Ch. 19

Question 1

The __________________ is the rate of interest banks charge each other on overnight loans.

Answer 1

Fed Funds Rate

Question 2

List some examples of cyclical stocks.

Answer 2

Automobiles, housing, airlines

Question 3

Which short-term interest rate is the most volatile?

Answer 3

Fed Funds Rate

Question 4

A _____ stock tends to trade at a lower price relative to the issuing company’s fundamentals.

Answer 4

Value stock

Question 5

For collateralized loans they make to broker-dealers (for margin purposes), commercial banks charge the ____ rate.

Answer 5

Call rate

Question 6

____________ stock is resistant to recession.

Answer 6

Defensive

Question 7

________ policy attempts to control the supply of money and credit in the economy.

Answer 7

Monetary

Question 8

True or False: A flat yield curve reflects both long and short-term yields being the same.

Answer 8

True

Question 9

If interest rates are higher in the U.S. than overseas, what should happen to the value of the U.S. dollar?

Answer 9

It should strengthen as more foreign money is being invested in the U.S.

Question 10

What is the effect on the money supply if the Fed enters into a repurchase agreement (repo)?

Answer 10

Since the Fed is lending money, the money supply increases.

Question 11

The __________ rate is the only rate directly controlled by the FRB.

Answer 11

Discount rate

Question 12

______ stocks are related to companies whose sales and earnings are growing at a faster rate than the overall economy.

Answer 12

Growth

Question 13

In proper order, list the four phases of the business cycle.

Answer 13

1) Expansion - 2) Peak - 3) Recession / Contraction - 4) Trough

Question 14

What is the least effective tool available to the FRB?

Answer 14

Margin Requirements (Reg T)

Question 15

What does a normal, positive, ascending, or upward sloping yield curve indicate?

Answer 15

Bonds with longer maturities have higher yields than bonds with shorter maturities.

Question 16

True or False: Growth stocks have high P/E ratios and low dividend payouts.

Answer 16

True

Question 17

What is the effect of raising the minimum reserve requirement?

Answer 17

It decreases the money supply and tightens credit.

Question 18

For a bond, how is the real interest rate calculated?

Answer 18

Bond’s interest rate - Rate of inflation = Real Interest Rate

Question 19

The average duration of unemployment is what type of economic indicator?

Answer 19

Lagging

Question 20

____________ occurs when the supply of goods exceeds the demand for goods.

Answer 20

Deflation

Question 21

There would be a tightening of the money supply if the discount rate is __________.

Answer 21

Increased

Question 22

True or False: A value investor buys stocks with high P/E ratios.

Answer 22

False. Value investors buy stocks with low P/E ratios, low price-to-book ratios, and high dividend yields.

Question 23

U.S. importers prefer a _________ dollar since their cost of goods will be cheaper.

Answer 23

Stronger

Question 24

True or False: A strong U.S. dollar benefits U.S. manufacturers that export their goods.

Answer 24

False

Question 25

What is the effect of lowering the minimum reserve requirement?

Answer 25

It increases the money supply and eases credit.

Question 26

What typically happens to interest rates during an inflationary period?

Answer 26

Rates typically rise as investors need greater returns to compensate for rising prices.

Question 27

Define Gross Domestic Product (GDP).

Answer 27

The output of all of the goods and services that are produced in the U.S., without regard to the origin of the producer.

Question 28

Are inflationary periods characterized by rising or falling interest rates?

Answer 28

Rising

Question 29

Define deflation.

Answer 29

General decline in price levels

Question 30

The yield curve is ___________________________ when short-term bonds have higher yields than long-term bonds.

Answer 30

Inverted

Question 31

Non-farm payrolls is what type of economic indicator?

Answer 31

Coincident (current)

Question 32

If a member bank needs to borrow funds from the FRB, what rate will it be charged?

Answer 32

Discount rate

Question 33

Would inflationary periods be characterized by rising or falling interest rates?

Answer 33

Rising

Question 34

When the FOMC sells securities, it is pursuing a(n) _____ money policy in an attempt to ______ credit.

Answer 34

Tight monetary policy to restrict

Question 35

True or False: Industrial production and manufacturing sales are lagging economic indicators.

Answer 35

False- coincident

Question 36

True or False: GNP measures the output of goods and services within the U.S. disregarding the origin of the producer.

Answer 36

False, that is GDP

Question 37

True or False: A strong U.S. dollar benefits foreign manufacturers that export their goods to the U.S.

Answer 37

True

Question 38

True or False: Keynesian economic policies are implemented through government fiscal policies.

Answer 38

True

Question 39

True or False: Market cap includes the treasury shares of the corporation.

Answer 39

False

Question 40

True or False: GNP measures the output of goods and services by a national economy, both domestically and abroad.

Answer 40

True

Question 41

What should investors buy if they're worried about inflation?

Answer 41

Stocks and/or commodities

Question 42

______________ is the rate that banks charge their most creditworthy corporate clients.

Answer 42

Prime Rate

Question 43

What are lagging economic indicators able to confirm?

Answer 43

Confirm the business cycle

Question 44

The FRB will ______ securities to decrease the money supply and tighten credit.

Answer 44

Sell securities

Question 45

True or False: Companies with lower market caps tend to be safer.

Answer 45

False- they tend to be more risky

Question 46

True or False: Value stocks have low P/E ratios and high dividend payouts.

Answer 46

True

Question 47

There would be an easing of the money supply if the discount rate is __________.

Answer 47

Lowered

Question 48

Higher inflation leads to ______ interest rates, which causes bond prices to ____.

Answer 48

Higher interest rates causing bond prices to fall

Question 49

When the FOMC buys securities, it is pursuing a(n) _____ money policy in an attempt to _________ the economy.

Answer 49

Expansionary to stimulate the economy

Question 50

A decline in GDP for two successive quarters is defined as a ____________.

Answer 50

Recession

Question 51

_________ economic theory states that government intervention in the economy is necessary for sustained economic growth.

Answer 51

Keynsian

Question 52

In the foreign exchange markets, what is required to correct a trade deficit in the U.S.?

Answer 52

US dollar would need to weaken

Question 53

Define disinflation.

Answer 53

Reduction in the rate of inflation

Question 54

Who sets the prime rate?

Answer 54

Individual banks

Question 55

The money supply is what type of economic indicator?

Answer 55

Leading

Question 56

List some of the leading economic indicators.

Answer 56

Unemployment claims, housing permits, orders for consumer goods, M2, S&P 500, average work week, interest rate spread

Question 57

Lower inflation leads to _____ interest rates, which causes bond prices to ____.

Answer 57

Lower interest rates causing bond prices to increase

Question 58

What is the effect on the money supply if the Fed enters into a reverse repurchase agreement (repo)?

Answer 58

Money supply will tighten

Question 59

U.S. exporters prefer a _______ dollar since their products will be more competitive.

Answer 59

Weak dollar

Question 60

The FRB will ______ securities to increase the money supply and ease credit.

Answer 60

Buy securities

Question 61

__________ requirements set the amount of funds that banks must hold in reserve against specified deposit liabilities.

Answer 61

Reserve Requirements

Question 62

The _______________________ is often considered the most important measure of inflation.

Answer 62

CPI