Chapter 19- Economic Factors

Question 1

consumer domestic product (CPI)

Answer 1

Measures the change in prices of goods purchased by a typical consumer
- key measure of inflation

Question 2

Inflation may begin to occur here,
with the FRB then responding
with a ___ ___ policy

Answer 2

“Tight Money”

Question 3

The FRB pursues an
____ ____ policy to
stop the contraction

Answer 3

“Easy Money”

Question 4

leading economic indicators

Answer 4

• Building permits, private
  housing units
• Manufacturers’ new orders,
  consumer goods, non-defense
  capital goods
• S & P 500 Index
• Initial claims for unemployment
  insurance
• Interest rate spreads, 10-year T-bonds less federal funds

Question 5

coincident economic indicators

Answer 5

• The Index of Industrial Production
• Employees on non-agricultural
  payrolls
• Personal income less transfer
  payments

Question 6

lagging economic indicators

Answer 6

• Change in the Consumer Price
  Index for services
• Average prime rate charged by
  banks
• Average duration of
  unemployment

Question 7

Prime Rate

Answer 7

The rate charged by commercial banks to their best corporate clients

Question 8

Discount Rate

Answer 8

The rate charged by the FRB when a member bank borrows from it

Question 9

cyclical stock

Answer 9

Performance tends to run parallel to changes in the
economy
- Includes machine tool companies, construction firms, transportation and automotive
- do well during the expansion phase

Question 10

defensive stock

Answer 10

Have smaller reactions to changes in the economy
- Examples include utility, tobacco, alcohol,
cosmetic, pharmaceutical and food companies
- These tend to do better during contraction

Question 11

growth stocks

Answer 11

Companies whose sales and earnings are growing at a faster rate than the economy
- They reinvest most of their earnings and pay little
or no dividends
- Tend to be riskier than other stocks, but offer
greater potential for appreciation

Question 12

value stock

Answer 12

Stocks that trade at lower prices relative to the issuing company’s fundamentals
- The risk is that investors may ignore these companies
- Investors who buy value stocks are considered contrarians

Question 13

Regulation T

Answer 13

Extension of credit by broker-dealers

Question 14

Discount Rate

Answer 14

The only rate that’s directly controlled by the Fed

Question 15

Reserve Requirement

Answer 15

Amount of money that a bank must maintain based on a percentage of deposits

Question 16

Trades U.S. Treasuries through “primary government dealers”

Answer 16

Federal Open Market Committee (FOMC)

Question 17

To increase money supply
and ease credit – The FOMC will –>

Answer 17

BUY SECURITIES and Engage in Repos

Question 18

To decrease money supply
and tighten credit – the FOMC will –>

Answer 18

SELL SECURITIES and Engage in Reverse Repos

Question 19

The balance sheet equation is total assets =

Answer 19

total liabilities + shareholders’ equity.

Question 20

Paid-in capital is part of ____ ____

Answer 20

shareholders’ equity

Question 21

In order to determine a company’s earnings per share, its ___ ____must be examined.

Answer 21

income statement