asset.

realized capital gain The gain thatoccurs when the owner of an assetactually sells it for more than he or shepaid for it.


5/21

CHAPTER29:

TheStockMa

rketandtheEconomy


STOCKS AND BONDS

DETERMINING THE PRICE OF A STOCK

Things that are likely to affect the price of astock include:

What people expect its future dividendswill be.

When the dividends are expected to be

paid.

The amount of risk involved.


6/21

CHAPTER29:

TheStockMa

rketandtheEconomy


THE STOCK MARKET SINCE 1948

Dow Jones Industrial Average Anindex based on the stock prices of 30actively traded large companies. Theoldest and most widely followed index of

stock market performance.

NASDAQ Composite An index basedon the stock prices of over 5,000companies traded on the NASDAQStock Market. The NASDAQ markettakes its name from the NationalAssociation of Securities DealersAutomated Quotation System.


7/21CHAPTER29:

TheStockMa

rketandtheEconomy



Standard and Poors 500 (S&P 500)

An index based on the stock prices ofthe largest 500 firms traded on the NewYork Stock Exchange, the NASDAQ

Stock Market, and the American StockExchange.


8/21CHAPTER29:

TheStockMa

rketandtheEconomy



FIGURE 16.1 The S&P 500 Stock Price Index, 1948 I2005 II


9/21CHAPTER29:

TheStockMa

rketandtheEconomy



FIGURE 16.2 Ratio of After-Tax Profits to GDP, 1948 I2005 II


10/21CHAPTER29:

TheStockMa

rketandtheEconomy


STOCK MARKET EFFECTS ON THE ECONOMY

An increase in stock prices causes an increasein wealth, and consequently an increase inconsumer spending.

Investment is also affected by higher stockprices. With a higher stock price, a firm canraise more money per share to financeinvestment projects.


11/21CHAPTER29:

TheStockMa

rketandtheEconomy



The value of stocks in the United States fell byabout a trillion dollars between August 1987 andthe end of October 1987.

If the multiplier is 1.4, the total decrease in GDPwould be about 1.4 x $40 billion = $56 billion, orabout 1.4 percent of GDP.

The stock market crash of 1987 did not result ina recession in 1988 because households andbusiness firms did not lower their expectationsdrastically.

THE CRASH OF OCTOBER 1987


12/21CHAPTER29:

TheStockMa

rketandtheEconomy



THE BOOM OF 19952000

FIGURE 16.3 Personal Saving Rate, 1995 I2002 III


13/21CHAPTER29:

TheStockMa

rketandtheEconomy



FIGURE 16.4 Investment-Output Ratio, 1995 I2002 III


14/21CHAPTER29:

TheStockMa

rketandtheEconomy



FIGURE 16.5 Ratio of Federal Government Budget Surplus to GDP, 1995 I2002 III


15/21CHAPTER29:

TheStockMa

rketandtheEconomy



FIGURE 16.6 Growth Rate of Real GDP, 1995 I2002 III


16/21CHAPTER29:

TheStockMa

rketandtheEconomy



FIGURE 16.7 The Unemployment Rate, 1995 I2002 III


17/21CHAPTER29:

TheStockMa

rketandtheEconomy



FIGURE 16.8 Inflation Rate, 1995 I2002 III


18/21CHAPTER29:

TheStockMa

rketandtheEconomy



FIGURE 16.9 3-Month Treasury Bill Rate, 1995 I2002 III


19/21CHAPTER29:

TheStockMa

rketandtheEconomy



The Fed cares about the stock market to theextent that the stock market affects the thingsthat it ultimately cares about, namely, output,

unemployment, and inflation.

FED POLICY AND THE STOCK MARKET


20/21

CHAPTER29:

TheStockMa

rketandtheEconomy



Both stock market wealth and housing wealth

have important effects on the economy.

THE POST-BOOM ECONOMY


21/21

12 stock market chapter 29

Documents