Unit 6 Basic Economic

Gross domestic product (GDP) is increasing. Real interest rates are relatively high. Consumer sentiment is strong, as are auto and retail sales. Labor productivity is declining. What state of the business cycle is the economy likely experiencing?

Expansion to peak

what is inflation commonly caused by?

increased consumer demand

________ is not included in the Conference Board's list of economic indicators

GDP

Which of the statements below best describes why a normal yield curve is positively sloped?

Investors demand higher interest when lending their money for longer periods.

The Conference Board releases information about the economy on a periodic basis. Included are a number of different indicators. These indicators can be used to predict how the economy as a whole might change. Which of the following would be considered a leading indicator?

Stock prices as measured by a broad index such as the S&P 50

what broker-dealers pay on stock market collateral pledged for margin accounts.

call loan collateral

Whenever money from a foreign source enters the United States, it becomes a

credit item in the U.S. balance of payments

refers to the difference between yields of bonds with similar maturities but different ratings.

credit spread

The contraction phase of the business cycle is least likely accompanied by

decreasing unemployment

obacco industry and producers of nondurable consumer goods (e.g., toilet paper and basic clothing) are considered

defensive industries

relies on government spending and is affected by conditions not related to our personal incomes

defensive industry

what does the federal reserve increase when the economy becomes overhead with double digit inflation

discount rate

when a bank borrows from the Federal Reserve, it does so at the

discount rate

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

inertial inflation

A bond analyst is plotting a yield curve and notices that short-term maturities have higher yields than intermediate and long-term maturities. This is an example of

inverted yield curve

various macroeconomic theories and models of how aggregate demand strongly influences economic output and inflation

keynesian

average duration of unemployment, leading or lagging?

lagging

Average weekly initial claims for unemployment insurance, leading or lagging?

leading

the stock market and market indices are ____________ indicators of the economy's corporate and financial performance.

leading

what type of indicator is stock indices and manufacturing?

leading

The amount of money in the economy determines the overall price level over time; therefore, the Federal Reserve should control the growth of the amount of money in the economy in a gradual and predictable way.

monetarist economic position

Among the responsibilities of the Federal Reserve (the Fed) is influencing the supply of money and credit in the economy. When performing this function, adjusting which of the following is not a tool at its disposal

the prime rate

The federal government's fiscal policy can have a great impact on

the securities markets

business cycle occurs at the end of a contraction phase when businesses are operating at their lowest capacity levels.

trough

If disposable personal income has fallen steadily over the past year, which of the following is most likely going to be affected?

Automotive industry

measures the rate of increase or decrease in a broad range of prices, such as food, housing, medical care, and clothing.

CPI

The stock market, which anticipates economy activity, is a

LEADING INDICATOR

Which of the following statements regarding the economics of fixed-income securities are true?

Short-term interest rates are more volatile than long-term rates Long-term bond prices react more than short-term bond prices given a change in interest rates

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

U.S. Treasury securities.

what is a good hedge against deflation (economic slump)?

US treasuries

that excludes certain volatile goods prices.

core inflation

maintains future earnings that are likely to withstand an economic downturn

defensive stock

keynesian theory is a _______economic theory

macro

Reserve requirements, discount rates,, and money supply are components of what

monetary policy by the fed

All of the following are leading indicators for economic growth except

prime rate

higher interest rates tend to do what to corporate growth and earnings

slow down

who carries out monetary policy?

the fed reserve

When a bank that is a member of the Federal Reserve System borrows from another member bank, the rate that is charged is known as

the federal funds rate.

Overnight loans between banks are made at

the prime rate

shows the relationship between short-term and long-term interest rates

yield curve

A common measurement used to evaluate attitudes regarding future economic conditions is the difference in yields between U.S. Treasury bonds and corporate bonds. This is known as

yield spread

While listening to a commentator on cable TV, you hear the statement, "The flight to quality has ended." What would you expect the effect of this to be?

yield spreads are narrowing

A frequently used metric by analysts is the yield, or credit, spread. Common methods of computing this would be comparing which of these?

Bonds of similar quality and different maturities Bonds of different quality and similar maturities

The average cost of goods and services (market basket) purchased by consumers, compared to those same goods and services purchased during a base period

CPI

Which of the statements below best describes why a normal yield curve is positively sloped?

Investors demand higher interest when lending their money for longer periods

Which school of economists encourages a government to spend money to move the economy into an expansionary phase?

Keynesian

Which of the following statements describes the federal funds rate?

The federal funds rate represents the interest charged on reserves, traded among commercial banks for overnight use, in amounts of $1 million or more.

Which of the following is not a characteristic of expansionary monetary policy?

The reserve requirement will be increased

the most common yield curves are drawn using what?

US Treasuries using short term t-bills to the long bonds

when interest rates (discount rate) rise, what happens to the prime rate?

also increases

the prime rate is set by who?

banks

The federal government finances its deficit spending by selling

bonds

starts by attempting to find superior performing companies, regardless of the industry

bottom up

average prime rate, leading or lagging?

lagging

Yield curve analysis plays an important role as a benchmarking and forecasting tool for the future direction of interest rates. In most cases, this analysis involves examining bonds of

single issue

The federal government's fiscal policy is its policy for managing

taxation, spending, and debts

Which of the following is a component of U.S. fiscal policy?

taxing and budgeting

Core inflation is best described as an inflation rate

that excludes certain volatile goods prices.

the discount rate is controlled by who?

the Fed

aggregate demand

the amount of goods and services in the economy that will be purchased at all possible price levels

_________ spreads generally indicate a concern about the economy

wider

During an economic downturn, one would expect to see

higher unemployment

Generally, an inverted yield curve is caused by

investors buying long-term bonds and selling short-term bonds.

is CPI leading or lagging?

lagging

how often is CPI computed?

monthly

_________ spreads generally indicate economic optimism

narrow

Manufacturing and trade sales is a __________ indicator

coincident

what type of indicator is industrial production?

coincident

Increases in personal income reflect current, not future, activity and are therefore considered a _______________

coincident indictor

To compare GDP from one year to another, and thus to compare the amount of actual economic activity, economists use

constant dollars - to elimiate distortins caused by inflation

Which of the following would probably not be an attractive investment during periods of rising inflation?

corporate bonds

It is during periods of economic contraction that interest rates tend to

decline

Which of these is a definition of inflation?

decrease in the value of the monetary unit

When a bank borrows from another bank on an overnight basis

federal funds rate

If the yield curve is positive (sloping upward), this means that long-term interest rates are

higher

When the yield curve is positively sloped (and thus normal), long-term bonds carry

higher interest rates than short-term bonds of the same quality

how does the FRB attempt to slow the economy decrease the money supply?

increase interest rates

do economists use agricultural employment as an indicator?

no

Under the concept of inertial inflation,

prices tend to increase at a steady rate until the system receives an economic shock

inflation deals to a decrease in what?

purchasing power of the monetary unit