Unit 14 Economics and Analysis

Leading Economic Indicators

Building permits Manufacturers' new orders S&P 500 Index M2

According to the Dow theory, reversal of a primary bullish trend must be confirmed by:

Charted price trends can be deceptive, so a trend must be confirmed by the Dow Jones Industrial Average and Transportation Average.

Lagging Economic Indicators

Corporate Profits Duration of Unemployment

When analyzing a company's balance sheet, you notice that it is using the first in, first out (FIFO) accounting method to value its inventory. This information is most likely shown

In a footnote to the balance sheet Notations regarding accounting methods used, such as those for valuing inventory, would generally be found in the footnotes of the balance sheet.

What term do economists use to describe a downturn in the economy that is characterized by both unemployment and rising prices?

Stagflation "Stagflation" is the term used to describe the unusual combination of inflation and unemployment (stagnation).

An analyst comparing revenues with expenses is most likely analyzing:

The analyst is most likely measuring the income statement for cash flow (money coming in against money going out). Working capital analysis would involve examining the balance sheet's current assets and current liability entries, not the income statement. Capitalization analysis involves examination of long-term debt and stock issues. Liquidity analysis involves examining current assets and liabilities from the balance sheet.

A tool that is NOT used by the FRB to control the money supply is:

The prime rate is the rate of interest charged by banks to their best customers. The prime rate reacts to the FRB's tools, but it is not one of them.

During the past 2 quarters, the GDP declined by 3%, unemployment rose by .7%, and the Consumer Price Index fell off by 1.3%; this economic condition is called A) recession B) depression C) inflation D) stagflation

Two consecutive quarters of economic decline is termed a recession

An upward sloping yield curve represents all of the following EXCEPT: A) inflation expectations. B) time value of money. C) increased risk of default over time. D) foreign interest rate differentials.

Foreign interest rate differentials are not reflected in an upward sloping yield curve. Interest rate differentials between countries reflect differences in domestic monetary and fiscal conditions. The time value of money is reflected in the upward sloping yield curve.

Coincident Economic Indicators

GDP Industrial production Personal Income Manufacturing and trade sales

The Federal Reserve sets which of the following? I.The reserve requirement II.The federal funds rate III.The prime rate IV.Initial margin requirements for nonexempt securities

I and IV The Fed is responsible for setting the reserve requirement, the discount rate, and the initial margin requirement for nonexempt securities. The federal funds rate, charged in bank-to-bank borrowing, is a market rate of interest. While it is heavily influenced by Fed action, it is not set by the Fed. and neither is the prime rate, which is the rate large banks charge their most creditworthy customers for unsecured loans.

Which of the following is the most stringent test of liquidity? A) (Current assets - inventory) / current liabilities. B) Current assets / current liabilities. C) (Cash + cash equivalents) / current liabilities. D) Assets / current liabilities.

Of the answers given, the cash assets ratio is the most stringent because it excludes inventories and accounts receivable.

All of the following will affect the working capital of a corporation EXCEPT: A) payment of a cash dividend. B) a decrease in liabilities. C) declaration of a cash dividend. D) an increase in assets.

Payment of cash dividend Working capital is defined as current assets minus current liabilities. Payment of a cash dividend will reduce current assets (cash) and current liabilities (dividend payable) by the same amount, leaving working capital unchanged.

Included in the working capital computation of a corporation are all of the following EXCEPT: A) cash. B) convertible bonds it has issued. C) marketable securities of other companies. D) accounts receivable.

The working capital of a corporation is equal to its current assets minus its current liabilities (a current liability is payable within 12 months). Because all bonds, convertible or not, issued by the corporation are long-term liabilities, they are not included in the working capital computation. Accounts receivable, marketable securities, and cash are short-term assets included in the calculation of working capital.