Unit 7.3 Economic Indicators (Series 65)

A significant increase in importing of goods into the United States would have what effect on the strength of the U.S. dollar? A) Weaken. B) Strengthen. C) No effect. D) Fluctuation both ways.

Answer: A Importing tends to weaken the dollar because it indicates an outflow of money from the United States to foreign countries. Much of this outflow is in the form of debt. When our debt (deficit in balance of payments) gets too high, there is international concern about our ability to pay our debts and a reluctance in accepting U.S. dollars as payment for goods. Therefore, the dollar weakens. Reference: 7.3.4 in the License Exam Manual.

To reflect a more accurate picture of economic results, gross domestic product is adjusted: A) to include bank reserves. B) downward by the balance of payments. C) for inflation. D) to match foreign GDP.

Answer: C By adjusting GDP for inflation, one can measure economic activity with less distortion. A constant dollar adjustment is made to remove the effects of inflation. Reference: 7.3.1 in the License Exam Manual.

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. New orders for durable goods is what kind of economic indicator? A) Coterminous. B) Lagging. C) Leading. D) Coincident.

Answer: C New orders for durable goods are a leading economic indicator. Reference: 7.3.6.1 in the License Exam Manual.

Increases in which of the following indicators are regarded as predictors of the level of business activity? A) Building permits. B) Personal incomes. C) Corporate profits. D) Levels of inventories.

Answer: A Increases in building permits are indicative of increased, future business activity and therefore are considered a leading economic indicator. Increases in personal income reflect current, not future, activity and is therefore considered a coincident indicator. Increases in inventories indicate that goods are not being sold in anticipated quantities and functions as a disincentive to manufacturing. Buildup in inventories is a lagging economic indicator. Corporate profits are not included in the Conference Board's list of economic indicators. Reference: 7.3.6.1 in the License Exam Manual.

In comparing the change in the GDP from one year to another, to arrive at an accurate figure, each year's GDP should be converted to which of the following? A) Constant dollars. B) International dollars. C) Dollars in terms of gold bullion. D) Dollars valued by exchange with foreign currencies.

Answer: A The GDP must be adjusted for inflation to get an accurate comparison from one year to the next. Reference: 7.3.1 in the License Exam Manual.

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

Answer: C Whenever money from a foreign source enters the United States, it becomes a credit item in the U.S. balance of payments. Reference: 7.3.4 in the License Exam Manual.

You note that an article in "The Wall Street Journal" points out that the money supply has been increasing. This economic measure is a: A) lagging indicator. B) coincident indicator. C) GDP deflator. D) leading indicator.

Answer: D Among the list of leading indicators is the Money Supply. Reference: 7.3.6.1 in the License Exam Manual.

Which of the following is considered the most accurate method of measuring GDP? A) Constant dollars. B) Actual dollars. C) Eurodollars. D) As a function of GNP.

Answer: A Constant dollars are mathematically adjusted to remove the effects of inflation, so when economists compare the gross domestic product of one period with that of another, they measure economic activity rather than inflation. Reference: 7.3.1 in the License Exam Manual.

All of the following actions will increase the deficit in the U.S. balance of payments EXCEPT: A) Americans buying Japanese cars. B) purchase by foreigners of U.S. securities. C) investments by U.S. firms abroad. D) U.S. foreign aid.

Answer: B A debit in the U.S. balance of payments occurs when the country pays out more abroad than it takes in. This occurs when the U.S. imports more than it exports, invests money abroad, or sends money to foreign countries in the form of foreign aid. Reference: 7.3.5 in the License Exam Manual.

All of the following are leading indicators for economic growth EXCEPT: A) average weekly initial claims for state unemployment compensation. B) average prime rate. C) stock prices as measured by the S&P 500 index. D) orders for durable goods.

Answer: B The average prime rate is a lagging indicator. The duration of unemployment is also a lagging indicator, but the number of initial unemployment claims is a leading indicator. The S&P 500 index and orders for durable goods are leading economic indicators. Reference: 7.3.6.1 in the License Exam Manual.

Which of the following is a NOT a leading economic indicator? A) New housing permits. B) Money supply. C) Orders for durable goods. D) Duration of unemployment.

Answer: D The average amount of time it takes for an unemployed person to find a new job is a lagging indicator, not a leading one. Employment is usually one of the last things to pick up as the economy enters a period of expansion. Layoffs are one of the last resorts for companies when the economy turns down. Reference: 7.3.6.1 in the License Exam Manual.

If the U.S. dollar has fallen relative to foreign currencies, which of the following statements are TRUE? I. U.S. exports are likely to rise. II. U.S. exports are likely to fall. III. Foreign currencies buy fewer U.S. dollars. IV. Foreign currencies buy more U.S. dollars. A) I and III. B) II and III. C) II and IV. D) I and IV.

Answer: D When the U.S. dollar loses value compared to a foreign currency, the same amount of the foreign currency now buys more dollars. As a result, U.S. goods are cheaper in terms of that foreign currency, which means that the foreign country and its residents tend to buy more U.S. products and U.S. exports rise. Reference: 7.3.4 in the License Exam Manual.

During an economic downturn, one would expect to see A) a rising CPI B) manufacturer's inventories to decline C) bond prices fall D) higher unemployment

Answer: D When the economy enters the contraction portion of the business cycle, employers cut costs by letting employees go, thus increasing the number of unemployed persons. With less money in the economy, the CPI will generally remain level or even decline. Manufacturing sales will slow, so their inventories will rise as it takes longer to move product and, we can expect a reduction in interest rates, which will cause bond prices to rise. Reference: 7.3.2 in the License Exam Manual.

If the U.S. dollar has been appreciating against foreign currencies, all of the following statements are true EXCEPT: A) U.S. goods become more expensive in foreign countries. B) foreign goods become cheaper in the United States. C) U.S. exports become more competitive. D) the U.S. dollar buys more of foreign currencies.

Answer: C The U.S. exports will cost more to foreigners and become less competitive. The dollar is worth more in terms of foreign currencies and will purchase more foreign goods per dollar. Reference: 7.3.4 in the License Exam Manual.

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) Average prime rate. B) S&P 500. C) Housing permits issued. D) Hours worked.

Answer: A 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 of time. The average prime rate is a lagging indicator because, in an economic downturn, the longer rates stay low, the quicker the recovery should be. Reference: 7.3.6.3 in the License Exam Manual.

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

Answer: A 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. Reference: 7.3.4 in the License Exam Manual.

Over time, a country's trade deficit will lead to a decline in the value of its currency because: A) the country's imports will exceed exports creating selling pressure on its currency. B) the country's exports will exceed its imports. C) the money supply will decrease. D) domestic goods will become too expensive for foreigners to buy.

Answer: A When a country's imports exceed its exports, a trade deficit will occur which causes selling pressure on its currency, therefore lowering its exchange rate against other currencies. When a country's currency declines in price relative to other currencies, exports tend to increase over time because they become less expensive in terms of foreign currency, thus reversing the trade deficit. Reference: 7.3.5 in the License Exam Manual.

If the value of the U.S. dollar decreases: I. domestic goods become more competitive. II. domestic goods become less competitive. III. foreign goods become more competitive. IV. foreign goods become less competitive. A) I and IV. B) I and III. C) II and III. D) II and IV.

Answer: A When the U.S. dollar decreases against other currencies, foreign goods become more expensive, whereas our domestically produced goods are cheaper for those buying with foreign currencies. Reference: 7.3.4 in the License Exam Manual.

Which of the following statements best describes what will happen when the value of the American dollar rises in relationship to foreign currencies? A) Foreign goods and services will become less expensive for Americans. B) The risk of stagflation will increase. C) Shares of foreign stock will be worth more in terms of American dollars. D) Foreign goods and services will become more expensive for Americans.

Answer: A When the value of the dollar rises, it will buy more foreign money, making foreign goods and services less expensive for Americans. Because foreign securities are valued in foreign currencies, shares of foreign stock will be worth fewer American dollars when the value of the dollar increases. Reference: 7.3.4 in the License Exam Manual.

Which of the following would lead to a credit to our foreign account balance? A) Loans made to foreign governments. B) Interest received on money loaned to foreign business enterprises. C) Dividends paid on foreign investment in the U.S. D) Services provided by foreign companies.

Answer: B Our foreign accounts balance will be credited whenever "foreign" money comes in rather than going out. Interest received from foreigners represents money coming into the U.S. while the other choices represent money going out. Reference: 7.3.4 in the License Exam Manual.

To determine the amount of change in the GDP from one year to another, both years' GDP should be converted into: A) the current dollar price of gold bullion. B) constant dollars. C) the exchange value of the dollar, as compared with major foreign currencies. D) international depositary receipts.

Answer: B To compare GDP from one year to another, and thus to compare the amount of actual economic activity, economists use constant dollars to eliminate distortions caused by inflation. Reference: 7.3.1 in the License Exam Manual.

Which of the following securities are the most interest-rate sensitive? I. Utility stocks. II. Growth stocks. III. Preferred stocks. IV. Common stocks. A) III and IV. B) I and III. C) I and II. D) II and IV.

Answer: B Utility and preferred stocks are the most interest-rate sensitive. Utility stocks are interest-rate sensitive because they are highly leveraged. Preferred stocks are interest-rate sensitive because they have a set dividend and fluctuate in price like bonds when interest rates change. Reference: 7.3.3 in the License Exam Manual.

If the U.S. dollar is devalued relative to other world currencies, which of the following will occur with respect to the prices of goods? I. U.S. exports will be more price-competitive overseas. II. U.S. exports will be less price-competitive overseas. III. Foreign imported goods will be more price-competitive with ours. IV. Foreign imported goods will be less price-competitive with ours. A) II and III. B) II and IV. C) I and IV. D) I and III.

Answer: C If the dollar goes down in relation to foreign currencies, then foreigners can buy more U.S. goods with the same amount of their currency, making U.S. goods more competitive in foreign markets. This same movement in the dollar means it takes more dollars to buy the same amount of foreign goods in domestic markets, making foreign goods less competitive with U.S. goods. Reference: 7.3.4 in the License Exam Manual.

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) S&P 500. B) Housing permits issued. C) Hours worked. D) Prime interest rate.

Answer: D 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 of time. The prime interest rate is a lagging indicator. Reference: 7.3.6.3 in the License Exam Manual.

If the value of the U.S. dollar increases against other currencies, which of the following are TRUE? I. U.S. exports are more competitive in foreign countries. II. U.S. exports are less competitive in foreign countries. III. Foreign imports into the U.S. are more competitive in U.S. markets. IV. Foreign imports into the US are less competitive in U.S. markets. A) I and III. B) I and IV. C) II and IV. D) II and III.

Answer: D If the value of the U.S. dollar increases against other currencies, then U.S. exports cost more for foreign markets to purchase. This also makes foreign imports less expensive for U.S. consumers. Reference: 7.3.4 in the License Exam Manual.

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 coincident economic indicator? A) Stock market prices as measured by the S&P 500. B) Machine tool orders. C) Agricultural employment. D) Industrial production.

Answer: D Industrial production is a coincident indicator. The stock indices and manufacturing orders are leading indicators; economists do not use agricultural employment as an indicator. Reference: 7.3.6.2 in the License Exam Manual.

The gross domestic product (GDP) for the United States is composed of the: A) national debt. B) balance of payments. C) sum of all goods and services, imports, and foreign investment. D) sum of all consumer goods, capital goods, and services produced in the United States and net exports to other countries.

Answer: D The (GDP) is comprised of all consumer goods, capital goods, services produced in the United States, and net U.S. exports (exports minus imports). Reference: 7.3.1 in the License Exam Manual.

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? A) Gross domestic product. B) CPI for services. C) Industrial production. D) Stock prices as measured by a broad index such as the S&P 500.

Answer: D The stock market, which anticipates economy activity, is a leading economic indicator. Industrial production is a coincident, or current, economic indicator. CPI for services is a lagging indicator. GDP is not included in the Conference Board's list of economic indicators. Reference: 7.3.6.1 in the License Exam Manual.

Among the effects of a country devaluating its currency is that there will probably be: I. a credit to that nation's trade account balance. II. a debit to that nation's trade account balance. III. an increase in that nation's exports. IV. an increase in that nation's imports. A) I and IV. B) II and III. C) II and IV. D) I and III.

Answer: D When a currency is devalued by a country, it means that foreigners will find their money has more buying power in that country. Therefore, it would be expected that foreigners would buy more goods produced in that country causing an increase in exports. Those exports result in a credit to the country's trade account balance. Reference: 7.3.5 in the License Exam Manual.

If the value of the U.S. dollar increases with respect to other currencies, it would make I. U.S. exports, like heavy equipment, more competitive in foreign markets. II. U.S. exports, like heavy equipment, less competitive in foreign markets. III. foreign imports into the United States, such as cars, less competitive in U.S. markets. IV. foreign imports into the United States, such as cars, more competitive in U.S. markets. A) I and III. B) I and IV. C) II and III. D) II and IV.

Answer: D When the value of the U.S. dollar rises in relation to other currencies, exported products become more expensive in those foreign markets and are less competitive. On the other hand, imported products become less expensive in U.S. markets and are more competitive. Reference: 7.3.4 in the License Exam Manual.