Economic Factors Flashcards
Which of the following short-term effects would not be a result of increases in the money supply?
A
Increases in interest rates
B
Inflation
C
Increases in stock prices
D
Increases in bond prices
A
Increases in interest rates
In the short term, increases in the money supply cause decreases in interest rates and increases in bond and stock prices. Increases in the money supply could lead to an overstimulated economy and inflation.
Which of the following is not a coincident economic indicator?
A
Duration of unemployment
B
Industrial production
C
Gross domestic product
D
Personal income
A
Duration of unemployment
Coincident indicators include personal income, GDP (gross domestic product), and industrial production. If the economy is strong, then personal income and retail sales will also show strong data. Duration of unemployment is a lagging indicator, which tends to occur after the economy has changed and, therefore, would be of no help in forecasting where the economy may be headed.
What is the rate the Fed charges to its member banks for short-term loans?
A
Margin
B
Fed funds
C
Discount
D
Prime
C
Discount
Fed member banks can borrow money on a short-term basis from the Fed. The rate of interest charged by the Fed on these loans is called the discount rate. The discount rate is the only rate set by the Fed.
The discount rate used by the Fed is:
A
The discount given on sales prices of repurchase agreements
B
The rate the Fed charges member bankers when borrowing money directly from the federal reserve
C
The percentage of bank’s demand deposits that they are required to keep on reserve
D
The interest rate banks charge each other for loans
B
The rate the Fed charges member bankers when borrowing money directly from the federal reserve
The Fed’s discount rate is the rate the Fed charges its member banks for loans to meet their overnight reserve requirement. T The discount rate is the only rate set by the Fed. The Fed funds rate is the interest rate banks charge each other for loans.
Who sets and manages fiscal policy?
A
The U.S. Treasury
B
The president and Congress
C
The Fed
D
The Internal Revenue Service (IRS)
B
The president and Congress
The president and Congress manage fiscal policy through legislative decisions that have a direct impact on the economy.
When the Fed is implementing a tight monetary policy, all the following should occur except:
A
Stock prices should fall
B
Interest rates should rise
C
Bond prices should fall
D
Interest rates should fall
Interest rates should fall
The Fed would implement a tight monetary policy when economic growth is too strong, and they want to combat inflation. A tight money policy would be expected to slow down the economy. The Fed could engage in reverse repos, raise reserve requirements, raise the discount rate and/or raise margin requirements. All of these would cause rates to rise. When rates are rising, bond prices are falling. Rising rates also means borrowing costs become higher, reducing earnings, and causing stock prices to fall.
The CPI is an indicator of:
A
The total sum of final goods and services produced in the nation in a given year
B
The average cost of specific goods and services
C
The average cost of private utilities and consumer goods over a 3-month period
D
The fluctuation of goods and utilities that make up GNP
B
The average cost of specific goods and services
The Consumer Price Index is a measure of the prices of a basket of goods and services. It is used to measure inflation.
The Federal Reserve has several tools it can use to increase or decrease the money supply. Which tool has the smallest impact on money supply levels?
A
Reserve requirement
B
Discount rate
C
Open market operations
D
Margin requirement
CORRECT!
D
Margin requirement
Monetary policy tools of the Fed include setting reserve requirements, setting the discount rate, setting margin rates, moral suasion and conducting open market operations. Changing margin rates on securities has the smallest impact on money supply levels.
Deflation would likely begin to occur in which phase of the economic cycle?
A
Contraction
B
Peak
C
Expansion
D
Trough
A
Contraction
Deflation refers to a decrease in the general level of prices. In this case, the supply of goods and services is greater than the demand. During a recession (which occurs during the contraction phase), there is a general decline in economic activity accompanied by a significant increase in unemployment. This results in more products than money, causing prices to decrease.
This yield curve represents shorter maturities having higher yields than longer maturities and may occur right before a recession or during very extreme economic conditions when interest rates are very high in the market and the demand for money far exceeds the money supply:
A
Negative
B
Flat
C
Positive
D
Fluctuating
A
Negative
The negative yield curve, also known as the inverted yield curve, flips the normal yield curve upside down and represents shorter maturities having higher yields than longer maturities. Inverted yields may occur right before a recession. This type of yield curve only occurs during very extreme economic conditions when interest rates are very high in the market and the demand for money far exceeds the money supply. The positive yield curve, also known as a normal ascending yield curve, is an upward and outward sloping curve. This yield curve is present during normal economic conditions. A normal yield curve indicates that bond issuers are willing to pay a higher coupon for the ability to use the money from the bond for a longer period. In turn, bond investors are willing to wait a longer period to get their principal back in return for the higher yield on the bond. A flat yield curve is a straight line on the graph and represents short- and long-term rates on bonds that are yielding similar results. This typically happens when the yield curve is on the way to inverting, or becoming a normal curve again, because investors are expecting a change in rates.
Which of the following represents the 2 key measures of inflation?
A
Money supply and balance of trade
B
New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotation System (NASDAQ)
C
Gross Domestic Product (GDP) and real Gross Domestic Product (GDP)
D
Consumer Price Index (CPI) and Producer Price Index (PPI)
D
Consumer Price Index (CPI) and Producer Price Index (PPI)
2 key measures of inflation are the Consumer Price Index (CPI) and Producer Price Index (PPI). The CPI measures the change in consumer prices, and the PPI measures the change in producer or wholesale prices.
Which of the following choices places the phases of the economic cycle in correct chronological order?
A
Contraction, expansion, peak, trough
B
Expansion, peak, trough, contraction
C
Trough, contraction, peak, expansion
D
Expansion, peak, contraction, trough
D
Expansion, peak, contraction, trough
The 4 phases of the business cycle are expansion, peak, contraction, trough. When you are asked to identify the correct chronological order of the economic cycle, it does not matter which phase is the starting point. Focus on the sequence, and be able to name the next 3 in order.
An unfavorable balance of trade, also called a trade deficit, would be widened by which of the following?
A
Decreased level of U.S. imports
B
Increased sales of U.S. securities to foreign investors
C
Increased levels of U.S. exports
D
Increased levels of U.S. imports
D
Increased levels of U.S. imports
If the U.S. dollar is strong compared to foreign currencies, it is likely that the U.S. would experience a trade deficit. This makes U.S. exports expensive in foreign countries, and foreign products would be cheap in the U.S., resulting in more imports than exports in the U.S. If the dollar is strong against foreign currency, there will likely be a decrease in sales of U.S. securities to foreign investors, not an increase.
Who implements the Federal Reserve’s policies?
A
Congress
B
The Federal Open Market Committee (FOMC)
C
The U.S. Treasury
D
The president
B
The Federal Open Market Committee (FOMC)
The Federal Open Market Committee (FOMC) includes the Fed Board of Governors and 5 district presidents who implement the Fed’s policy.
The decisions and actions of the Fed that influence the amount of money and credit in the U.S. economy is called:
A
Internal revenue policy
B
Treasury policy
C
Fiscal policy
D
Monetary policy
D
Monetary policy
Monetary policy refers to the decisions and actions of the Fed that influence the amount of money and credit in the U.S. economy
