Unit 6 - Basic Economic Concepts

If the CPI is down but consumer demand is up, the economy is likely in which stage of the business cycle? a) trough to expansion b) peak to contraction c) recovery to trough d0 contraction to trough

a. as prices trend downward and consumer demand declines, the economy is recovering from a trough to expansion. As demand continues to increase, assuming supply remains constant, upward pressure will be put on prices through the expansion to the peak.

The Conference Board releases information about the economy on a monthly basis. Which of the following is a lagging economic indicator? a) nonagricultural employment b) building permits c) manufacturers' new orders for consumer goods d) prime rate

d

With respect to the fiscal policy of the United States, the annual budget request is submitted by the a) congress b) president c) Federal Reserve Board d) Internal Revenue Service

b. The president of the U.S. is responsible for submitting the country's annual budget request to Congress for their approval and ultimately sent back to the president for signature.

The research department of an investment advisory firm forecasts that the current business cycle should reach its peak within the next 2 months. Under such circumstances, which of the following portfolio adjustments would be most suitable for the firm's customers who actively invest in common stocks? a) aggressive growth stocks b) cyclical stocks c) corporate bonds d) defensive stocks

d. The concept of sector rotation involved moving assets from those whose sectors that are close to their peak and moving into those who will benefit from the next move in the business cycle.

The Conference Board has released information indicating an increase in Help Wanted Index. Most analysts would take this as a sign of a) an impending recession b) likely wage inflation in the future c) an increase in manufacturing inventories d) a rising trade deficit

b. This signifies that employers are hiring - business is good. Competition for qualified workers will usually result in paying higher wages, and that will translate to higher prices for goods and services (inflation)

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

a

The U.S. balance of payments deficit would decrease in all of the following scenarios EXCEPT a) a decrease in the purchase of U.S. securities by foreign investors b) a decrease in imports of foreign goods into the United States c) an increase in exports of domestic goods from the United States d) a decrease in dividend payments by U.S. companies to foreign investors

a. A deficit in the balance of payments occurs when more money is flowing out of the country than in. When foreign investors decrease their purchases of U.S. securities, the flow of money coming into the United States decreases; this adds to the deficit rather than decreasing it.

Which of the following would lead to a debit to our foreign account balance? a) U.S. residents taking vacations abroad b) an increase in exports c) foreign governments repaying loans to U.S. banks d) residents of other countries buying apartments here

a. When our foreign account is debited, that creates a negative action. It is like a charge on your credit card- your account is debited. On the other hand, a credit on your card account is money coming to you. Our foreign accounts balance will be debited whenever our money goes out rather than coming in. When U.S. residents take vacations abroad, our money is being spent on hotels, restaurants, and other items in foreign countries. The other choices represent a credit to our foreign account balance. When exports increase, more foreign money comes in. When foreigners buy property here, we get their money, and when loans are repaid here, once again, foreign money comes into the U.S.

Proponents of the concept of inflation inertia believe that a) prices will rise slowly and then begin to increase at a faster rate b) prices will remain the same for a protracted period of time c) the rate of inflation will parallel the CPI d) prices will rise rapidly and then begin to contract

a. the concept of inflation inertia is that prices will rise slowly during an initial period of inflation and then begin to "pick up steam" as a result of some economic shock

When the business cycle is in the recovery stage, what type of industry tends to perform the best? a) countercyclical b) cyclical c) defensive d) growth

b. in general cyclical industries, those that follow the cycle tend to be the best performers during expansion (recovery). Most economists would agree that growth industries react later as the recovery gets closer to the peak.

Some prominent stock market pundits are predicting that the economy will slide into a recession in the near future. Furthermore, they are expecting moderate deflation during the same period. If this were to happen, your clients would probably enjoy the greatest overall return from investing in a) commodities b) common stock c) U.S. Treasury Bonds d) real estate

c. The combination of recession and deflation leads us to a security with the highest safety. The other 3 choices tend to rise with inflation and, therefore, are often thought of as inflation hedges.

A U.S.-based firm assembles electronic equipment using parts imported from Singapore. Its income statement looks like this. Sales $60 million Wages $30 million Parts $16 million Expenses $46 million Net Income $14 million What is this firm's contribution to GDP? a) $14 million b) $30 million c) $44 million d) $60 million

c. The parts ($16M) were produced somewhere else, so it shouldn't be counted as part of the firm's - or the United States - output.

In the secondary market, U.S. Treasury Bond prices are most influenced by a) the primary dealers b) the prime rate c) the treasury department d) the inflation rate

d

Which of the following would probably NOT be an attractive investment during periods of rising inflation? a) real estate b) oil stocks c) gold d) corporate bonds

d. 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.

When investors tend to increase their investments in debt securities on the short end of the spectrum, it generally leads to a) short-term yields that exceed long-term yields b) a flat yield curve c) an inverted yield curve d) a positive yield curve

d. Investors buying short-term debt rather than long-term debt will have the effect of driving the prices of short-term instruments up and, as a result, their yields down.