Deck 11: The Macroeconomic Environment for Investment Decisions

Question 1

The price of gold tends to rise during inflationary periods.

Answer 1

True

Question 2

The federal funds rate is the rate banks charge each other when they borrow reserves.

Answer 2

True

Question 3

An easy monetary policy should generate a lower required return for common stock.

Answer 3

True

Question 4

Open market operations involve the buying and selling of securities by the Federal Reserve.

Question 5

If the Federal Reserve sells securities, that reduces commercial banks' capacity to lend.

Question 6

An increase in stock prices is a lagging indicator of economic activity.

Question 7

An easy monetary policy increases the cost of credit.

Question 8

Monetary and fiscal policy may affect stock prices through their impact on corporate earnings.

Question 9

M2 is a narrower definition of the money supply and excludes savings accounts in commercial banks.

Question 10

Economies go through regular, identifiable cycles that can be forecasted with accuracy.

Question 11

An increase in the expected rate of inflation suggests that investors should sell the stocks of natural resource companies (e.g., gold and silver).

Question 12

Deflation is a period of rising employment.

Question 13

An increase in the targeted federal funds rate implies that the Fed is buying securities.

Question 14

If the country's exports increase, GDP declines.

Question 15

The federal funds rate is the rate the federal government pays when it borrows funds.

Question 16

A recession is a period of rising employment.

Question 17

The money supply, defined as M1, includes currency, coins, and checking accounts.

Question 18

Gross domestic product (GDP)is the sum of spending on consumer goods, government spending, and investing in stocks and bonds.

Question 19

The Federal Reserve is the central bank of the United States.

Question 20

Changes in the price of gold are often related to the anticipation of inflation.

Question 21

The sum of cash, currency, and demand deposits is

A)M1
B)M2
C)M3
D)M4

Question 22

Financial crises lead to

A)higher interest rates
B)a decrease in the money supply
C)an increase in the rate of inflation
D)the Federal Reserve buying securities

Question 23

When the Federal Reserve seeks to expand the money supply, it

A)sells securities
B)buys securities
C)runs a deficit
D)runs a surplus

Question 24

Monetary policy affects securities prices by
1. affecting investors' required return
2. increasing the federal deficit
3. affecting firms' capacity to generate earnings

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 25

The anticipation of inflation suggests that the investor should

A)buy bonds
B)anticipate higher interest rates
C)avoid real estate investments
D)sell stocks of gold companies

Question 26

One means to invest in anticipation of deflation is to

A)sell stocks short
B)buy real estate
C)acquire ETFs specializing in commodities
D)hoard money

Question 27

When the Federal Reserve seeks to contract the money supply, it may

A)sell securities and raise the targeted federal funds rate
B)sell securities and lower the targeted federal funds rate
C)buy securities and raise the targeted federal funds rate
D)buy securities and lower the targeted federal funds rate

Question 28

The fiscal policy of the federal government excludes

A)expenditures
B)taxation
C)the money supply
D)debt management

Question 29

Inflation is a period of

A)rising stock prices
B)rising prices of consumer goods
C)declining interest rates
D)rising confidence in the dollar

Question 30

A federal government deficit may be financed by
1. the general public buying government bonds
2. commercial banks buying treasury bills
3. the Federal Reserve selling securities

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 31

The economic goals of the Federal Reserve include
1. prosperity
2. full employment
3. stable prices

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 32

If the Federal Reserve lowers the target federal funds rate,

A)the discount rate rises
B)liquidity in the banking system is increased
C)securities prices fall
D)required reserves are decreased

Question 33

Deflation is a period of

A)rising unemployment
B)declining unemployment
C)rising prices
D)falling prices

Question 34

Recession is a period of

A)declining unemployment
B)rising unemployment
C)falling prices
D)rising prices

Question 35

Increased unemployment may be associated with

A)increased inflation
B)an increase in interest rates
C)an easy monetary policy
D)a tight monetary policy

Question 36

Which of the following is not a leading indicator?

A)initial claims for unemployment insurance
B)building permits for new home construction
C)changes in manufacturers' unfilled orders for durable goods
D)the level of unemployment