SIE STC Ch. 19
During which phase of the business cycle will an investor experience a decrease in purchasing power? A) Peak B) Expansion C) Contraction D) Trough
A) Peak
Which of the following items is considered a coincident economic indicator? A) The industrial production index B) The S&P index C) Housing starts D) Expenditures for capital goods
A) The industrial production index
Deflation will generally cause existing bond prices to: A) Remain the same B) Increase C) Decrease by a high percentage D) Decrease by a low percentage
B) In order to stimulate the economy the FRB often lowers interest rates, which causes existing bond prices to rise. Long-term zero coupon bonds tend to perform best during periods of deflation.
The Federal Reserve Board is attempting to talk down rates. This practice is referred to as: A) Utilizing open market operations B) Moral suasion C) Reducing the discount rate D) Increasing repurchase agreements
B) Moral Suasion
An increase in which of the following will likely result in the Federal Reserve Board implementing an easy money policy? A) Inflation B) Unemployment C) Consumer Price Index D)Personal income
B) Unemployment
If the FRB engages in repurchase agreements, which of the following statements is TRUE? A) The money supply has been decreased. B) The money supply has been increased. C) Short-term yields will likely increase. D) The FRB is initially selling securities.
B) When the FRB conducts a repo, it is initially purchasing securities and the immediate result is an increase in money supply. This action tends to reduce short-term yields.
If an investment's distribution increases by 3% while inflation has increased by 3%, what's the impact on the investment's purchasing power? AIt decreases. BIt stays the same. CIt increases. DIt increases by 3%.
B. When an investment's distribution increases by the same amount as inflation, the purchasing power remains the same. If inflation outpaces an investment's return, the purchasing power will decrease. If the rate of inflation is lower than an investment's return, the purchasing power will increase
The investments that tend to perform the WORST during periods of inflation are: ABonds BMutual funds CETFs DGold and silver
Bonds tend to perform the worst during periods of inflation since rising interest rates will result in falling bond prices and a decrease in the purchasing power of the interest payments. Mutual funds, ETFs, and gold and silver commodities tend to be good investments for a person seeking to offset inflation
When watching for signs of inflation, which of the following is one of the most relevant statistics? A) The Standard & Poor's 500 Index B) The balance of payments C) The Consumer Price Index D) The federal budget deficit
C) CPI
The economic theory stating that government intervention in the marketplace is necessary for controlling economic growth is known as: A) Supply-side economics B) Monetary theory C) Keynesian theory D) The Dow Theory
C) Keynesian Theory
Which of the following is the likely result of persistent deflation? AA decrease in interest rates BA decrease in the level of inflation CA decrease in bond prices DAn increase in the value of equities
Deflation is considered a reduction in the general level of prices. Deflation leads to lower interest rates, which results in higher bond prices. Equities tend to perform well during periods of inflation, not deflation.
Historically, a decline in the Real GDP for two consecutive quarters is an indication that the economy is in a(n): AExpansion BRecovery CRecession DDepression
Gross Domestic Product (GDP) is the total value of goods and services produced by the U.S. economy over a given period. It is one of the most significant measures of economic activity. Traditionally, economists considered a decline in Real GDP for two consecutive quarters to indicate a recession. Real GDP is the Gross Domestic Product adjusted for inflation.
Which of the following statements is TRUE if interest rates are lower in the U.S. than they are overseas? AU.S. investors will invest in the United States. BU.S. investors will invest overseas. CThe value of the dollar will strengthen. DForeign goods will become more attractive.
If interest rates are lower in the U.S. than they are overseas, this will typically lead to U.S. investors investing overseas. This will decrease the demand for the dollar, which results in a weaker dollar and foreign goods being less attractive.
The Federal Reserve Board's Open Market Committee (FOMC) buys and sells which of the following securities most often to accomplish its aims? AAgency bonds BTreasury bonds CTreasury notes DTreasury bills
The Federal Reserve Board's Open Market Committee (FOMC) purchases and sells U.S. government securities in the open market to accomplish the Federal Reserve Board's aims of influencing the money supply. The securities most often used are Treasury bills.
Which of the following is the rate that's charged when a member bank borrows from the Federal Reserve? APrime rate BDiscount rate CFederal funds rate DCall rate
The discount rate is the rate that the Federal Reserve charges when its lends money to a member bank. The prime rate is the rate that commercial banks charge their best corporate clients. The federal funds rate is the rate charged for overnight loans between member banks. The call rate is what commercial banks charge on loans to broker-dealers for margin purposes.
real interest rate formula
Yield - Inflation = Real Interest
During periods of easy money when interest rates are declining, yield curves tend to: A) Slope upward from the shorter to the longer maturities B) Slope downward from the shorter to the longer maturities C) Remain flat D) Slope downward from shorter to intermediate and then upward to longer maturities
A) Slope upward from the shorter to longer maturities
What is the basic balance sheet equation? A) Total Assets = Total Liabilities + Stockholders' Equity B) Total Assets = Total Liabilities - Stockholders' Equity C) Total Assets + Total Liabilities = Stockholders' Equity D) Total Liabilities = Total Assets + Stockholders' Equ
A) The balance sheet equation is: Total Assets = Total Liabilities + Stockholders' Equit
During periods of deflation, the FRB will likely: A) Purchase securities in the open market B) Encourage a rise in interest rates C) Sell securities in the open market D) Issue new securities
A. In an effort to stimulate the economy, the FRB will attempt to move into a period of easy money. Easing money (making it available) may be accomplished by purchasing securities in the open market. On the other hand, selling securities, issuing new securities, or encouraging higher interest rates will have an opposite effect.
Cyclical stocks tend to be most influenced by: ARegulatory changes BChanges in economic trends CChanges in the political climate DExchange rates
Cyclical stocks tend to follow changes in the economy. Examples of cyclical stocks include stocks of companies in basic industries (e.g., construction firms, machine tool companies, and transportation companies).
Which of the following will occur if U.S. imports are increasing? AThe dollar will weaken. BYields will decrease. CThe money supply will increase. DGross Domestic Product will decrease.
D. When imports exceed exports, it means that more money is being spent than received. This typically leads to a decrease in the production of U.S. goods (i.e., a decrease in GDP). Monetary policy may then be implemented to use strategies designed to strengthen the dollar, increase yields, and decrease the money supply.
Who enacts fiscal policy? AThe Federal Reserve Board BThe Comptroller of the Currency CThe FDIC DCongress
Fiscal policy is enacted by Congress. Fiscal policy is the use of the government's power to tax and spend. Control of the economy by changing the levels of government spending and taxation can either put money into the economy, or take money out of the economy. Monetary policy is carried out by the Federal Reserve Board's use of its available options for increasing or decreasing the supply of money and credit in the economy.
All of the following characteristics would be associated with a growth company, EXCEPT that it has a: AHigh price/earnings ratio BHigh dividend payout ratio CHigh amount of research and development costs DWide trading range for the price of its stock
Growth companies will normally retain most of their earnings to enable them to continue their growth. They would typically have low dividend payout ratios, high research and development expenses, and high price/earnings ratios, as well as a wide trading range for the stock.
Money received by a corporation when it sells its stock above its par value is called: AExcess capital BEarned surplus CPaid-in capital DStockholders' capital
Money received by a corporation when it sells its stock above its par value is called capital surplus or paid-in capital. This is different from earned surplus (retained earnings), which is profits that have been retained by the company and have not been paid as dividends.
Which FRB tools determines the amount of money that member banks must keep on deposit? ADiscount rate BReserve requirements CRegulation T DOpen market operations
The FRB sets the reserve requirements for member banks, which determine the amount of money that banks must keep on deposit. When banks have excess funds they tend to lend them to other banks that have deficits.
A stock that typically performs in parallel to the changes in the economy is referred to as a: ACyclical stock BDefensive stock CGrowth stock DValue stock
The performance of a cyclical stock normally runs parallel to changes in the economy. Examples of cyclical stocks include machine tool companies, construction firms, as well as transportation and energy companies.
Which of the following is the rate that commercial banks charge their best corporate clients? APrime rate BDiscount rate CFederal funds rate DCall rate
The prime rate is the rate commercial banks charge their best corporate clients. The discount rate is the rate that the Federal Reserve charges when lending to member banks. The federal funds rate is the rate charged for overnight loans between member banks. The call rate is what commercial banks charge on loans to broker-dealers for margin purposes.
Which of the following choices is NOT a leading economic indicator? A) Building permits B) Consumer expectations C) Prime rate D) Stock prices
The prime rate is the rate that banks charge their best credit customers and is considered a lagging (not leading) economic indicator. The other three choices are all considered leading economic indicators.
