What is Quantitative Easing? Quantitative easing (QE) is a monetary policy of printing money, that is implemented by the Central Bank to energize the economy. The Central Bank creates money to buy government securities from the market in order to lower interest rates and increase the money supply. These economic conditions will then trigger financial institutions…
What is Cyclical Unemployment? Cyclical unemployment is a type of unemployment where labor forces are reduced as a result of business cycles or fluctuations in the economy, such as recessions (periods of economic decline). When the economy is at its peak or experiences continuous growth, the rate of cyclical unemployment is low. During the period,…
What is a Market Economy? A market economy is defined as a system in which the production of goods and services is determined by the changing desires and abilities of market participants. It allows the market to operate freely in accordance with the law of supply and demand, set by individuals and corporations rather than…
What is a Command Economy? Most economic activity in countries around the world exists on a spectrum that ranges from a pure free market economy to an extreme command economy. The command economy is a type of system where the government plays the principal role in planning and regulating goods and services produced in the…
What is the Law of Supply? The law of supply is a basic principle in economics that asserts that, assuming all else being constant, an increase in the price of goods will result in a corresponding direct increase in the supply thereof. The law works similarly with a decrease in prices. The law of supply…
What is Residual Income? Residual income (RI) can mean different things depending on the context. When looking at corporate finance, residual income is any excess that an investment earns relative to the opportunity cost of capital that was used. However, in the context of equity valuation, residual income refers to the net income after accounting…
What is a Natural Monopoly? A natural monopoly is a market where a single seller can provide the output because of its size. A natural monopolist can produce the entire output for the market at a cost lower than what it would be if there were multiple firms operating in the market. A natural monopoly…
What is the Laffer Curve? The Laffer Curve is a theoretical explanation of the relationship between tax rates set by a government and the tax revenue collected at that tax rate. It was introduced by American supply-side economist, Arthur Laffer. The concept was not invented by Laffer; there were other antecedents from the 14th-century writings…
What is the Phillips Curve? The Phillips Curve is the graphical representation of the short-term relationship between unemployment and inflation within an economy. According to the Phillips Curve, there exists a negative, or inverse, relationship between the unemployment rate and the inflation rate in an economy. History of the Phillips Curve In 1958, Alban William…
What is the “Invisible Hand”? The concept of the “invisible hand” was invented by the Scottish Enlightenment thinker, Adam Smith. It refers to the invisible market force that brings a free market to equilibrium with levels of supply and demand by actions of self-interested individuals. The concept was first introduced by Smith in “The Theory…
