Series 65 Chapter 8

________ 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.

Prime rate

When interest rates rise the ______ increases

Prime rate -

Which of the following statements describes the federal funds rate?

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

Cyclical Means

The most sensitive to economic fluctuation.

If the U.S. dollar has been appreciating against foreign currencies, all of the following statements are true EXCEPT

U.S. exports become more competitive 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.

A significant increase in the importing of goods into the United States would likely have what effect on the strength of the U.S. dollar?

Weaken

To determine the amount of change in the GDP from 1 year to another, both years' GDP should be converted into

constant dollars To compare GDP from 1 year to another, and thus to compare the amount of actual economic activity, economists use constant dollars to eliminate distortions caused by inflation.

Bank borrowing from the Fed is referred to as

discount rate

The economy has gone through 3 consecutive quarters of economic decline with no immediate end in sight, and therefore could be said to be

in a recession Recession is defined as 2 or more consecutive quarters of economic decline. It would have to be at least 6 quarters to be considered a depression.

An inverted yield curve results in part by

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

If the dollar weakens, which of the following statements is TRUE?

A rise in U.S. interest rates might strengthen the dollar.

What generally happens to outstanding fixed-income securities when the rate of inflation slows?

A) Prices go up. When the rate of inflation slows and is expected to remain stable, coupons on new issue bonds will often decline to offer lower yields. The prices of outstanding bonds will go up to adjust to the lower yields on bonds of similar quality.

The Conference Board, a nongovernmental nonprofit organization, regularly publishes a list of economic indicators. Which of the following would be included in their list of leading indicators?

Average weekly initial claims for unemployment insurance

Core CPI

CPI excluding food and energy

To compare GDP from one year to another both GDP's should be converted into _____

Constant dollars.

What can be used to strengthen the dollar?

Increase in interest rates.

A business reporter claims that we are suffering from inertial inflation. This means

Inertial inflation means that a change in the inflation rate is not expected until some kind of economic event "shakes things up" and causes the rate to move up or down.

To create a more accurate picture of economic results GDP is adjusted for...._____

Inflation

Inverted yield results by

Investors buying longterm bonds and selling short term bonds.

The Federal Reserve Board foresees the probability of an overheated economy and the resumption of double-digit inflation. Therefore, the FRB takes actions to slow down the economy, including increasing the discount rate. Which of the following are likely effects of these moves?

An increase in the prime rate An increase in bond yields and an accompanying decrease in bond prices A slowdown in corporate growth A decrease in corporate earnings

Increases in which of the following indicators are regarded as predictors of the level of business activity?

Building permits 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.

Increases in which of the following indicators are regarded as predictors of the level of business activity?

Building permits 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.

When discussing employment and production, which of the following industries are typically more affected by a recession?

Capital Goods and Durable Goods

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?

Industrial production Industrial production is a coincident indicator. The stock indices and manufacturing orders are leading indicators; economists do not use agricultural employment as an indicator.

Interest Rates tend to Increase with

Inflation - So therefore Corporate bonds are not desireable during a recession

Which of the following statements about the federal government's fiscal policy is TRUE?

The federal government's fiscal policy is its policy for managing taxation, spending, and debts. The federal government's fiscal policy can have a great impact on the securities markets. The federal government finances its deficit spending by selling bonds.

If the value of the U.S. dollar were to increase with respect to other currencies, it would make

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.

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 credit to the current account of the United States

An inverted yield is the result of

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

A bond analyst reports that there is currently an inverted yield curve. That would mean

the closer the bond is to its maturity date, the higher the yield. An inverted yield curve shows near-term maturities with higher yields than those of long-term maturities. Sometimes called a negative yield curve, it is usually an indication that interest rates are near a peak and the trend should soon reverse.

A business reporter claims that we are suffering from inertial inflation. This means

the current rate of inflation will remain at this level until economic shocks cause it to change.

hen a bank's reserve account is running low, it might choose to borrow from the Fed. When doing so, the bank will be charged

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.

In the secondary market, Treasury bond prices are most influenced by

the inflation rate

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

Kenynesian

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

Short term interest rates are more volatile than longterm interest rates Long term bond prices are more volatile than short term bond prices

When discussing employment and production, which of the following industries are typically more affected by a recession?

-Capital goods -Consumer Durable goods Durable goods and capital goods are more affected by a recession than are nondurable goods and services. This is primarily because they are larger items, last for a longer period, and are somewhat discretionary.

If the Consumer Price Index (CPI) is down but consumer demand is up, the economy is likely in which stage of the business cycle?

Recovery to expansion As prices trend downward and consumer demand increases, the economy is moving from recovery to expansion. As demand continues to increase, assuming supply remains constant, upward pressure will be put on prices through the expansion to the peak.

A free trade agreement is entered into between Country A and Country B. As time goes on, the value of Country A's currency increases while that of Country B's decreases. The effect of this will likely be that

As a country's currency increases in value, its exports become more expensive, so they will fall. On the other hand, with a stronger currency, the country's citizens will have a greater buying power, and this will cause imports to increase.

Which of the following is considered the most accurate method of measuring GDP?

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.

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

Corporate bonds Interest rates tend to increase with inflation. Rising interest rates cause the values of all fixed-income securities to decline. That is why bonds are not an attractive investment during periods of inflation. Values of real estate, gold, and natural resources tend to rise with inflation.

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?

Average Prime rates 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.