Unit 6 Checkpoint

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

b. 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.

A recession is defined as a drop in GDP for A) three consecutive quarters. B) six consecutive quarters. C) two consecutive quarters. D) four consecutive quarters.

c. two consecutive quarters A recession is a drop in GDP for two consecutive quarters.

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.

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) common stock. B) commodities. C) real estate. D) U.S. Treasury bonds.

d. U.S. Treasury Bonds The combination of recession and deflation leads us to a security with the highest safety. The other three choices tend to rise with inflation and, therefore, are often thought of as inflation hedges. However, deflation is the opposite; you'd want to be in fixed investments because their purchasing power will increase.

A fixed-income investor notices that the short, intermediate, and long ends of the yield curve reflect a similar return. This would be typical of A) a normal yield curve. B) a positive yield curve. C) an inverted yield curve. D) a flat yield curve.

d. a flat yield curve

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

d. a postive 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 exceeds the 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.

When the value of the U.S. dollar decreases, A) domestic manufacturers will likely increase their imports. B) foreign manufacturers will likely export more to the United States. C) domestic manufactures will likely not be affected. D) domestic manufacturers will likely increase their exports.

d. domestic manufacturers will likely increase their exports When the U.S. dollar decreases against other currencies, foreign goods become more expensive. On the other hand, domestically produced goods are cheaper for those buying with foreign currencies, so we can expect the exporting of goods made in the United States to increase.

A decrease in the value of the monetary unit is just a way of defining A) deflation. B) a likely decrease in exports. C) a decrease in consumer demand. D) inflation.

d. inflation What causes the value of the money unit (the dollar in the United States) to decrease? Inflation—it takes more dollars to pay for goods and services. This is usually caused by an increase in consumer demand. If the value of the currency declines, exports generally rise because domestically produced goods are less expensive to those using foreign currency.

The research department of an investment advisory firm forecasts that the current business cycle should reach its peak within the next two 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) Defensive stocks B) Corporate bonds C) Aggressive growth stocks D) Cyclical stocks

a. defensive stocks The concept of sector rotation involves moving assets from those sectors that are close to their peak and into those sectors that will benefit from the next move in the business cycle. Defensive stocks—such as food, pharmaceuticals, and public utilities—would most likely be suitable for investors who believe the cycle is near its peak. Defensive stocks are least likely to be affected by a reversal in the business cycle.

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

a. president The president of the United States is responsible for submitting the country's annual budget request to Congress for its approval, and Congress ultimately sends the annual budget back to the president for his signature.

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) prices will rise rapidly and then begin to contract. D) the rate of inflation will parallel the Consumer Price Index.

a. prices will rise slowly and then begin to increase at a faster rate. 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.

All of the following are tools that may be employed by the Federal Reserve in an effort to control the economy except A) open market operations buying and selling Treasury securities. B) the discount rate. C) the prime rate. D) the reserve requirements.

c. the prime rate The prime rate is set by money center commercial banks. All of the others are under control of the Fed.