Unit 8

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 positive yield curve B)a normal yield curve C)a flat yield curve D)an inverted yield curve

C)a flat yield curve If you were to plot this curve, what would it look like? It would be a flat line because, regardless of the maturities, all of the yields are the same. In an inverted (or negative) yield curve, the short end of the curve has higher yields than the long end. A normal (or positive) yield curve slopes upwards, with lower yields at the short end and higher yields at the long end.

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

D)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.

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

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

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)a positive yield curve D)an inverted 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.

The research department of an investment advisory firm forecasts that the current business cycle should reach its peak within the next 2 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)Aggressive growth stocks B)Cyclical stocks C)Corporate bonds D)Defensive stocks

D)Defensive stocks The concept of sector rotation involves moving assets from those sectors that are close to their peak and moving into those who will benefit from the next move in the business cycle. Defensive stocks such as those in the food, pharmaceuticals, and energy industries 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.

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

C)inflation What causes the value of the money unit (in the United States it is the dollar) 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.

If disposable personal income has fallen steadily over the past year, which of the following is most likely going to be affected? A)Firms that produce nondurable consumer goods B)Automotive industry C)Defense industry D)Tobacco industry

B)Automotive industry The automobile industry is cyclical and, of the choices, the most likely to be affected by a change in the business cycle as indicated by declining personal income. The tobacco industry and producers of nondurable consumer goods (e.g., toilet paper and basic clothing) are considered defensive industries: those where the demand is relatively constant, regardless of economic conditions. The defensive industry relies on government spending and is affected by conditions not related to our personal incomes.

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

B)U.S. Treasury bonds The combination of recession and deflation leads us to a security with the highest safety. The other 3 choices tend to rise with inflation and, therefore, are often thought of as inflation hedges. But, deflation is the opposite and you'd want to be in fixed investments because their purchasing power will increase.

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

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

C)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 U.S. made goods to increase.

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

B)the prime rate The prime rate is set by the banks. All of the others are under the control of the Fed.

You note that an article in the Wall Street Journal points out that the money supply has been increasing. This economic measure is A)a GDP deflator B)a lagging indicator C)a coincident indicator D)a leading indicator

D)a leading indicator Among the list of leading indicators is the money supply.

Proponents of the concept of inflation inertia believe that A)prices will rise rapidly and then begin to contract B)prices will rise slowly and then begin to increase at a faster rate C)the rate of inflation will parallel the CPI D)prices will remain the same for a protracted period of time

B)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.

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. Adjusting the money supply is a monetary policy tool.