Unit 6: basic economic concepts

Which of the following is not a characteristic of expansionary monetary policy? A) Interest rates may decline. B) More funds are available for banks to lend to borrowers. C) The money supply will increase. D) The reserve requirement will be increased.

D) The reserve requirement will be increased. Expansionary monetary policy is also referred to as easy monetary policy. The Federal Reserve follows an easy monetary policy when it wants to expand the level of income and employment. The Federal Reserve may decrease rather than increase the reserve requirement, affording banks the opportunity to loan more money to borrowers.

Under the concept of inertial inflation, A) prices tend to remain the same until the system receives an economic shock. B) inflation and deflation alternate at regular intervals. C) core inflation is a better measure of the actual inflation rate than the CPI. D) prices tend to increase at a steady rate until the system receives an economic shock.

D) prices tend to increase at a steady rate until the system receives an economic shock. Inertial inflation is an economic 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. It is true that most economists view the core inflation rate as a more accurate measure of true inflation than the CPI, but that has nothing to do with inertial inflation.

To stimulate a sluggish economy using fiscal policy measures, policymakers would A) reduce income taxes B) reduce the money supply C) increase income taxes D) increase the money supply

A) reduce income taxes Reducing income taxes is a fiscal policy tool intended to increase overall demand for goods and services. Think about it. If income taxes were reduced, you'd have more money in your pocket to spend. Adjusting the money supply is a monetary policy tool.

During an economic recession, which of the following items will most likely increase? A) Consumer confidence and profits B) Bond prices C) Inflation D) Interest rates

B) Bond prices During a recessionary period, inflation and interest rates generally decline. This causes bond prices to increase because they are inversely related to the change in interest rates. Consumer confidence and profits are declining at this point in the economic cycle.

With respect to the fiscal policy of the United States, the annual budget request is submitted by the A) Congress B) president C) Internal Revenue Service D) Federal Reserve Board

B) president The president of the United States 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 business cycle has expanded, peaked, and contracted. The current economic activity could best be described as a trough. Which of the following would most likely be found in the trough? A high rate of inflation A low rate of inflation A high rate of unemployment A low rate of unemployment A) I and IV B) II and IV C) I and III D) II and III

D) II and III A trough is the latter stage of a recession. Unemployment is higher than normal, and with a lesser demand for goods and services, the inflation rate is low.

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) Manufacturers' new orders for consumer goods C) Nonagricultural employment D) Building permits (housing starts)

A) Average prime rate 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.

Which of the following statements reflects the monetarist economic position? A) 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. B) The total amount of money in the economy is the result of the level of interest rates. C) The amount of money in the economy is not significant because economic activity reflects the value of real goods and services; therefore, the Federal Reserve should not attempt to manage the money supply. D) The best way to control the money supply is to raise taxes, which will reduce the amount of money in the economy and lower prices.

A) 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. Monetarists believe that the economy and inflation are best controlled through the management of the money supply rather than through fiscal policy stimulation.

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 A) U.S. Treasury securities. B) real estate. C) common stock. D) gold.

A) U.S. Treasury securities. It is times like this that the flight to safety has investors commit their funds to U.S. government securities. Gold (and other commodities) tends to increase in price during inflationary, not deflationary, periods. Both real estate and equities tend to rise when things are good, not during recessions.

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

A) average prime rate. 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.

A securities analyst's stock selection method is to begin by looking for superior companies, regardless of their industry sector or the condition of the overall economy. In so doing, this analyst is using A) the bottom-up approach. B) the business cycle approach. C) the optimal portfolio approach. D) the top-down approach.

A) the bottom-up approach. This is the basic approach of bottom-up analysis. Rather than focusing the attention on the overall market (the macro view of the economy) or the sectors that are likely to outperform, this approach seeks to identify—usually based on the company's fundamentals—the most attractive individual stocks.

Which of the following statements about the federal government's fiscal policy are 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. A) II and III B) I, II, and III C) I and II D) I and III

B) I, II, and III The federal government's fiscal policy establishes the government's taxation, spending, and debt practices. Fiscal policy can affect the securities markets because it can be used to regulate prices, employment, and economic growth. If fiscal policy includes deficit spending, the government sells bonds to make up the deficit.

An investor using yield curve analysis would expect to view bonds of A) similar quality over varying maturities B) a single issuer over varying maturities C) varying quality of similar maturities D) varying quality over a number of maturities

B) a single issuer over varying maturities The most common yield curves are drawn using U.S. Treasury securities. The curve is plotted using maturities ranging from the short-term T-bills to the long bonds. There are other curves drawn with bonds from other sectors, such as corporate bonds, to show the yield spread, but that is going beyond the scope of this question.

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

C) a positive yield curve 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. This will produce a normal, or positive, yield. It is when the demand for bonds on the long end of the spectrum exceed demand for those in the near term that short-term yields exceed those of long-term yields. This creates an inverted or negative yield curve

A research analyst studying the performance of ABC Industries compares that with reports from other analysts reviewing other companies in other industries. This is known as A) top-down analysis. B) sector analysis. C) bottom-up analysis. D) fundamental analysis.

C) bottom-up analysis. Bottom-up analysis starts by attempting to find superior performing companies, regardless of the industry. Those analysts believe that these companies will provide attractive returns even if they are in an industry sector that is in a negative position in the economic cycle.

The economic theory that says economic growth results from lower tax rates and lower government spending is A) Keynesian theory. B) demand-side theory. C) supply-side theory. D) monetary theory.

C) supply-side theory. Supply-side economics is the theory of Arthur Laffer, who believed that heavy taxing and government intervention have a negative effect on the economy.