Unit 6

While reviewing nationwide industrial production figures, an analyst notices that inventories have been rising. From that information, one would gather that the economy is most likely in which phase of the business cycle? Expansion Recovery Contraction Peak

B. Downturns in the business cycle (a contraction) tend to be characterized by rising inventories due to a lack of consumer demand. During expansion or recovery, demand is high and goods are less likely to remain in inventory.

Which of the following best describes the economic phase in which unemployment increases and businesses operate at their lowest capacity levels? Expansion Peak Trough Contraction

C

Inflation

is a general increase in prices as measured by an index such as the Consumer Price Index (CPI).

federal funds rate

market rate determined by the demand for bank reserves on the part of deposit-based financial institutions

Economists have determined that the economy is slowing down. Orders for durable goods have been declining and unemployment, while not a reason for concern, has been steadily increasing over the past year. Given the information provided, what phase of the business cycle is the economy currently experiencing? Contraction Deflation Trough Expansion

A

When the yield curve is normal, (long-term/short-term) interest rates are higher than (long-term/short-term) interest rates.

Long-term

____ sets the prime rate

Major commercial banks

Long-term interest rates are normally higher than short-term interest rates (T/F)?

T

If the yield spread between corporate bonds and government bonds is widening, a ________ is expected If the yield spread between corporate bonds and government bonds is narrowing, an economic ___________ is expected

recession expansion

Which of the following would not be considered a defensive security? Steel company stock Utility company stock Food Chain Stock Tobacco Stock

A

The U.S. balance of payments deficit would decrease in all of the following scenarios except: an increase in exports of domestic goods from the United States. a decrease in purchases of U.S. securities by foreign investors. a decrease in imports of foreign goods into the United States. 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.

Interest rates are rising. An analyst would be most likely to state that the business cycle is in which stage? Peak Contraction Expansion Trough

B

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 coincident economic indicator? Stock market prices as measured by the S&P 500 Industrial production Machine tool orders Agricultural employment

B. Industrial production is a coincident indicator. The stock indices and manufacturing orders are leading indicators; economists do not use agricultural employment as an indicator.

Core inflation is best described as an inflation rate: for producers' raw materials the central bank views as acceptable. that excludes certain volatile goods prices. that represents a market basket of consumer items.

C. Core inflation is measured using a price index that excludes food and energy prices.

Among the responsibilities of the Federal Reserve (the Fed) is influencing the supply of money and credit in the economy. When performing this function, adjusting which of the following is not a tool at its disposal? The discount rate The reserve requirements The activities of the Federal Open Market Committee The prime rate

D

An upward sloping yield curve represents which of the following? Time value of money < risk of default over time Inflation expectations All of the above

D

Which of the following is considered the most accurate method of measuring GDP? Actual dollars As a function of the GNP Eurodollars Constant dollars

D

The contraction phase of the business cycle is least likely accompanied by decreasing consumer spending. economic output. inflation pressure. unemployment.

D. An economic contraction is likely to feature increasing unemployment (i.e., decreasing employment), along with decreasing consumer spending, declining economic output, and decreasing inflation pressure.

Which of the following statements describes the federal funds rate? Rate charged on reserves traded among commercial banks for overnight use in amounts of $1 million or more Charge on loans to depository institutions by the New York FRB Charge on loans to brokers on stock exchange collateral Base rate on corporate loans at large U.S. money center commercial banks

A

A bond analyst is plotting a yield curve and notices that short-term maturities have higher yields than intermediate and long-term maturities. This is an example of: an inverted yield curve. a positive yield curve. a normal yield curve. an algorithmic yield curve.

A. An inverted, or negative, yield curve is one that results when debt with short-term maturities has higher yields than those with maturities that are longer.

Which of the following statements regarding significant interest rates in the U.S. economy is not true? The federal funds rate is the rate the Federal Reserve charges for overnight loans to member commercial banks. The prime rate is the interest rate that large U.S. money center commercial banks charge their most creditworthy corporate borrowers. The discount rate is the rate the New York Federal Reserve Bank charges for short-term loans to member banks. The most active tool used by the Fed is the buying and selling of Treasury securities by the FOMC.

A. The federal funds rate is the rate that member banks charge each other for overnight loans of $1 million or more; it is not the rate that the Federal Reserve charges member banks for overnight loans.

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

B

A bond analyst is plotting a yield curve and notices that short-term maturities have higher yields than intermediate and long-term maturities. This is an example of: An algorithmic yield curve A normal yield curve A positive yield curve An inverted yield curve

D

Your client calls you after reading a story in the business section of his local newspaper. It seems that the article focused on changes to the core CPI, and the client wants to know how that is different from the normal CPI. You should explain that it is the Consumer Price Index, excluding housing and automobiles. the figure used to determine annual increases, if any, to Social Security benefits. the total of the leading indicators, excluding stock prices. the Consumer Price Index, excluding energy and food prices.

D

Normal Positive Curve: Slopes upwards. Times of expansion. As the term of the security increases, the yield increases. -Inverted (Negative) Yield Curve: Slopes downwards. An inverted yield curve may occur because of a sharp increase in short-term rates. -When short-term and long-term rates are the same, it's called a flat yield curve. No change in interest rates is expected.

Note