Unit 9

A surplus in the U.S. balance of payments can occur if 1.interest rates in foreign countries are higher than U.S. domestic rates. 2.interest rates in foreign countries are lower than U.S. domestic rates. 3.U.S. consumers are purchasing (importing) foreign goods. 4.foreign consumers are purchasing (importing) U.S. goods

2.interest rates in foreign countries are lower than U.S. domestic rates. and 4.foreign consumers are purchasing (importing) U.S. goods Anything that brings money into our domestic economy leads to a surplus (more money coming in than going out). When interest rates abroad are comparatively lower, money flows into the United States to earn a better rate. When foreign consumers are purchasing more U.S. domestic goods and services, money flows into the United States as well.

Which of the following would decrease the U.S. balance of payments deficit? A) An increase in purchases of U.S. securities by foreign investors B) U.S. investors seeking better returns in overseas markets C) A decrease in exports of domestic goods from the United States D) An increase in imports of foreign goods into the United States

A) An increase in purchases of U.S. securities by foreign investors Foreign investors pulling their money out of the United States or investing less in the United States will increase the U.S. deficit.

Which of the following is used to calculate a company's net worth? A) Assets − liabilities B) Assets + liabilities C) Liabilities ‒ assets D) Debt − equity

A) Assets − liabilities

Which segment of the business cycle would one expect to find rising interest rates and higher wages? A) Expansion B) Recession C) Contraction D) Trough

A) Expansion Expansions in the business cycle are characterized by increasing consumer demand for goods and services and increasing industrial production. One would expect these increases to lead to rising interest rates as demands for loans for purchases increases and higher wages for workers as production increases.

Which of the following is a coincident indicator? A) Household income B) Housing starts C) Increase in the duration of unemployment D) S&P 500 Index

A) Household income Personal or household incomes are coincident indicators, moving up and down along with the overall economy. Equity prices and housing starts are both leading indicators. Changes in the duration of unemployment is a lagging indicator.

Fiscal policy 1.is the most efficient means for solving short-term economic issues. 2.is not considered the most efficient means to solve short-term economic issues. 3.is reflected in the budget decisions enacted by our president and Congress. 4. is reflected in the money supply decisions enacted by the Federal Reserve Board (FRB). A) I and III B) II and IV C) I and IV D) II and III

A) I and III Fiscal policy is reflected in the budget decisions enacted by our president and Congress. This political process takes time for conditions and solutions to be identified and implemented and is therefore not considered the most efficient way to solve short-term economic issues.

Which of the following is a leading indicator? A) New orders for consumer goods B) Corporate profits C) Gross domestic product D) Wages

A) New orders for consumer goods New orders for consumer goods is a leading indicator, foretelling future economic activity (the actual purchase of those goods). Wages and gross domestic product are coincident indicators. Corporate profits are lagging indicators

Which of the following is a true statement with regard to either U.S. securities laws or the description of international economic factors? A) When the U.S. dollar is strong, foreign currency buys fewer U.S. goods. B) When a company files for bankruptcy, claims of preferred shareholders are settled before all others. C) The Securities Act of 1933 regulates secondary markets and trading on exchanges. D) A tombstone advertisement may be used in lieu of a prospectus in the distribution and sale of corporate securities.

A) When the U.S. dollar is strong, foreign currency buys fewer U.S. goods. When the dollar is strong, foreign currency buys fewer U.S. goods. On the other hand, the strong dollar would buy more foreign goods. A tombstone is not a prospectus nor can it be used instead of a prospectus when securities are sold. The Securities Act of 1933 regulates the primary (new issue) market. During a bankruptcy liquidation, preferred shareholders and common shareholders come after all other debt obligations have been satisfied.

Assets = liabilities + net worth is the A) basic balance sheet equation. B) price to book ratio. C) fully diluted earnings ratio. D) working capital formula.

A) basic balance sheet equation

Stagnation in the economy can be associated with A) high unemployment. B) plentiful employment opportunities. C) prolonged periods of healthy economic growth. D) robust production.

A) high unemployment Economic stagnation refers to prolonged periods of slow or little economic growth, usually accompanied by high unemployment.

An economic indicator that tends to change direction following a change in the direction of GDP is a A) lagging indicator. B) coincident indicator. C) flagging indicator. D) leading indicator.

A) lagging indicator. Lagging indicators tend to change direction after a change in the overall economy. GDP is the most common indicator for economic activity. When you have studied for eight hours straight and can not keep your eyes open; that is a flagging indicator. Take a break, flagging indicator is not on the exam.

Companies in defensive industries would be the manufactures of A) pharmaceuticals. B) automobiles. C) fighter jets. D) armored personnel carriers.

A) pharmaceuticals. Defensive industries are those that make products that are not as sensitive to economic cycles because people use the same amount of these products regardless of the condition of the economy. Other examples would be food and utilities.

Different degrees of inflation can impact the economy differently. Which of the following best reflects this? A) Mild inflation can thwart business investments and slow economic growth. B) Mild inflation can encourage growth and stimulate the economy. C) High inflation pushes prices to their highest levels, continuously pushing the economy higher. D) High inflation spurs the economy forward by increasing the demand for goods.

B) Mild inflation can encourage growth and stimulate the economy. While mild inflation can encourage economic growth because gradually increasing prices tend to stimulate business investments, high inflation pushes prices up, reducing the U.S. dollar's buying power. Ultimately, high inflation hurts the economy.

Certain actions taken by the Federal Reserve Board (FRB) would likely have the effect of causing interest rates to increase. Which would these be? 1. The Federal Open Market Committee (FOMC) buying securities 2. Raising the reserve requirements 3. Raising the discount rate 4. Raising the prime rate A) I and IV B) II and III C) II and IV D) I and III

B) II and III Raising reserve requirements, having more member deposits being held on reserve at the Fed, would lessen the money available to lend. Raising the discount rate, charging member banks more for loans, would also lessen the money available to lend. With less money available to lend, interest rates would go

Reports of rising inventories generally occur during which period of the business cycle? A) Peak B) Recovery C) Contraction D) Expansion

C) Contraction 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.

Tiny Cars, Inc., manufactures very small cars and trucks that get really good gas mileage. Their best seller is a small truck that is popular with businesses that use them as delivery vehicles. Tiny Cars is likely which kind of company? A) Countercyclical company B) Defensive company C) Cyclical company D) Growth company

C) Cyclical company Tiny Cars is a cyclical company whose sales will likely decline as business slows, and recover as the economy grows.

Demand side theory is also known as A) Miltonian theory. B) the Laffer Curve. C) Keynesian theory. D) invisible hand theory.

C) Keynesian theory.J ohn Maynard Keynes (later the first Baron Keynes) wrote the Magnum Opus of demand side theory. Milton Friedman is known for his work on Monetarist theory. Adam Smith (the invisible hand) is known for a free-market approach. Art Laffer leans toward a supply-side approach.

Which of the following interest rates do large U.S. money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans? A) Broker call loan rate B) Federal funds rate C) Prime rate D) Discount rate

C) Prime rate Each bank sets its own prime rate—the rate charged to their most credit worthy corporate customers for unsecured loans.

Which of the following theories postulates that market forces should be allowed to freely determine the price of goods with minimal government intervention? A) Monetarist theory B) Demand-side theory C) Supply-side theory D) Keynesian theory

C) Supply-side theory Supply-side economics holds that the government should allow market forces to determine prices of all goods. Supply-siders believe the federal government should reduce government spending and taxes. In this way, sellers of goods will price the goods at a rate that allows them to meet market demand and still sell them profitably.

A weak U.S. dollar leads to more A) U.S. imports and a balance of payments surplus. B) U.S. exports and a balance of payments deficit. C) U.S. exports and a balance of payments surplus. D) U.S. imports and a balance of payments deficit.

C) U.S. exports and a balance of payments surplus. When the dollar is weak relative to other currencies, it makes U.S. goods more affordable for foreign consumers to buy, so U.S. exports increase. As more goods flow out of the U.S., more money flows in—surplus.

Deflation occurs during A) a recession, coinciding with economic peaks. B) a depression, coinciding with an economic trough in the business cycle. C) a recession, coinciding with an economic contraction. D) a depression, coinciding with economic expansion in the business cycle.

C) a recession, coinciding with an economic contraction. Deflationary periods in the economy are most associated with severe recessions. Recessions occur during periods of economic contraction in the business cycle.

U.S. consumers are increasing their imports of foreign-made goods. On this data alone, one might expect gross domestic product (GDP) to A) initially increase sharply and then decrease. B) remain the same. C) decrease. D) increase.

C) decrease. GDP is the measure of good and services produced. If U.S. consumers are importing more foreign goods, it is likely that production of U.S. goods will fall off, leading to a decrease in the GDP.

When the Federal Open Market Committee (FOMC) directs that Treasury securities be purchased in the open market, this A) is intended to hinder contraction of the money supply. B) increases the supply of money. C) decreases the money supply. D) stabilizes the money supply.

C) decreases the money supply. When the FOMC directs that Treasury securities be purchased in the open market, this increases the supply of money. Treasury securities are coming out of the economy and, therefore, money is going in—the money supply increases. LO 9.h

A supply-side approach to fiscal policy will use all of these tools except A) decreasing government regulatory costs. B) decreasing tax rates on business entities. C) personal income tax rebates. D) providing tax credits to small business.

C) personal income tax rebates. Supply-side fiscal policy seeks to create a better environment for business to thrive. The end goal is a growing economy that creates jobs. Sometimes called trickle-down economics, the emphasis is on the business side much more than the consumer side.

When the Federal Reserve Board (FRB) wants to contract (tighten) the money supply, it will A) sell corporate securities to banks in the open market. B) buy Treasury securities from banks in the open market. C) sell Treasury securities to banks in the open market. D) buy corporate securities from banks in the open market.

C) sell Treasury securities to banks in the open market. When the FRB wants to contract (tighten) the money supply, it will sell Treasury securities to banks in the open market. The securities go into the economy, and the money comes out of the economy.

Economic reports show that there is a general rise in prices for consumer goods and a high unemployment rate occurring simultaneously. This combination can best be described as A) inflation. B) stagnation. C) stagflation. D) deflation.

C) stagflation. Stagflation is the term used to describe the unusual combination of inflation (a rise in prices) and high unemployment (stagnation). This generally occurs when the economy isn't growing (there is a lack of consumer demand and business activity), yet prices for goods are still rising.

Which of the following would be the interest rate charged for overnight, uncollateralized loans negotiated between two money center banks? A) Prime rate B) Discount rate C) Repo rate D) Federal funds rate

D) Federal funds rate The federal funds rate is the rate commercial money center banks charge each other for an overnight, unsecured loan. It is considered a barometer of the direction of short-term interest rates such as commercial paper and Treasury bills, which often move up or down roughly in parallel with the funds rate.

The Federal Reserve is concerned that the economy is slowing. With this in mind, which of these actions would the Federal Reserve most likely engage in? A) Engage in open market sales of T-bills B) Double the reserve requirements for member banks C) Raise the margin requirements under Regulation T D) Pursue an easy-money policy to lower interest rates

D) Pursue an easy-money policy to lower interest rates Monetary policy is implemented by the FRB. Monetary policy attempts to control the supply of money to influence the level of interest rates which, in turn, will either stimulate or dampen the U.S. economy. If the FRB believes the economy is sluggish and needs to be stimulated, it will attempt to lower interest rates by pursuing an easy-money policy. Lower rates are designed to encourage borrowing in an effort to stimulate growth. Raising margin rates or reserve requirements is considered a tightening action, which will dampen economic activity. Selling T-bills will reduce the money supply and raise rates, which is also a tightening action.

Which benchmark interest rate indicates the direction of the Federal Reserve Board's monetary policy? A) The prime rate B) The federal funds rate C) The broker call loan rate D) The discount rate

D) The discount rate The discount rate, being the rate the Federal Reserve Bank (FRB) charges for short-term loans to its member banks, is generally considered a good indication of the FRBs policy to either tighten or loosen its hold on the amount of money available to banks for lending to consumers.

When engaging in open-market operations, taking actions to either expand or contract the money supply, the Federal Reserve Board (FRB) will buy or sell A) U.S government agency securities. B) corporate bonds. C) corporate equity securities. D) Treasury securities.

D) Treasury securities. The FRB will buy or sell Treasury securities in the open market to either expand or contract the money supply.

The U.S. balance of payments deficit would decrease in all of the following scenarios except A) a decrease in dividend payments by U.S. companies to foreign investors. B) a decrease in purchases of U.S. securities by foreign investors. C) a decrease in imports of foreign goods into the United States. D) an increase in exports of domestic goods from the United States.

D) an increase in exports of domestic goods from the United States. A deficit in the balance of payments occurs when more money is flowing out of the country than in. When foreign investors decrease their purchases of U.S. securities, the flow of money coming into the United States decreases, this adds to the deficit rather than decreasing it.

The Federal Reserve Board (FRB) might impact the money supply by using all of the following except A) reserve requirements for member banks. B) buying or selling securities in open market. C) discount rate. D) prime rate.

D) prime rate. The prime rate is set by money center banks, not the FRB. The remaining three answer choices are the tools available to the FRB to be used to impact the money supply.

Sparkly florescent earbuds made in the U.S. by Irksome, Inc., are suddenly popular in Asia. People from Canton to Calcutta are buying them in huge numbers. This is most likely to cause A) the trade surplus to decrease, or deficit to increase . B) something, but the impact is unpredictable. C) no effect on the balance of trade. D) the trade deficit to decrease, or surplus to increase.

D) the trade deficit to decrease, or surplus to increase. The increased demand for a U.S. produced good will increase what is exported, causing a deficit to shrink, or a surplus to grow.

Which of the following is considered to be the order of the stages in a business cycle? A) Trough, contraction, expansion, peak B) Expansion, peak, contraction, trough C) Contraction, trough, peak, expansion D) Peak, expansion, contraction, trough

Expansion, peak, contraction, trough The correct order for the stages of a business cycle is expansion followed by a peak, then a contraction that ends in a trough. The cycle then repeats. Note that because this order represents a cycle, the correct answer has no set starting point or ending point, as long as the stages are shown in the right order.

Increasing cost of goods and services and high unemployment are characteristics of A) inflation. B) stagnation. C) stagflation. D) deflation.

Stagflation is the rare occurrence where the economy is contracting and income is dropping but prices are still rising.

What is the formula for calculating working capital? A) Current assets - current liabilities B) Assets + liabilities C) Assets - liabilities D) Current assets ÷ current liabilities

Working capital = current assets - current liabilities.

A toy company is experiencing sudden strong demand for a game. Purchasing this company's stock may prove profitable in the short run. This company's stock might best be termed as A) a short sale. B) a special situation. C) a cyclical. D) a growth.

a special situation. Special situations arise when a company shows unusual profit potential resulting from nonrecurring circumstances. These situations might include new management, the discovery of a valuable natural resource on corporate property, patents pending, or the introduction of a new product.

Hyperinflation is a period in which prices A) are rising at a fast and accelerating rate. B) are rising at a mild and steady rate. C) and economic activity are flat. D) are dropping.

are rising at a fast and accelerating rate If prices are rising rapidly this could be a sign of hyperinflation. This is most likely experienced in nations that have dramatically increased the money supply beyond what the economy can absorb.

The nation is experiencing a rapid increase in the cost of living, but wages are not keeping pace with the increase in cost. The nation is experiencing A) stagflation. B) stagnation. C) disinflation. D) inflation.

stagflation When prices are increasing but the economy is not growing, it is stagflation.

economic growth has slowed to a halt with little consumer demand, but prices for goods and services are still rising this. This is known as economic .. A) stagnation. B) contraction. C) stagflation. D) deflation.

stagflation When prices for goods and services are rising (inflation) during times when the economy isn't growing (stagnation), the economy is known to be in a period of stagflation.

A registered representative has a customer buying securities, but rather than paying in full, the customer wants to borrow some of the money needed for the purchase from the broker-dealer. It is explained to the customer that in order to borrow the money, there will be interest payable based on A) the broker call loan rate. B) the federal funds rate. C) the discount rate. D) the prime rate.

the broker call loan rate.