CFP Economic Cycles

Question 1

As interest rates increase, what happens to stock prices and bond prices?

Answer 1

Decrease

Question 2

Investment returns are ____ related to changes in interest rates

Answer 2

Investment returns are inversely related to changes in interest rates

Question 3

As interest rates DECREASE what happens to bond prices?

Answer 3

As interest rates DECREASE, bond prices will INCREASE

Question 4

Purchasing power is _______ related to interest rates

Answer 4

Purchasing power is INVERSELY related to interest rates

As interest rates go up, you can buy less with your money (inflation)

Question 5

The cost of money is measured by

Answer 5

Interest rates

Question 6

Monetary Policy / 3 goals

Answer 6

Federal Reserve (interest rates)

3 goals:
l-t economic growth
maintain price levels
full employment

Question 7

Fiscal Policy

Answer 7

Congress

Stimulus
Debt Management

Question 8

What things cause a shift in the Demand Curve up and to the right?

Answer 8

Increased Income
Goverment lowers Taxes
Lower Savings Rate
More Disposable Income

Question 9

What things cause a shift in the Supply Curve down and to the right?

Answer 9

Technology improves efficiency
Competition
Anything other than price

Question 10

What things cause a shift in the Supply Curve up and to the left?

Answer 10

Less firms in the marketplace
Goods used in the manufacturing process increase

Question 11

What is the definition of a substitute?

Answer 11

Products that serve a similar purpose

Movie rentals / Movie tickets

Question 12

What is the definition of a complement?

Answer 12

Complements are products that are consumed jointly

Razors / Razor blades / Shaving cream

Question 13

Examples of Elastic Demand

Answer 13

Sensitive to price

-Airline tickets
-Alcohol
-Luxury goods

An elastic demand curve is almost horizontal, sloping down and to the right

Question 14

Examples of Inelastic Demand

Answer 14

Not sensitive to price (doesn’t snap)

Toilet paper
Gasoline
Milk

An INelastic demand curve is almost vertical, sloping down and to the right. Remember the “I” in inelastic to remember the shape of the inelastic demand curve

Question 15

What are the phases of the Business Life Cycle?

Answer 15

Expansion
Peak
Recession/Contraction
Trough
Back to Expansion

Average time = 60 months

Fundamental p.67 for key chart on variables during each cycle

Question 16

Gross Domestic Product

Answer 16

Amount of good and services produced in the US, regardless of ownership (ex: Mexican beer made in Texas)

Question 17

Gross National Product

Answer 17

Measures the amount of goods and services produced by a country’s citizens, regardless of where the goods and services are produced
(ex: Ford production in Mexico is included in GNP, not GDP)

Question 18

Definition of a recession

Answer 18

6 consecutive months (2 quarters) of declining GDP

Question 19

Definition of a depression

Answer 19

If recession lasts for 18 months or 6 consecutive quarters

Question 20

Inflation formula

Answer 20

Price (year x) - Price (previous year)
____________________________________
Price (previous year)

Question 21

Moderate inflation

Answer 21

1-2%

Question 22

Definition of deflation

Answer 22

Opposite of inflation.

Prices are falling.

Individuals hold cash because cash becomes more valuable.

Question 23

Definition of DISINFLATIONS

Answer 23

A decline or slowdown in the rate of inflation

Question 24

CPI
Consumer Price Index measures

Answer 24

CPI measures the price change in a basket of goods and services at the retail level

Question 25

PPI
Producer Price Index

Answer 25

PPI measures price changes in the wholesale and manufacturing sectors

Question 26

Leading Economic Indicators

Answer 26

Initial Unemployment Claims
Stock prices
Money Supply M2
New manufacturing orders
New private housing units
Consumer sentiment

Question 27

Lagging Indicators

Answer 27

Average duration of unemployment
Change in CPI
Change in labor cost per unit
Consumer credit to income
Value of outstanding loans
Avg prime rate charged by banks

Question 28

How does the Fed ease Monetary Policy?

Answer 28

Increase Money supply
Decrease interest rates
Decrease discount rate
Purchase securities through open market operations

Question 29

How does the Fed tighten Monetary Policy?

Answer 29

Decrease money supply
Increase interest rates
Increase the discount rate

Sell securities through open market operations (putting notes on the market, taking cash OFF the market)

Question 30

What is the Discount Rate?

Answer 30

Overnight interest rate at which member banks can borrow from the Fed to meet reserve requiements

Question 31

Normal yield curve

Answer 31

Concave sloping upward and to the right

Question 32

Inverted yield curve

Answer 32

Convex, sloping downward and to the right

Question 33

Fair Credit Reporting Act

Answer 33

If a consumer is refused credit, must be provided with the report. Rights to free credit report 1x per year.

Question 34

Fair Debt Collection Act

Answer 34

Calls 8am-9pm
Must contact attorney

Question 35

Fair Credit Billing Act

Answer 35

Gives a creditor 30 days to acknowledge receipt of a billing dispute
Must explain/correct within 90 days

Consumer liability for stolen card is limited to $50

Question 36

Truth in Lending Act

Answer 36

Lenders must disclose cost of financing
Interest must be stated in terms of APR
Administered by the Federal Reserve

Question 37

Credit Card Accountability Responsibility and Disclosure Act of 2009
(Credit CARD Act)

Answer 37

45 days notice of interest rate increases

No interest on debt pd within grace period

21+ (or with co-signer)

Late fees limited to $24 /$35(6 months)

Question 38

FDIC Insurance does not cover

Answer 38

mutual funds, stocks, bonds, annuities

deposits outside US

Question 39

Chapter 7 bankruptcy, items not discharged

Answer 39

Not discharged:
Student loans
3 years of back taxes
Alimony
Child support
Monies owed due to malicious acts

Question 40

Chapter 7 bankruptcy, exempt property

Answer 40

Homestead

Life insurance

Qualified plans along with converted IRAs have an unlimited exemption

Traditional and Roth IRAs up to $1M
$1,512,350 (2022-2025)

Question 41

How long does Chapter 7 bankruptcy remain on your credit report?

Answer 41

Up to 10 years

Question 42

Chapter 11 bankruptcy provide relief through

Answer 42

reorganization for businesses or for the self-employed

Question 43

Chapter 13 bankruptcy provides relief through

Answer 43

adjusting debts

Question 44

Workers compensation is a form of limited liability or absolute liability?

Answer 44

Absolute

Question 45

Maximum number of weeks to receive unemployment is

Answer 45

39 weeks

with regular benefits last up to 26 weeks

additional 13 weeks is during periods of high unemployment

Question 46

Securities Act of 1933

Answer 46

Regulates new issues of securities (IPOs)

Question 47

Securities Act of 1934

Answer 47

Regulates secondary market

Question 48

Securities Investor Protection Act of 1970

Answer 48

Created Securities Investor Protection Corporation (SIPC)

Provides coverage if a broker-dealer becomes insolvent

Question 49

What are the 5 factors that affect credit scores?

Answer 49

Payment history

Amount of debt

Length of credit history

New credit

Type of credit