Question 1

To obtain an approximate estimate of the real interest rate, one must ________ the ________ the nominal risk-free rate.

Accepted Answer

To obtain the real interest rate, we need to adjust the nominal rate for the expected inflation. Thus, the correct combination would be to subtract the expected inflation from the nominal rate.

Question 2

________ in interest rates are associated with stock market declines.

Accepted Answer

Unanticipated increases in interest rates are associated with stock market declines. This is because when interest rates unexpectedly rise, it becomes more expensive for companies to borrow money to invest in their businesses, which in turn can lead to lower stock prices. Anticipated increases in interest rates, on the other hand, may already be priced into the stock market and therefore have less of an impact. Anticipated decreases in interest rates tend to have the opposite effect, as they can stimulate economic growth and lead to higher stock prices. Unanticipated decreases in interest rates may also have a positive impact on the stock market, but to a lesser extent than anticipated decreases.

Question 3

Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment?

Accepted Answer

The real interest rate is the rate at which your ability to purchase grows while accounting for inflation. It represents the actual increase in purchasing power you will experience from holding an interest-earning investment. The nominal interest rate, on the other hand, only indicates the stated rate of return before factoring in inflation. Therefore, the real interest rate is the best choice for describing the growth in purchasing power from an interest-earning investment.

Question 4

Which one of the following is not a U.S. supply shock?

Accepted Answer

Chinese purchases of U.S. exports increasing is not a U.S. supply shock, it would be a boost to the U.S. economy. The other options - unions forcing an increase in national wage rates, the oil supply from the Middle East dropping 30%, and extended droughts reducing U.S. food production 25% - are all examples of supply shocks that can negatively impact the U.S. economy.

Question 5

The ratio of the purchasing power of two economies is termed the ________.

Accepted Answer

The ratio of the purchasing power of two economies is called the real exchange rate. The nominal exchange rate refers to the value of one currency in terms of another, while the balance of trade measures the difference between a country's exports and imports. The real interest rate is the nominal interest rate adjusted for inflation.

Question 6

Which one of the following is probably the most direct and immediate way to stimulate or slow the economy, although it is not very useful for fine-tuning economic performance?

Accepted Answer

Fiscal policy involves government spending and taxation decisions, which can directly and immediately impact economic activity by increasing or decreasing aggregate demand.

Question 7

Which one of the following is not a demand shock?

Accepted Answer

Options A, B, and C are all demand shocks as they affect the level of demand in the economy, either through increased government spending, increased money supply, or reduced consumer spending. Option D, however, is not a demand shock as it is an improvement in education which can lead to an increase in productivity and potential supply, rather than demand.

Question 8

Everything else equal, an increase in the government budget deficit would:
I. Increase the government's demand for funds
II. Shift the demand curve for funds to the left
III. Increase the interest rate in the economy

Accepted Answer

An increase in the government budget deficit would increase the government's demand for funds as it requires more money to finance the deficit. This would lead to a rightward shift in the demand curve for funds, which would increase the interest rates in the economy. Therefore, both I and III are true, while II is false as the demand curve shifts right instead of left.

Question 9

The stock price index and contracts and orders for nondefense capital goods are ________.

Accepted Answer

Stock price index and contracts/orders for nondefense capital goods are considered leading economic indicators because they provide a glimpse into future economic activity. The stock price index reflects market expectations of future profitability of firms, while contracts and orders for capital goods reflect expected future investments by firms.

Question 10

Which of the following would not be considered a supply shock?

Accepted Answer

An increase in government spending is a demand shock, not a supply shock. Supply shocks are unexpected events that affect the production and availability of goods and services, such as changes in the price of inputs like oil or natural disasters that damage crops. A change in the level of education of the average worker could potentially lead to a supply shock if it affects productivity and output.

Question 11

Supply-side economics tends to focus on ________.

Accepted Answer

Supply-side economics emphasizes increasing productive capacity by promoting investment, lowering taxes on businesses and individuals, and reducing regulations that may hinder economic growth. The theory suggests that by improving the supply of goods and services, economic growth and employment will increase. The other options, government spending, price controls, and monetary policy, are more closely associated with demand-side economics.

Question 12

Which of the following is not an example of fiscal policy?

Accepted Answer

Fiscal policy refers to the decisions made by the government regarding taxation and spending. Social Security spending and Medicare spending are both examples of government spending. Changes in the tax rate are also an example of fiscal policy. Fed purchases of Treasury securities, on the other hand, are part of monetary policy which is the responsibility of the Federal Reserve, not the government's fiscal policy.

Question 13

Which one of the following describes the amount by which government spending exceeds government revenues?

Accepted Answer

Budget deficit is the term that describes the amount by which government spending exceeds its revenues. A budget deficit can lead to government borrowing, which can cause the national debt to increase.

Question 14

Which of the following affects a firm's sensitivity of its earnings to the business cycle?
I. Financial leverage
II. Operating leverage
III. Type of product

Accepted Answer

All three factors affect a firm's sensitivity of its earnings to the business cycle. Financial leverage amplifies the impact of business cycle fluctuations on a firm's earnings due to fixed financial obligations. Operating leverage does so through fixed operational costs, and the type of product influences how demand for it varies with economic conditions.

Question 15

If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with ________ sensitivity to economic conditions.

Accepted Answer

Industries with below-average sensitivity to economic conditions would be more stable and have a better chance of maintaining steady growth during slow economic times. This could include sectors such as healthcare, utilities, and consumer staples, which tend to be less affected by cyclical economic factors.

Question 16

In macroeconomic terms, an increase in the price of imported oil or a decrease in the availability of oil is an example of a ________.

Accepted Answer

An increase in the price of imported oil or decrease in availability would disrupt the supply of oil, making it a supply shock in macroeconomic terms. Demand shock would refer to a change in consumer spending behavior, monetary shock refers to changes in the money supply, and refinery shock would refer to an issue specific to the refining process.

Question 17

Everything else equal, if you expect a larger interest rate increase than other market participants, you should ________.

Accepted Answer

If you expect a larger interest rate increase than other market participants, you should buy short-term bonds. This is because short-term bonds have lower interest rate risk than long-term bonds, meaning that their prices will be less affected by a rise in interest rates. Buying common or preferred stocks is not necessarily related to interest rate expectations.

Question 18

The average duration of unemployment is ________.

Accepted Answer

The average duration of unemployment is a lagging economic indicator because it reflects past economic events rather than predicting future changes. A high average duration of unemployment indicates that it took longer for people to find work after losing their jobs, which likely occurred during a period of economic downturn.

Question 19

Inflation is caused by ________.

Accepted Answer

Inflation is caused by a rapid growth of the money supply, as there is an excess of money chasing a limited supply of goods and services, which drives up prices. The other choices (unions, excess supply, low rates of capacity utilization) are not direct causes of inflation.

Question 20

An example of a highly cyclical industry is the ________.

Accepted Answer

The automobile industry is highly cyclical due to its sensitivity to economic conditions. Consumer demand for new cars decreases during economic downturns and increases during periods of growth.

Quiz 12: Macroeconomic and Industry Analysis

To obtain an approximate estimate of the real interest rate, one must the the nominal risk-free rate.