Series 6

The President would like to improve the economy by allowing business greater freedom to obtain funds for the pursuit of commercial projects and business opportunities. He might appoint Federal Reserve governors wh?o

favors lower interest rates

To encourage business activity, the FOMC should?

increase their purchases of U.S. Treasury securities in the open market, which increases the amount of money available to banks to lend out.

The Consumer Price Index (CPI) is the most commonly used tool to?

measure the rate of inflation

A client invests $10,000 into a large-cap growth fund. Five years later, the account value is $15,000. At the same time, the CPI has increased 25%. In terms of constant (real) dollars, the client's account is worth?

more than $10,000, but less than $15,000

With regard to the suitability for a customer of buying shares of an international stock fund, what will likely have a positive effect on NAV?

A weakening dollar and a strengthening economy abroad

What is the affect of dramatically increasing interest rates in the United States?

High U.S. interest rates will attract foreign investment money into the United States. This will have the effect of strengthening the dollar and thus weakening foreign currencies compared to the dollar. American investors will also be encouraged to invest in American debt securities.

An increase in the Federal Reserve Board's (FRB) reserve requirement has what effects?

If the FRB increases the (cash) reserve requirements for banks, banks will have less money to lend customers, money will be tight, interest rates will rise, and the economy will contract.

Which interest rate would be of most direct concern to a business enterprise looking to borrow money for next year's business operations?

The published prime rate is an average of prime rates from representative regions around the country and is the minimum that a business enterprise must plan on paying for a business loan.

The Federal Reserve Board can manage the money supply with what tools?

1. bank reserve requirements 2. discount rate 3. open market operations (trading government securities)

Which policy measure might a supply-side economist urge the government to implement if business activity needs to increases?

Reduce record keeping and reporting requirements imposed on business. Supply-side economists concentrate on reducing the portion of cash flow and other assets that businesses (the suppliers) must allocate to matters other than the conduct of business.

When a member bank of the Federal Reserve System borrows from the Federal Reserve, it would pay?

The discount rate - set by the FRB to designate the rate at which member banks can borrow from the Fed.

If the FRB decides to attempt to curb inflation, it can?

Tighten the money supply and Raise the discount rate.

Two consecutive quarters of economic decline is termed?

recession - GDP declines for six consecutive months (2 quarters)

The call rate, or broker call loan rate

the charge on loans to brokers for margin loans

discount rate

the charge on loans to member banks by the New York Federal Reserve Bank

The Federal Reserve Board would most likely implement a tight money policy if?

the consumer price index is rising rapidly. The CPI measures inflation which would case the FRB to implement a tight or restrictive monetary policy.

What FRB action would cause interest rates to increase?

An increase in the reserve requirements - anything the FRB does to reduce (or tighten) the money supply will increase interest rates

Which interest rate is determined by a vote rather than market forces?

Discount rate - set by vote of the Federal Reserve Board

What is the CORRECT order of the stages in a business cycle?

Expansion, peak, contraction, trough

How does deflation affect corporate bond prices?

In a period of deflation, interest rates are falling. When interest rates drop, bond prices increase.

If the FRB decides to tighten the money supply, which of the following would the Fed be most likely to do?

Raise the discount rate, which discourages borrowers and shrinks the money supply.

In assessing the economy's productivity and the general health of the currency, the chief measures used include?

The CPI to measure inflation and the GDP to measure productivity

What methods are used by the FRB to control the money supply?

The discount rate, the reserve requirement, and the FOMC

Which rate is the most volatile?

The federal funds rate, which changes at least daily, is the most volatile of the rates

Some purposes of the Federal Reserve are?

To influence the money supply to promote the growth of the economy and to prevent or ease inflation

The economy is in a depression when?

a decline in real output of goods and services (GDP) lasts for six consecutive quarters (18 months and generally associated with high unemployment

A trough occurs

at the bottom of the decline

Who sets fiscal policy?

congress and the President

When comparing the change in the GDP from one year to another, each year's GDP should be converted into?

constant dollars - To retain an accurate comparison of one year to the next, it must be measured with constant dollars (inflation-adjusted dollars)

If the FRB changes policy the _____________ is the key indicator?

discount rate

The discount rate is set by:

the Federal Reserve Board.

An economic expansion occurs when?

the GDP (Gross Domestic Product) increases

The economy is in a state of decline when?

the GDP falls from one period to the next

The high point in an economic cycle is known as?

the Peak

When the value of the U.S. dollar appreciates relative to other currencies -

the U.S. dollar purchases more foreign goods and foreign currencies purchase fewer U.S. goods. Therefore, travel abroad and foreign goods cost less while U.S. exports decrease as U.S. goods become more expensive to foreign purchasers.

prime rate

the base rate on corporate loans at large U.S. money center commercial banks; rate a bank charges its most creditworthy commercial customers for business loans

Federal Open Market Committee (FOMC) activities affect?

the money supply, interest rates, and reserves that member banks must maintain

federal funds rate

the rate charged on reserves traded among commercial banks for overnight use in amounts of $1 million or more