Series 65 - Unit 6 Quiz #2

Interest rates are declining. An analyst would be most likely to state that the business cycle is in which stage? A) Contraction B) Expansion C) Peak D) Trough

A. Contraction It is during periods of economic contraction that interest rates tend to decline. They tend to rise during expansions.

All the pundits are predicting bad times ahead—not only a recession but a period where prices actually fall (deflation). If they are right, the best place for your client would probably be A) U.S. Treasury securities. B) gold. C) common stock. D) real estate.

A. U.S. Treasury securities.

XYZ Aircraft Manufacturing Corporation, based in the United States, announces a multibillion-dollar order for its new jumbo jet from Fly Airlines, a Japanese-based carrier. When the sale is completed, there will be A) a credit to the current account of the United States. B) a debit to the current account of the United States. C) no effect on the balance of trade. D) a credit to the current account of Japan.

A. a credit to the current account of the United States. Whenever money from a foreign source enters the United States, it becomes a credit item in the U.S. balance of payments.

Under the concept of inertial inflation, A) prices tend to increase at a steady rate until the system receives an economic shock. B) prices tend to remain the same until the system receives an economic shock. C) inflation and deflation alternate at regular intervals. D) core inflation is a better measure of the actual inflation rate than the CPI.

A. prices tend to increase at a steady rate until the system receives an economic shock. Inertial inflation is an economic condition where the rate of price increases reaches a stable equilibrium and stays there until a shock to the system occurs, at which time, the rate of inflation changes. It is true that most economists view the core inflation rate as a more accurate measure of true inflation than the CPI, but that has nothing to do with inertial inflation.

A securities analyst's approach is to look at the overall economy and try to forecast which industry will outperform. Then, the analyst searches for those individual companies within that industry that appear to have the best expected return and adds those to their recommended list. In so doing, this analyst is using A) the top-down approach. B) the optimal portfolio approach. C) the bottom-up approach. D) the business cycle approach.

A. the top-down approach. This is the basic approach of top-down analysis—start with the big picture and narrow it down to the most attractive individual stocks.

Generally, an inverted yield curve is caused by A) rising interest rates. B) investors buying long-term bonds and selling short-term bonds. C) declining interest rates. D) investors buying short-term bonds and selling long-term bonds.

B. investors buying long-term bonds and selling short-term bonds. First of all, what is an inverted yield curve? That is what we get when the yields on short-term debt are higher than the yields on long-term debt. Next, what happens to make the yield of a bond go up? When the price of the bond falls, the yield rises. Conversely, when the price of a bond rises, the yield falls. Finally, what causes the price of a security, any security, to go up or go down? Supply and demand in the marketplace. That is, when there are more buyers than sellers, that demand pushes the price up. Likewise, if there are more sellers than buyers, the price will go down. That's the basic economics of supply and demand. When investor demand is for long-term bonds, the price of those bonds will rise, causing the yields to fall. And, when investors are selling short-term bonds, that selling pressure causes the price to drop and the yields to increase. That is what has happened in this question: more demand for the long-term, resulting in higher prices and lower yields, and more supply for the short-term, resulting in lower prices and higher yields.

When a bank's reserve account is running low, it might choose to borrow from the Fed. When doing so, the bank will be charged A) the call loan rate. B) the discount rate. C) the federal funds rate. D) the prime rate.

B. the discount rate. When a bank borrows from the Federal Reserve, it does so at the discount rate. When borrowing from another bank, it is at the federal funds rate. The prime rate is charged by the banks to their stronger borrowers, and the call loan rate is what broker-dealers pay on stock market collateral pledged for margin accounts.

If the dollar weakens, which of the following statements is true? A) U.S. exports will fall. B) Foreign securities denominated in their domestic currency decrease in value to the U.S. investor. C) A rise in U.S. interest rates might strengthen the dollar. D) The dollar buys more foreign currency.

C. A rise in U.S. interest rates might strengthen the dollar. If U.S. interest rates rise, foreign investors would invest in U.S. dollar-denominated securities, thereby increasing the demand for dollars and causing the dollar to strengthen.

The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a lagging economic indicator? A) Manufacturers' new orders for consumer goods B) Building permits (housing starts) C) Average prime rate D) Nonagricultural employment

C. Average prime rate Both the S&P 500 and housing permits are leading economic indicators, as is the measure of hours worked because it reflects changes in the average workweek during the current period. The average prime rate is a lagging indicator because, in an economic downturn, the longer rates stay low, the quicker the recovery should be.

Country A develops a new product that is in high demand around the world. The likely effect of this would be A) a decrease in the value of the currency of Country A. B) a trade deficit for Country A. C) a trade surplus for Country A. D) an increase in the income tax rates of Country A.

C. a trade surplus for Country A. When exports exceed imports (the likely case here), it leads to a trade surplus. Invariably, that causes a positive balance of payments, which has the tendency to increase the value of that country's currency relative to others. There is no way to know how this new product will impact the tax legislation of Country A.

During an economic recession, which of the following items will most likely increase? A) Interest rates B) Inflation C) Consumer confidence and profits D) Bond prices

D. Bond prices During a recessionary period, inflation and interest rates generally decline. This causes bond prices to increase because they are inversely related to the change in interest rates. Consumer confidence and profits are declining at this point in the economic cycle.

An analyst uses a stock selection method that involves analyzing a specific corporation, followed by evaluating where it fits in its industry and then viewing the overall economy. The term that best describes this method is A) capital asset pricing model. B) efficient frontier. C) top-down. D) bottom-up.

D. bottom-up. The bottom-up method of stock selection goes from micro to macro—that is, identifying the specific company and then working up through the overall economy. It is the opposite of top-down.