SIE UNIT 10 ASSESSMENT

Bond prices would be expected to rise as the result of

A falling CPI. Explanation: When the CPI falls, suggesting slower economic activity, interest rates may tend to fall, causing bond prices to rise.

Of the interest rates listed below, which is considered the most volatile?

Federal funds rate Explanation: The Federal Funds rate is the highly volatile rate at which member banks with excess reserves loan to other member banks for the purpose of meeting reserve requirements. It typically changes daily. Also, you should note that although the Fed has a target Fed Funds Rate, it does not actually set the rate. The Fed sets the Discount Rate.

During a period of recession, consumers generally experience I. Increasing bond prices II. Decreasing bond prices III. Lower bond yields IV. Higher bond yields

I and III Explanation: In times of recession, interest rates are generally falling, so bond prices are rising.

During a time when the yield curve is inverted, the Federal Reserve is likely to I. Increase interest rates II. Decrease interest rates III. Buy securities in the open market IV. Sell securities in the open market

II and III Explanation: An inverted yield curve means short-term rates are higher than long-term rates. Investors are more likely to purchase short-term debt than long-term debt. The Federal Reserve may attempt to ease credit under these conditions, and will reduce interest rates through increasing the money supply and buying securities in the open market.

All of the following generally accompany a slowing economy EXCEPT

Increased demand for credit Explanation: Demand for credit increases when the economy is strengthening, or in an expansionary cycle. The Fed puts more money into the money supply when it purchases securities. It does this to help increase the supply of money to reduce interest rates, and stimulate demand for credit. Inflation is usually stable or falling during periods of economic decline.

A general increase in the price of goods and services in the economy is

Inflation. Explanation: Inflation is an increase in general price levels for goods and services in the economy. Textbook Reference:

If the Federal Reserve determines that a tight money policy is necessary, all of the following are likely EXCEPT

Interest rates will fall Explanation: A tight money policy exists when the Federal Reserve makes credit less available to slow down the economy. This means it will tighten the money supply through raising interest rates. As interest rates go up, bond prices fall and generally the stock market will also fall. The dollar's value against foreign currency will generally move in the same direction as interest rates.

All of the following statements describe fiscal policy EXCEPT

It attempts to stabilize the economy by controlling interest rates and the supply of money Explanation: Monetary policy attempts to stabilize the economy by controlling interest rates and the supply of money, while fiscal policy relies on government spending and taxation. Textbook Reference:

The theory that says the economy is best controlled through taxation and government spending is known as

Keynesian economic theory. Explanation: This is the framework behind Keynesian economic theory, founded by John Maynard Keynes in the 1930's.

Which of the following refers to the residual profit after all of a company's expenses have been netted out?

Net income Explanation: Net income is the profit after all of a company's expenses have been subtracted from revenues. It represents the earnings available to shareholders after all obligations (e.g. debt, payable to vendors, etc.) have been paid. EBITDA is a widely used proxy for operating cash flow as it reflects the company's total cash operating costs for producing its products and services. Gross Profit is defined as sales less cost of goods sold (COGS). Sales is the first line item on an income statement.

All of the following activities have a positive effect on the U.S. balance of payments EXCEPT

New U.S. investment in foreign countries Explanation: New U.S. investments abroad would increase the deficit in the U.S. balance of payments because dollars are leaving the U.S. for investment invested in foreign countries.

Personal incomes are an example of an economic indicator that is

Procyclic Explanation: Procyclic indicators move in the same direction as the general economy: they increase when the economy is thriving and decrease when it is performing poorly. Gross Domestic Product (GDP) is another example of a procyclic indicator.

Which of the following is positively impacted when inflation is rising rapidly?

Real estate values Explanation: The value of real estate is likely to increase during a period of increasing inflation. Stocks may increase or decrease during a period of high inflation, but are not tied to inflation as much as real estate. Prices of bonds and other fixed rate investments fall when inflation is rising. Purchasing power is eroded in inflationary times, because today's dollar will buy fewer goods in the future.

A decline in Gross Domestic Product (GDP) for two or more consecutive quarters is typically defined as a

Recession Explanation: A recession is defined as a decline in GDP for two or more consecutive quarters.

If the Fed determines that the current economic growth rate is too strong it is most likely to do which of the following?

Sell U.S. Treasury securities Explanation: If the economy is growing too quickly the Fed will tighten the money supply by selling securities. Decreasing the discount rate or margin requirements will ease the money supply. The Fed funds rate is not established by the Fed; it is the market rate determined by banks lending funds to each other overnight to meet reserve requirements.

Rising commodity prices in the U.S. would most likely cause which of the following responses from the Federal Reserve?

Sell securities in the open market Explanation: Rising commodity prices tends to be a sign of inflation. To control potential inflation the Federal Reserve would tighten the money supply. This could be accomplished by selling securities. Purchasing securities in the open market or decreasing interest rates would have the opposite effect.

Deficit spending results when the U.S. government

Spends more than it collects in tax receipts Explanation: When the U.S. government engages in deficit spending, it is spending more than its budget. It has spent more than it has collected in tax receipts - its primary source of income.

Which of the following is not a "tool" of the FRB in monetary policy?

Taxing and spending Explanation: Taxing and spending is a component of fiscal policy, not monetary policy.

The entity that controls the money supply acts as the U.S banking regulator and serves as a banker to the government is the

U.S. Central bank Explanation: The U.S. Central Bank, or Federal Reserve is the banker to the U.S. government and is responsible for the monetary policy of the country. It also regulates other banks in the national banking system.

Which of the following economic indicators is considered a lagging indicator?

Unemployment rate Explanation: The unemployment rate is considered a lagging indicator, because it tends to react several quarters after changes in the economy. Stock market returns are considered a leading indicator; while GDP and retail sales are considered coincident indicators.

All of the following are defensive stocks EXCEPT

airline Explanation: Defensive stocks are those that do not vary directly with economic cycles, like food, pharmaceuticals, energy and utility stocks. Airline stocks are very reactive to economic trends, and are considered cyclical stocks.

The status of a company's financial position at a particular point in time is best measured by which of the following financial statements?

balance sheet Explanation: The balance sheet displays a company's financial position at a point in time. It lists the assets, liabilities, and shareholders' equity balances as of the fiscal quarter or year end. The income statement provides the best overview of a company's profitability during a particular period. It provides an overview of the company's sales amounts, associated expenses, and net income. The cash flow statement records the cash inflows and outflows of the company during a particular time period.

As the result of a rising CPI, it would be anticipated that bond prices will

decrease Explanation: Strong economic growth will tend to cause bond prices to fall.

When the U.S. dollar depreciates against the Euro

foreign goods become more expensive in the U.S. Explanation: When the dollar falls against a foreign currency, the goods of that country become more expensive in the U.S. Foreign countries buy more U.S. goods when their currency is stronger, so the balance of trade would most likely increase. Because of the weakness in the dollar, travel abroad is more costly; the U.S. dollar buys less of the foreign currency.

To loosen credit, the Federal Reserve Board might take all of the following actions EXCEPT

reducing taxes Explanation: The Federal Reserve Board does not control taxation; the rate of taxation can only be changed by Congress and is a tool of fiscal policy. The Federal Reserve Board will loosen credit, or make more money available, by lowering the bank reserve requirement, buying securities on the open market and reducing the margin requirement.