Chapter 10 REAL Exam
Of the interest rates listed below, which is considered the most volatile? A) Federal funds rate B) Broker's Call Loan Rate C) Discount Rate D) Prime rate
A 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.
A general increase in the price of goods and services in the economy is A) Inflation. B) Deflation. C) Disinflation. D) Stagflation.
A Inflation. Explanation: Inflation is an increase in general price levels for goods and services in the economy.
The theory that says the economy is best controlled through taxation and government spending is known as A) Keynesian economic theory. B) Open market operations. C) Classical economic theory. D) Monetarist economic theory.
A 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 is positively impacted when inflation is rising rapidly? A) Real estate values B) Purchasing power C) Prices of municipal bond mutual funds D) Prices of fixed rate investments Previous
A 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 A) Recession B) Depression C) Correction D) Contraction
A Recession Recession Explanation: A recession is defined as a decline in GDP for two or more consecutive quarters.
All of the following generally accompany a slowing economy EXCEPT A) Stabilizing or falling inflation B) Increased demand for credit C) An increase in the money supply D) An increase in purchases of securities by the Fed's Open Markets Committee
B 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.
If the Federal Reserve determines that a tight money policy is necessary, all of the following are likely EXCEPT A) Bond prices will fall B) Interest rates will fall C) Stock prices will fall D) The exchange value of the dollar will rise.
B 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 A) It was introduced in the 1930's by John Maynard Keynes to combat the Great Depression B) It attempts to stabilize the economy by controlling interest rates and the supply of money C) A contractionary fiscal policy occurs when net government spending is reduced either through higher taxation revenue, reduced government spending, or a combination of the two D) An expansionary stance of fiscal policy involves a net increase in government spending
B 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.
If the Fed determines that the current economic growth rate is too strong it is most likely to do which of the following? A) Increase the federal funds rate B) Sell U.S. Treasury securities C) Decrease margin requirements D) Decrease the discount rate
B 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? A) Ease the money supply B) Sell securities in the open market C) Decrease interest rates D) Purchase securities in the open market
B 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 A) Borrows less than is necessary to pay the cost of fiscal programs B) Spends more than it collects in tax receipts C) Spends less than the budget established for that fiscal year D) Spends more than it collects in sales of Treasury securities
B 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? A) Open-market operations B) Taxing and spending C) Margin requirements D) Discount rate
B Taxing and spending Explanation: Taxing and spending is a component of fiscal policy, not monetary policy.
Bond prices would be expected to rise as the result of A) The yield curve becoming flat, B) A rising CPI. C) A falling CPI. D) Rising interest rates
C A falling CPI. Explanation: When the CPI falls, suggesting slower economic activity, interest rates may tend to fall, causing bond prices to rise.
All of the following are defensive stocks EXCEPT A) pharmaceuticals B) oil C) airline D) food
C 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.
As the result of a rising CPI, it would be anticipated that bond prices will A) Remain stable B) Become volatile C) decrease D) increase
C Decrease decrease Explanation: Strong economic growth will tend to cause bond prices to fall.
During a period of recession, consumers generally experience I. Increasing bond prices II. Decreasing bond prices III. Lower bond yields IV. Higher bond yields A) II and IV B) I and IV C) I and III D) II and III
C I and III Explanation: In times of recession, interest rates are generally falling, so bond prices are rising.
All of the following activities have a positive effect on the U.S. balance of payments EXCEPT A) Foreign purchases of U.S. securities B) An increase in foreign investments in the U.S C) New U.S. investment in foreign countries D) An increase in U.S. exports to foreign countries
C 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 A) Countercyclic B) Defensive C) Procyclic D) Acyclic
C 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.
The status of a company's financial position at a particular point in time is best measured by which of the following financial statements? A) income statement B) statement of shareholders' equity C) balance sheet D) cash flow statement
C 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.
When the U.S. dollar depreciates against the Euro A) American travel in Europe would become less costly B) the Euro would buy fewer U.S. dollars C) foreign goods become more expensive in the U.S. D) the balance of payments would most likely decrease
C 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 A) reducing reserve requirements B) buying securities in the open market C) reducing taxes D) reducing margin requirements
C 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.
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 A) II and IV B) I and III C) I and IV D) II and III
D 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.
Which of the following refers to the residual profit after all of a company's expenses have been netted out? A) Gross profit B) Sales C) EBITDA D) Net income
D 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.
The entity that controls the money supply acts as the U.S banking regulator and serves as a banker to the government is the A) Comptroller of the Currency B) FDIC C) Internal Revenue Service (IRS) D) U.S. Central bank
D 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? A) Stock market returns B) GDP C) Retail Sales D) Unemployment rate
D 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.
