Unit 6 | Basic Economic Concepts Flashcards
If the Consumer Price Index (CPI) is down but consumer demand is up, the economy is likely in which stage of the business cycle?
A. Trough to expansion
B. Peak to contraction
C. Recovery to trough
D. Contraction to trough
A. As prices trend downward and consumer demand increases, the economy is recovering from a trough (the bottom) to expansion, choice A. As demand continues to increase, assuming supply remains constant, upward pressure will be put on prices through the expansion to the peak.
A bond analyst plots a yield curve and notices that short-term maturities have higher yields than intermediate and long-term maturities. This result is an example of
A. an inverted yield curve.
B. a positive yield curve.
C. a normal yield curve.
D. an algorithmic yield curve.
A. An inverted or negative yield curve results when debts with short-term maturities have higher yields than those with longer maturities. A positive, or normal, yield curve results when the yields increase as maturities do.
The business cycle includes all of the following classifications except
A. expansion.
B. peak.
C. trough.
D. waves.
D | Throughout modern history, periods of economic expansion have been followed by periods of contraction in a pattern referred to as the business or economic cycle.
Business cycles go through four stages: expansion, peak, contraction, and trough.
LO 6.a
An upward sloping yield curve represents which of the following?
A. Time value of money
B. Increased risk of default over time
C. Inflation expectations
D. All of the above
D | The time value of money is reflected in the upward-sloping yield curve. Longer-term rates require higher rates to compensate for losing current buying power and liquidity. Longer-term funds bear a higher risk of default than do shorter-term funds and, as a result, command higher rates. Increasing inflation expectations cause the yield curve to slope upward to compensate lenders for losing value through inflation.
LO 6.b
