Deck 5: Economic Activity

Question 1

An economic forecast will usually start with an analysis of the government's economic plan.

Answer 1

True
Explanation: Since most companies are influenced by the general level of economic activity, an economic forecast will usually start with an analysis of the government's economic program.

Question 2

If the government would stick to the goals of the Employment Act of 1946, economic policy would be coordinated.

Answer 2

False
Explanation: These goals are often conflicting in that not all respond favorably to the same economic stimulus.

Question 3

Fiscal policy involves government spending and taxation policies.

Answer 3

True
Explanation: Fiscal policy can be described as the government's taxing and spending policies.

Question 4

The most positive long-term sign of economic growth is probably slow, steady, predictable growth in the money supply.

Question 5

It is critical for financial analysts to specialize in a particular industry, or group of related industries, because of the large variety of factors which affect each industry significantly.

Question 6

Coincident indicators are of major importance to investors because they accurately predict the timing of business cycle changes.

Question 7

The U.S. budget deficit has been steadily growing since the beginning of 2001 because of the recession, tax cuts, and the war in Iraq.

Question 8

Fundamental analysis relies on forecasts of economic, industry, and company variables.

Question 9

An increase in reserve requirements by the Federal Reserve would decrease the money supply.

Question 10

A federal deficit will always expand the money supply.

Question 11

Past information can be extrapolated into the future to provide an accurate forecast.

Question 12

Between 1977 and 2007, the U.S. government budget has showed a surplus in only a few years.

Question 13

The Federal Reserve Board of Governors controls money supply and interest rates through its monetary policy.

Question 14

It is possible for any gain in real GDP to be completely offset by the rate of inflation.

Question 15

Subjective beliefs and judgments are usually eliminated from economic forecasts.

Question 16

The valuation process begins with an industry analysis.

Question 17

During President Reagan's first term, the three-year tax cut and negotiated cuts in government spending reduced inflation dramatically and sparked growth in the GDP, but also boosted the federal deficit to record levels.

Question 18

When comparing international growth in real GDP between 2000 and 2009 among the United States, Japan, China, Germany, and the United Kingdom, the United States clearly is at the top of the group of countries.

Question 19

Surpluses have a tendency to reduce economic growth.

Question 20

President George W. Bush took office in January of 2001 and inherited a crumbling economy that went into recession in March of 2001.

Question 21

Gross Domestic Product (GDP) measures only output from U.S. factories and consumption within the United States.

Question 22

Various industries are so different that no common factors exist among them for purposes of analysis.

Question 23

High interest rates in the United States relative to foreign interest rates have a tendency to attract foreign investors to the U.S. money markets.

Question 24

Monetary policy can be implemented very quickly to reinforce fiscal policy, or, when necessary, to offset the effects of fiscal policy.

Question 25

The U.S. government has had only ten years between 1977 and 2007 where a surplus occurred because government revenues were greater than expenditures.

Question 26

Leading indicators tend to give longer warnings before peaks than troughs.

Question 27

One sign that the recession beginning in 1990 was very painful was that many large companies such as AT&T, IBM, and GM announced significant reductions in their work forces.

Question 28

When the dollar increases relative to foreign currencies, foreign goods become more expensive, and consumers spend less money on imports.

Question 29

The Federal Open Market Committee (FOMC) determines the monetary policy for the U.S. economy.

Question 30

Leading indicators change direction in advance of general business conditions and are of prime importance to investors who want to forecast rising profits and stock prices.

Question 31

The change in real GDP is often inversely related to inflation.

Question 32

The fact that many studies have found a significant relationship between the money supply and stock prices has been quite helpful to investors.

Question 33

Every year since 1980, the U.S. has imported more goods than it has exported.

Question 34

Real GDP and the Consumer Price Index appear to move up and down together.

Question 35

The most widely used tool of monetary policy is open-market operations.

Question 36

Purchasing securities in open-market operations by the Federal Reserve has the same effect as increasing reserve requirements.

Question 37

In the last few years (since 2001), the trade deficit has increased dramatically.

Question 38

During recessions, it is common for imports to increase because people buy more cheap foreign goods.

Question 39

Gross Domestic Product (GDP) measures the worldwide production of all U.S. companies, firms, and enterprises.

Question 40

The composite index of leading indicators has shown little variation in its ability to predict.

Question 41

Which of the following is not a goal of the federal government economic policy as established by the Employment Act of 1946?

A)Low inflation
B)High levels of employment
C)Balanced federal budgets
D)Economic growth

Question 42

The most widely used tool of the Federal Reserve is:

A)buying and selling securities for its own portfolio.
B)changing the interest rate charged to commercial banks on very short-term loans.
C)changing reserve requirements on commercial bank time or demand deposits.
D)fiscal policy.
E)None of the above

Question 43

The quantity theory of money states that as the supply of money increases relative to the demand for money, people will make adjustments in their portfolios of assets. First, they will buy bonds, stocks, and then real assets.

Question 44

The Federal Reserve Bank's buying and selling of securities for its own portfolio is known as open-market operations.

Question 45

Some of the major coincident indicators would be:

A)money supply (M2), consumer expectations, and stock prices (S&P 500).
B)personal income, employees on nonagricultural payrolls, and industrial production.
C)average prime rate charged by banks, labor cost per unit of output, and commercial and industrial loans outstanding.
D)All of the above are coincident indicators

Question 46

The difference between GNP and GDP is that GDP only measures output from U.S. factories and consumption in the U.S.

Question 47

Expansions of economic activity during the eight peace time business cycles from February 1945 to November of 2001 have averaged approximately 63 months.

Question 48

Some of the major leading indicators would be:

A)money supply (M2), consumer expectations, and stock prices (S&P 500).
B)personal income, employees on nonagricultural payrolls, and industrial production.
C)average prime rate charged by banks, labor cost per unit of output, and commercial and industrial loans outstanding.
D)All of the above are leading indicators

Question 49

What is the difference between real GDP and inflation-adjusted GDP?

A)Real GDP is stated in current dollars
B)Inflation-adjusted, or nominal, GDP reflects output in physical terms
C)There is no difference between the two
D)None of the above

Question 50

The National Bureau of Economic Research publishes information about economic indicators in its monthly Survey of Current Business. The most important indicators to investors are the

A)leading indicators.
B)coincident indicators.
C)lagging indicators.
D)market indicators.
E)None of the above

Question 51

The composite index of leading indicators, made up of ten leading indicators, has historically

A)not always preceded changes in the business cycle.
B)given roughly the same notice at peaks as at troughs.
C)varied widely in its timing of notice at peaks and troughs.
D)More than one of the above

Question 52

Based on all recessions since 1945, contractions of economic cycles lasted an average of two years.

Question 53

If the Fed buys securities, the money supply goes down, along with interest rates.

Question 54

Fiscal policy that results in a deficit will cause more inflation when it finances the deficit through:

A)international currency exchange.
B)the sale of treasury securities to the Federal Reserve.
C)the sale of treasury securities to individuals in the private sector.
D)None of the above

Question 55

For the investor's purposes, a normal business cycle (peak to peak or trough to trough) lasts approximately ________, as reported by the National Bureau of Economic Research (based on the last eight peace time business cycles).

A)ten months
B)eleven months
C)forty-six months
D)sixty-five to sixty-six months

Question 56

It is estimated that manufacturing accounts for about than 20% of the GDP.

Question 57

The first step in any stock valuation is

A)economic analysis.
B)an accurate stock market prediction.
C)financial analysis.
D)industry analysis.
E)technical analysis.

Question 58

According to the traditional definitions, a recession is two or more quarters of:

A)negative nominal Gross Domestic Product (GDP) growth.
B)negative real GDP growth.
C)a rate of inflation which exceeds real GDP growth.
D)declining growth in real past GDP.

Question 59

The National Bureau of Economic Research revised its definition of a recession in 2001 to read as follows: A recession is

A)two or more quarters of negative GDP growth.
B)a significant decline in economic activity spread across the economy and lasting more than a few months.
C)a decline in industrial production lasting more than one year.
D)a decline in the growth rate of real GDP by more than 2% in any one quarter.

Question 60

Some of the major lagging indicators would be:

A)money supply (M2), consumer expectations, and stock prices (S&P 500).
B)personal income, employees on nonagricultural payrolls, and industrial production.
C)average prime rate charged by banks, labor cost per unit of output, and commercial and industrial loans outstanding.
D)All of the above are lagging indicators

Question 61

In the comparative international arena of real GDP growth rates, which country has had the highest growth in real GDP over the years 1993 to 2005?

A)The United States
B)Japan
C)China
D)Germany

Question 62

Since the stock market is the most accurate and reliable of the ten leading indicators,

A)investors need indicators which provide more lead time than the stock market.
B)investors are able to reduce or eliminate uncertainty about trading stocks.
C)investors are unable to forecast changes in stock prices.
D)None of the above

Question 63

The primary tools used to stimulate economic activity are:

A)international banking policies.
B)monetary and fiscal policies.
C)tax policy and interest rates.
D)imports and exports.

Question 64

When inflation increases over the long run (several years),

A)consumption will increase at a faster rate in real dollars.
B)interest rates will move up with inflation.
C)real GDP growth will stabilize at the rate of inflation plus 3% real growth.
D)the dollar will usually rise relative to currencies of countries where inflation is growing at a slower rate.

Question 65

Fiscal policy is implemented by:

A)the President of the U.S.
B)the Senate.
C)the House of Representatives.
D)Congress (the House and the Senate).
E)the Federal Reserve.

Question 66

In 2001, the World Trade Organization admitted:

A)China.
B)Poland.
C)The Czech Republic.
D)Turkey.

Question 67

Economic analysis is important for investors, because they need to anticipate

A)changes in corporate profits due to business cycle impacts.
B)growth in various industry segments based on changing economic trends.
C)how foreign trade might affect U.S. companies.
D)All of the above

Question 68

In order to stimulate the economy out of the 2008-2010 recession, the Federal Reserve Board:

A)printed more money than they have in decades.
B)did everything they could to see that the federal deficit was reduced as much as possible.
C)drove interest rates to their lowest levels in decades.
D)lowered taxes.

Question 69

All of the following are disadvantages of fiscal policy, except:

A)a long implementation lag.
B)that it may be politically motivated.
C)that it may be economically motivated.
D)that congress must approve the budgets and develop the tax laws.

Question 70

Of the predictors of economic patterns and stock market movements, the best is:

A)the money supply.
B)the level of interest rates.
C)the ten leading indicators.
D)No one variable is best, as many as possible should be considered

Question 71

All of the following are goals of monetary and fiscal policy, except:

A)stable prices.
B)business stability at high levels of production.
C)sustained economic growth.
D)a balance in domestic payments.

Question 72

The quantity theory of money holds that, as the supply of money increases relative to the demand for money, people will adjust their portfolios of assets by adding:

A)bonds first, then stocks, then real assets.
B)stocks first, then bonds, then real assets.
C)real assets first, then stocks, then bonds.
D)bonds first, then real assets, then stocks.

Question 73

Capacity utilization measures current manufacturing output against potential output. Which of the following statements is correct?

A)When capacity utilization is low, companies use their most productive and efficient plants and equipment.
B)As capacity utilization increases, companies bring less efficient plants and equipment on line.
C)When the capacity utilization rate moves above 80%, inflationary pressures may start to build in the economy.
D)All of the above are true

Question 74

Which of the following are true statements?

A)When a country's economy is healthy, its citizens will spend more in general.
B)When a country's economy is healthy, its citizens will import more high-priced luxury goods.
C)When a country's economy is healthy, its currency rises against its trading partners.
D)A and B are both correct

Question 75

The primary purpose of fundamental stock valuation is:

A)to eliminate stocks of those companies that are potential losers from the portfolio.
B)to identify for purchase those companies that are fundamentally undervalued.
C)to learn to identify peaks and troughs of the business cycle.
D)Two of the above.

Question 76

Since late 2002, the Bush administration has followed a weak dollar policy, and

A)the euro has fallen against the dollar.
B)the euro has risen against the dollar.
C)the Chinese renminbi has declined against the dollar.
D)None of the above happened

Question 77

Fiscal policy concerns the implementation of the government's

A)spending and taxing plans.
B)money supply and interest rate strategy.
C)foreign trade policy.
D)attitude towards business investment.

Question 78

Leading indicators have the following properties:

A)all leading indicators signal at the same time.
B)the stock market is the least accurate leading indicator.
C)there are 21 indicators that, when combined, give the most accurate signal of future economic activity.
D)all leading indicators lead at peaks and troughs.

Question 79

The breakdown of U.S. Gross Domestic Product into its major categories is usually as which of the following?

A)Personal Consumption, Government Purchases, Net Exports
B)Personal Consumption, Government Purchases, Gross Private Domestic Investment, Net Exports
C)Personal Consumption, Corporate Consumption, Government Consumption
D)Domestic Consumption and consumption of foreign goods by U.S. citizens