Mock 1 Flashcards
Which of the following statements about the CFA Institute’s Professional Conduct Program (PCP) is least accurate?
A)
Possible sanctions include condemnation by a member’s peers or suspension of a candidate’s participation in the CFA Program.
B)
If the PCP staff determine that a sanction against a member is warranted, the member must either accept the sanction or lose the right to use the CFA designation.
C)
Members who cooperate with a PCP inquiry by providing confidential client information to PCP staff are not in violation of Standard III(E) Preservation of Confidentiality.
B
Members can accept or reject a disciplinary sanction proposed by the Professional Conduct Program staff. If the member rejects the sanction, the matter is referred to a hearing before a disciplinary review panel of CFA Institute members. The other statements are accurate. ( Module 70.1, LOS 70.a)
Robert Miguel, CFA, is a portfolio manager. On Saturday, one of his clients invited Miguel and his wife to be his guests at his luxury suite for a major league baseball playoff game, which they did. Miguel told his supervisor on Monday that they had attended the game with the client and that the suite was luxurious. Miguel has:
A)
not violated the Standards.
B)
violated the Standards because disclosure must be in writing.
C)
violated the Standards because he must disclose the gift prior to accepting.
A
In this case, Miguel has not violated the standards. For a gift from a client in appreciation of past service or performance, informing his supervisor verbally is sufficient. Standard I(B) Independence and Objectivity requires disclosure prior to accepting the gift “when possible,” but in cases such as this when there is short notice, notification afterward is permitted.
At his golf club on Saturday morning, Paul Corwin, CFA, sees Frank Roberts, a friend and institutional client of his, who tells him that he is planning to sell his house on the 7th fairway. While golfing that day, Corwin tells Robert Lowe, a realtor, that Roberts is planning to sell his house and may need a realtor. He also tells Lowe that he manages an equities account for Roberts. If Corwin has not received permission from Roberts, he has violated the Standard on preservation of confidentiality:
A)
both by disclosing Roberts’ plan to sell his home and that he is a client.
B)
by disclosing Roberts’ plan to sell his home but not by mentioning that he was a client.
C)
by disclosing that Roberts is a client of his but not by mentioning Roberts’ plan to sell his home.
C)
by disclosing that Roberts is a client of his but not by mentioning Roberts’ plan to sell his home.
Corwin violated Standard III(E) Preservation of Confidentiality by revealing his business relationship with Roberts without permission. Because the information that Roberts’ plans to sell his home is not received as part of his professional relationship with Roberts, it is not covered by the Standard.
Doug Watson, CFA, serves in a sales position at Sommerset Brokerage, a registered investment adviser. Watson frequently drinks excessively. On one occasion, Watson was cited by local police for misdemeanor public intoxication. According to the Standard on knowledge of the law and the Standard on misconduct, Watson is in violation of:
A)
both of these Standards.
B)
neither of these Standards.
C)
only one of these Standards.
B)
neither of these Standards.
Watson’s excessive drinking is unfortunate, but we have no evidence that it has affected his work, professional integrity, judgment, or reputation. If he commits an act involving fraud or dishonesty, he would violate the Standard on misconduct.
Which of the following is least likely included in the CFA Institute Code of Ethics? Members of CFA Institute must:
A)
place their clients’ interests before their employer’s interests.
B)
strive to maintain and improve the competence of others in the profession.
C)
use reasonable care and exercise independent professional judgment.
A)
place their clients’ interests before their employer’s interests.
The requirement that members and candidates place their clients’ interests before their employer’s or their own is in Standard III(A) Loyalty, Prudence, and Care. The other choices are included in the CFA Institute Code of Ethics.
Dudley Thompson is a bond salesman for a small broker/dealer in London. His firm is the lead underwriter on a new junk bond issue for Ibex Corporation, and Thompson has sent details of the offering to clients. Thompson calls only his accounts over £1,000,000 for whom he thinks the issue is suitable. Thompson also posts his firm’s optimistic projections for Ibex’s performance in several Internet chat rooms. According to the Standards concerning market manipulation and fair dealing, Thompson is in violation of:
A)
both of these Standards.
B)
neither of these Standards.
C)
only one of these Standards.
B)
neither of these Standards.
Thompson has not violated Standard II(B) Market Manipulation by posting his firm’s projections for Ibex. A firm’s recommendation of a security may increase its price without any intent to mislead the market. The firm has disseminated the details of the offering to its clients fairly, so Thompson may call individual clients without violating the Standard III(B) Fair Dealing.
Angie Franklin, CFA, who covers technology stocks, joins a conference call for analysts presented by Cynthia Lucas, chief technology officer for LevelTech. Lucas tells the analysts that overseas shipments of the company’s important new product are going to be delayed due to manufacturing defects, which is new information to the analysts. After the meeting Franklin changes her rating on LevelTech from “buy” to “hold” and sends a note to accounts recommending the sale of LevelTech. Franklin:
A)
did not violate the Standards.
B)
violated the Standard on nonpublic information by revising her rating on LevelTech.
C)
violated the Standard on fair dealing by rating the stock a “hold” but recommending sale of the shares to her accounts.
B)
violated the Standard on nonpublic information by revising her rating on LevelTech.
Telling a selected group of analysts new information does not constitute public disclosure, and therefore acting or causing others to act on this information is a violation of Standard II(A) Material Nonpublic Information. Recommending the sale of a stock rated as a “hold” is not a violation of Standard III(B) Fair Dealing.
According to the recommended procedures for complying with the Standard on suitability, which of the following statements regarding an investment policy statement (IPS) is least accurate?
A)
An IPS should describe the roles and responsibilities of both the adviser and the client.
B)
A member or candidate is not responsible for financial information withheld by the client
C)
A client’s IPS must be updated at least quarterly to reflect any changes in their investment profile
C)
A client’s IPS must be updated at least quarterly to reflect any changes in their investment profile.
Standard III(C) Suitability requires that members and candidates update client information (the IPS) at least annually. The IPS can be updated more frequently if there are significant changes in the investment strategy or client characteristics.
Which of the following statements made in a marketing brochure is a violation of the Standards?
A)
“Roger Langley, Chartered Financial Analyst, has been a portfolio manager for ten years and passed all three levels of the CFA examinations on his first attempts.”
B)
“Jennifer York has passed the Level II exam and will earn the right to use the CFA designation after completing the Level III exam this June.”
C)
“Paul Yeng, CFA, has retired from the firm after 25 years of service. Much of the firm’s past success can be attributed to Yeng’s efforts as an analyst and portfolio manager.”
B)
“Jennifer York has passed the Level II exam and will earn the right to use the CFA designation after completing the Level III exam this June.
According to Standard VII(B) Reference to the CFA Institute, the CFA Designation, and CFA Program, citing an expected date for completing a level of the CFA Program is a misuse of the CFA designation. (Module 71.9, LOS 71.b)
According to the Code and Standards, members and candidates who are involved in distributing an initial public offering (IPO) of equity shares and wish to participate in the IPO:
A)
may participate unless the IPO is oversubscribed.
B)
may not participate because this creates a conflict of interest.
C)
must obtain pre-clearance from a supervisor before participating.
A)
may participate unless the IPO is oversubscribed.
Standard VI(B) Priority of Transactions recommends, but does not require, that a member or candidate obtain pre-clearance from his or her supervisor before participating in an equity IPO. Guidance for Standard III(B) Fair Dealing states that members and candidates distributing IPO shares must distribute shares in an oversubscribed IPO to clients and may not withhold shares for themselves. (Module 71.8, LOS 71.b)
Linda Bryant, CFA, is an employee of Roomkin Investment House, which underwrites equity and debt offerings. She has been approached by SimthCo to consult on a private debt placement. According to CFA Institute Standards of Professional Conduct, before Bryant agrees to accept this job, she is required to:
A)
obtain written consent from Roomkin after submitting details of the arrangement.
B)
talk to her immediate supervisor and get her approval to take this consulting job.
C)
inform SimthCo in writing that she will accept the job and provide details of the arrangement to Roomkin in writing.
A)
obtain written consent from Roomkin after submitting details of the arrangement.
To comply with Standard IV(B) Additional Compensation Arrangements, Bryant must obtain written consent from her employer before undertaking the independent consulting project. Bryant must also provide a description of the types of services being provided, the length of time the arrangement will last, and the compensation she expects to receive for her services. (Module 71.6, LOS 71.b)
To comply with the Code and Standards, analysts who send research recommendations to clients must:
A)
keep records of all the data and analysis that went into creating the report.
B)
send recommendations only to those clients for whom the investments are suitable.
C)
not send recommendations without including the underlying analysis and basic investment characteristics.
A)
keep records of all the data and analysis that went into creating the report.
Standard V(C) Record Retention requires members to maintain records of the data and analysis they use to develop their research recommendations. Recommendations may be brief, in capsule form, or simply a list of buy/sell recommendations. A list of recommendations may be sent without regard to suitability, including both safe income stocks and aggressive growth stocks, for example. (Module 71.7, LOS 71.b)
Excluding the results of terminated accounts when calculating historical performance is recommended by:
A)
both GIPS and the Standard concerning performance presentation.
B)
GIPS, but not by the Standard concerning performance presentation.
C)
neither GIPS nor the Standard concerning performance presentation.
C)
neither GIPS nor the Standard concerning performance presentation.
Standard III(D) Performance Presentation recommends that terminated accounts be included in historical performance calculations.
Ken Toma, CFA, has just completed an extensive analysis and concluded that the demand for vacation rentals in Hawaii will far exceed the supply for the foreseeable future. Toma writes a research report stating, “Based on the fact that the demand for Hawaiian beach vacations will exceed the supply of rooms for the foreseeable future, I recommend the purchase of shares of The Hawaiian REIT, a diversified portfolio of Hawaiian beachfront resorts.” If Toma presents this report to his clients, he will most likely violate the CFA Institute Standards by:
A)
not distinguishing between fact and opinion.
B)
not considering the suitability of the investment for his clients.
C)
failing to have a reasonable and adequate basis for his recommendation.
A)
not distinguishing between fact and opinion.
Standard V(B) Communication with Clients and Prospective Clients requires that Toma separate opinion from fact. Toma’s statement that excess demand will persist into the foreseeable future is an opinion, not a fact. Toma has established a reasonable basis for his recommendation through his analysis. Suitability does not become an issue until a client chooses to act on Toma’s recommendation. (Module 71.7, LOS 71.b)
Which of the following is one of the eight major sections of the GIPS standards for firms?
A)
Independent Third-Party Verification.
B)
Input Data and Calculation Methodology.
C)
Guidelines for Attributing Performance to Sub-Advisers.
B)
Input Data and Calculation Methodology.
Input Data and Calculation Methodology is one of the eight major sections of the GIPS standards for firms; the others are not. (Module 72.1, LOS 72.b)
Shan Ang, CFA, is a portfolio manager at Huang Investments. Lian Jan, an old friend of Ang’s, is an executive recruiter in the same city. Jan proposes that she will refer any high-level executives that she places locally to Ang, in exchange for one round of golf at Ang’s country club for each new client. According to the Standard concerning referral fees, Ang would be required to disclose this referral arrangement:
A)
only to all prospective clients referred by Jan.
B)
to his employer and all prospective clients referred by Jan.
C)
to all prospective clients, current clients, and his employer.
B)
to his employer and all prospective clients referred by Jan.
Standard VI(C) Referral Fees states that members and candidates must disclose to employers and to affected prospects and clients, before entering into any formal agreement for services, any benefits received for the recommendation of services provided by the member. (Module 71.8, LOS 71.b)
Yvette Michaels, CFA, an analyst for Torborg Investments, inadvertently overhears a conversation between two executives of Collective Healthcare in which they mention an upcoming tender offer for Network, a stock she covers. Michaels has followed both companies extensively and feels their consolidation would be very beneficial for both companies. She tells her supervisor, a senior analyst, about the proposed tender offer. Michaels’ actions are:
A)
in violation of the Standards.
B)
not in violation of the Standards because she told only her supervisor.
C)
not in violation of the Standards because she has not traded shares of Network or changed her report on the company.
A)
in violation of the Standards.
Michaels has violated Standard II(A) Material Nonpublic Information. Members who possess material nonpublic information are prohibited from acting or causing others to act on that information. She may not share the information with anyone except designated supervisory or compliance employees within her firm. Disclosing to her supervisor, who is not identified as a designated supervisor of compliance issues, is not permitted. (Module 71.3, LOS 71.b)
Kimberwick Technologies reported the following information for the year ending December 31.
Data
Net sales 50,000
Cash expenses 3,250
Cash inputs 17,000
Cash taxes 7,000
Increase in receivables 500
Depreciation expense 1,000
Cash flow from investing -5,000
Cash flow from financing -4,250
If the cash balance increased $13,000 over the year, cash flow from operations (CFO) is closest to:
A)
$21,250.
B)
$21,750.
C)
$22,250.
C)
$22,250.
The easiest way to calculate CFO here is total cash flow – cash flow from investing – cash flow from financing = $13,000 + 5,000 + 4,250 = $22,250. Alternatively, CFO = $50,000 − 3,250 − 17,000 − 7,000 − 500 = $22,250. (Module 20.2, LOS 20.f)
A business cycle theory developed by applying utility theory and budget constraints to macroeconomic models is most closely associated with which school of economic thought?
A)
Austrian.
B)
New Classical.
C)
New Keynesian.
B)
New Classical
Real business cycle theory, which derives from applying utility theory and budget constraints to macroeconomic models, is associated with the New Classical school. (Module 11.1, LOS 11.d)
Which of the following is most likely a motivation for a company’s management to issue low-quality financial reports?
A)
Management has provided optimistic earnings guidance.
B)
Oversight provided by the board of directors is weak or inadequate.
C)
Accounting principles permit a wide range of acceptable treatments and estimates.
A)
Management has provided optimistic earnings guidance.
Meeting or exceeding its own earnings guidance is a possible motivation for management to issue low-quality financial reports. Inadequate board oversight and wide ranges of acceptable accounting treatments are more appropriately viewed as opportunities for issuing low-quality financial reports. (Module 26.1, LOS 26.e)
The initial market value of a portfolio was $100,000. One year later the portfolio was valued at $90,000 and two years later at $99,000. The geometric mean annual return excluding any dividend income is closest to:
A)
−0.5%.
B)
−0.4%.
C)
0.0%.
A) -0.5%
R1 = −10/100 = −10%; R2 = +9/90 = +10%
geometric mean= √(0.9)(1.1)−1= −0.005 or −0.5%
Consider the following foreign exchange and interest rate information:
Spot rate: 1.3382 USD/EUR.
One year riskless USD rate = 2.5%.
One year riskless EUR rate = 3.5%.
The one-year arbitrage-free forward exchange rate is closest to:
A)
1.2391 USD/EUR.
B)
1.3253 USD/EUR.
C)
1.3513 USD/EUR.
B)
1.3253 USD/EUR
Arbitrage-free forward rate = 1.3382 USD/EUR × (1.025 / 1.035) = 1.3253 USD/EUR. (Module 15.2, LOS 15.h)
Other things equal, a country is most likely to have a current account deficit if it also has:
A)
a low savings rate
B)
a government budget surplus.
C)
a low rate of domestic investment.
A)
a low savings rate.
As shown by the fundamental macro relationship (X – M) = (S – I) – (G – T), a current account deficit (X < M) is associated with a low savings rate, a high rate of domestic investment, or low government savings (i.e., a budget deficit). (Module 14.2, LOS 14.i)
Haltata Turf & Sod currently uses the first in, first out (FIFO) method to account for inventory. Due to significant tax-loss carryforwards, the company has an effective tax rate of zero. Prices are rising and inventory quantities are stable. If the company were to use last in, first out (LIFO) instead of FIFO:
A)
net income would be lower and cash flow would be higher.
B)
cash flow would remain the same and working capital would be lower.
C)
gross margin would be higher and stockholder’s equity would be lower.
B)
cash flow would remain the same and working capital would be lower.
In the absence of taxes, there is no difference in cash flow between LIFO and FIFO. In addition, using LIFO would result in lower working capital (inventory is lower). Using LIFO would result in lower net income because of a lower gross margin (cost of goods sold is higher). (Module 22.5, LOS 22.l)
The probability that an acquisition has been executed well is 48%. If it is executed well, the probability of EPS greater than $3.20 is 55%. If the acquisition has not been executed well, the probability of EPS less than or equal to $3.20 is 65%. The unconditional probability of EPS greater than $3.20 is closest to:
A)
45%
B)
48%.
C)
55%
A)
45%
The unconditional probability, Prob(EPS>$3.20), is equal to Prob(executed well) × Prob(EPS > $3.20)|executed well) + Prob(not executed well) × Prob(EPS > $3.20|not executed well) = 0.48 × 0.55 + (1 – 0.48)(1 – 0.65) = 0.446.
A simple linear regression model produces the following outputs:
Total sum of squares
9,575.81
Mean regression sum of squares
7,115.74
Mean squared error
1,663.46
The F-statistic for this regression is closest to:
A)
1.3.
B)
4.3.
C)
5.8.
B)
4.3.
The F-statistic is the ratio of the mean regression sum of squares (MSR) to the mean squared error (MSE). 7,115.74 / 1,663.46 = 4.278. (Module 7.2, LOS 7.d)
Which of the following statements about monopolists is most accurate?
A)
Monopolists have imperfect information about the demand curve for their product.
B)
Without government intervention, monopolists will always earn economic profits.
C)
A monopolist maximizes total revenue where marginal revenue equals marginal cost.
A)
Monopolists have imperfect information about the demand curve for their product.
Demand curves are not observable so a monopolist must search for the profit maximizing price. Because demand information is not perfect, a monopolist is a price searcher. The other statements are false. Although a monopolist can earn positive economic profits in the long run, they are not guaranteed; if average total costs exceed price, the monopolist will experience economic losses. A monopolist maximizes profit, not revenue, where marginal revenue equals marginal cost. (Module 9.4, LOS 9.f)
A company’s investments in marketable securities include a 3-year tax-exempt bond measured at amortized cost and a 5-year government note measured at fair value through other comprehensive income. On its income statement, the company should report the coupon interest received from:
A)
both of these securities.
B)
neither of these securities.
C)
only one of these securities.
A)
both of these securities.
Interest and dividends received are reported as income, regardless of the balance sheet classification of marketable securities. (Module 19.6, LOS 19.e)
A central bank’s ability to achieve its policy goals is most likely to be limited by available resources when which of the following actual rates is below its target rate?
A)
Interest rate
B)
Inflation rate.
C)
Exchange rate.
C)
Exchange rate.
With exchange rate targeting, a central bank’s ability to increase the value of the domestic currency is limited by the amount of foreign reserves the country has available to buy its own currency in the foreign exchange market. While inflation targeting and interest rate targeting have limitations (e.g., liquidity trap conditions may exist, interest rates are bounded by zero), the central bank’s resources are not typically a limitation.
(Module 12.2, LOS 12.n)
Acme Corp. purchased a new stamping machine for $100,000, paid $10,000 for shipping, and paid $5,000 to have it installed in their plant. Based on an estimated salvage value of $25,000 and an economic life of six years, the difference between straight-line depreciation and double-declining balance depreciation in the second year of the asset’s life is closest to:
A)
$7,220.
B)
$10,556.
C)
$16,666.
B)
$10,556.
Straight line depreciation is (100,000 + 10,000 + 5,000 − 25,000) / 6 = 15,000 each year. Double-declining balance depreciation in the second year is: 115,000 (2/3)(1/3) = 25,556. The difference is $10,556. Remember that salvage value is not part of the declining balance calculation.
(Module 18.3, LOS 18.d)
From the point of view of a financial analyst, when evaluating companies that use different inventory cost assumptions, in a period of:
A)
stable prices, LIFO inventory is preferred to FIFO inventory.
B)
decreasing prices, FIFO inventory is preferred to LIFO inventory.
C)
increasing prices, FIFO cost of sales is preferred to LIFO cost of sales.
B)
decreasing prices, FIFO inventory is preferred to LIFO inventory.
The most useful estimates of inventory and cost of sales are those that best approximate current cost. Whether prices are increasing or decreasing, FIFO provides a better estimate of inventory values, and LIFO provides a better estimate of cost of sales. If prices are stable, there is no difference between LIFO and FIFO estimates of inventory or cost of sales.
An analyst estimates a stock has a 40% probability of earning a 10% return, a 40% probability of earning a 12.5% return, and a 20% probability of earning a 30% return. The stock’s standard deviation of returns based on this returns model is closest to:
A)
3.74%.
B)
5.75%.
C)
7.58%.
C)
7.58%.
Expected value = (0.4)(10%) + (0.4)(12.5%) + (0.2)(30%) = 15%
Variance = (0.4)(10 − 15)2 + (0.4)(12.5 − 15)2 + (0.2)(30 − 15)2 = 57.5
Standard deviation =√57.5 = 7.58%
Shortfall risk is best described as the probability:
A)
of a credit rating downgrade due to possible earnings shortfalls.
B)
of failing to make a contractually promised payment.
C)
that portfolio value will fall below some minimum level at a future date.
C)
that portfolio value will fall below some minimum level at a future date.
Choice A is downgrade risk; Choice B is default risk.
Longboat, Inc., sold a luxury passenger boat from its inventory on December 31 for $2,000,000. It is estimated that Longboat will incur $100,000 in warranty expenses during its 5-year warranty period. Longboat’s tax rate is 30%. To account for the tax implications of the warranty obligation prior to incurring warranty expenses, Longboat should:
A)
record a deferred tax asset of $30,000.
B)
record a deferred tax liability of $30,000.
C)
make no entry until actual warranty expenses are incurred.
A)
record a deferred tax asset of $30,000.
Warranty expense should be recorded when the inventory item covered by the warranty is sold. A deferred tax asset is created when warranty expenses are accrued on the financial statements but are not deductible on the tax returns until the warranty claims are paid. The full amount of the obligation, $100,000, is recorded as an expense, with a deferred tax asset of $30,000. Note that a deferred tax asset results when taxable income is more than pretax income and the difference is likely to reverse (warranty will be paid) in future years. (Module 24.2, LOS 24.c)
The presentation format of balance sheet data that standardizes the first-year values to 1.0 and presents subsequent years’ amounts relative to 1.0 is:
A)
an indexed balance sheet.
B)
a vertical common-size balance sheet.
C)
a horizontal common-size balance sheet.
C)
a horizontal common-size balance sheet.
On a horizontal common-size balance sheet, the divisor is the first-year values so they are all standardized to 1.0 by construction. Trends in the values of these items as well as the relative growth in these items are readily apparent. A vertical common-size balance sheet expresses all balance sheet accounts as a percentage of total assets and does not standardize the initial year.
Which of the following statements regarding the money supply and determination of short-term interest rates is least accurate?
A)
On balance, growth in real GDP tends to increase the transactional demand for money.
B)
If the short-term interest rate is greater than the equilibrium rate, there will be excess supply of real money balances.
C)
An increase in the real money supply from an initial equilibrium situation will cause households and businesses to sell interest- bearing securities.
C)
An increase in the real money supply from an initial equilibrium situation will cause households and businesses to sell interest- bearing securities.
From an initial equilibrium, an increase in real money balances will leave households and businesses with more money than they wish to hold, so they will purchase interest-bearing securities, driving their prices up and yields down until a new equilibrium short-term rate is established. (Module 12.1, LOS 12.d)
The bootstrap method of estimating the standard error of sample means involves drawing repeated samples from a data set, each with:
A)
outliers removed.
B)
the same sample size.
C)
one observation removed.
B)
the same sample size.
The bootstrap method involves drawing repeated samples of size n from the same data set and calculating the standard deviation of the resulting sample means. The jackknife method involves calculating multiple means from the same sample, each with one observation removed, and calculating the standard deviation of those means.
(Module 5.2, LOS 5.i)
n analyst writes the following about two nations:
East Dumerde has a state-dominated domestic economy and conducts little foreign trade.
West Dumerde uses its large economy and geophysical resource endowment to discourage other nations from criticizing its human rights record.
In this analyst’s opinion, the geopolitics of both East Dumerde and West Dumerde are most accurately described as:
A)
hegemony.
B)
nationalism.
C)
non-cooperation.
C)
non-cooperation.
In this analyst’s opinion, East Dumerde is best described as practicing autarky (nationalism and non-cooperation) and West Dumerde is best described as practicing hegemony (globalization and non-cooperation). (Module 13.1, L
An analyst gathered the following data about a company:
Collections from customers are $5,000.
Depreciation is $800.
Cash expenses (including taxes) are $2,000.
Tax rate = 30%.
Net cash increased by $1,000.
If inventory increases over the period by $800, cash flow from operations equals:
A)
$1,600.
B)
$2,400.
C)
$3,000.
C)
$3,000.
Use the direct method.
Collections from customers $5,000
Cash expenses –$2,000
Cash flow from operations $3,000
Cash expenses are given. If you had been given COGS, you would need to adjust that for inventory changes to get cash expenses for inputs. Depreciation is a non-cash change.
Changes in depreciation are used with the indirect method. Net change in cash will reflect CFI and CFF, not just CFO. (Module 20.2, LOS 20.f)
Automatic stabilizers are government programs that require no legislation and tend to:
A)
automatically increase spending at the same growth rate as real GDP.
B)
reduce interest rates, thus stimulating aggregate demand.
C)
change the government budget deficit in an opposite direction to economic growth.
C)
change the government budget deficit in an opposite direction to economic growth
Automatic stabilizers are built-in features that tend to automatically promote a budget deficit during a recession and a budget surplus during an inflationary boom, without a change in policy. (Module 12.3, LOS 12.o)
An economy is in full-employment equilibrium. If the government unexpectedly decreases the tax rate, the economy is most likely to experience:
A)
an increase in employment in the short run.
B)
a decrease in the price level in the short run.
C)
no change in employment in the short run.
A)
an increase in employment in the short run.
Short-run equilibrium may occur above full employment, for example as a result of an increase in aggregate demand caused by a decrease in taxes. Both employment and the price level increase in the short run. Above-full employment causes upward pressure on wages that will reduce short-run aggregate supply until, in the long run, output returns to its full-employment level with a still-higher equilibrium price level. (Module 10.3, LOS 10.k)
Pat Bannerman is analyzing economic indicators to form an opinion on whether an economic contraction has ended. Which of the following turning points should Bannerman most appropriately interpret as a coincident indicator suggesting economic growth is entering the early stage of a new expansion?
A)
Real personal income has begun increasing.
B)
The unemployment rate has begun decreasing.
C)
Building permits for new houses have begun increasing.
A)
Real personal income has begun increasing.
Real personal income is a coincident indicator with turning points that tend to coincide with business cycle turning points. The unemployment rate is a lagging indicator, here suggesting an expansion has been underway for some time. Building permits are a leading indicator because builders may seek permits in anticipation of an economic expansion that has not begun yet. (Module 11.2, LOS 11.e)
Three years ago, the U.S. dollar/euro exchange rate was 1.32 USD/EUR. Over the last three years, the price level in the United States has increased by 18%, and the price level in the eurozone has increased by 12%. If the current exchange rate is 1.40 USD/EUR, the real exchange rate over the period has:
A)
increased, and eurozone goods are now more expensive to U.S. consumers.
B)
decreased, and eurozone goods are now more expensive to U.S. consumers.
C)
increased, and U.S. goods are now more expensive to eurozone consumers.
A)
increased, and eurozone goods are now more expensive to U.S. consumers
For the base period, three years ago, the real exchange rate is the same as the nominal exchange rate, 1.32 USD/EUR. The real exchange rate over the period has changed from 1.32 to 1.40 × (112 / 118) = 1.3288. This increase in the real USD/EUR exchange rate indicates that the base currency (EUR) has appreciated in real terms, so that eurozone goods are now more expensive in real terms to U.S. consumers. (Module 15.1, LOS 15.a)
As a result of a recent acquisition, Lombard, Inc., has placed the following items on their balance sheet as of the beginning of their fiscal year:
Goodwill $30 million
Patent $10 million Expires in 10 years.
Trademark $15 million Expires in 15 years, renewable at minimal cost.
If Lombard amortizes intangible assets using the straight line method, the amortization expense on these assets for the fiscal year will be:
A)
$1 million.
B)
$2 million.
C)
$3 million.
A)
$1 million.
Goodwill has an indefinite life and is not amortized. A trademark or other intangible asset that has an expiration date but is renewable at minimal cost is treated as having an indefinite life and is not amortized. The patent has a finite life and its cost will be amortized at the rate of $1 million each year over ten years under the straight-line method. (Module 23.2, LOS 23.g)
