Series 7: Chapter 9 Practice Question Answers

Chapter 9 Practice Question Answers

1. 1. Answer: A. A recession is said to occur when the contraction phase of the business cycle lasts more than two quarters (six months). A contraction phase is typically measured through gross domestic product (GDP).
2. 2. Answer: A. If the Fed buys Treasuries, more money goes into the economy, causing interest rates to drop. When interest rates are low, credit is more available, so people and businesses spend more, thereby stimulating the economy.
3. 3. Answer: D. The Federal Reserve Board uses three tools to implement monetary policy: open market operations, discount window lending, and altering the reserve requirements. While the Fed may be able to alter the value of the dollar, it is not one of its tools to implement monetary policy.
4. 4. Answer: C. The Fed usually lowers interest rates to stimulate an economy. The Fed may do this if there is a drop in housing starts. The Fed may choose to raise interest rates if there is an increase in the CPI or the PPI.
5. 5. Answer: C. The Federal Reserve may tighten the money supply by raising interest rates if it suspects a rise in inflation suggested by a rise in the CPI. If there is an increase in the trade deficit, the Fed may also raise interest rates to reduce the flow of dollars out of the country and attract foreign investors. A rise in non-farm payroll generally signals a healthy economy, but it could cause the Fed to tighten the money supply if this coincident indicator in combination with certain leading indicators suggests inflation. However, a widening in credit spreads indicates an economic contraction and might move the Fed to increase the money supply.
6. 6. Answer: B. A normal yield curve reflects the fact that bonds with longer maturities tend to pay higher yields than bonds with shorter maturities. A flat yield curve is when short-, medium-, and long-term bonds all pay relatively similar yields. An inverted yield curve is when short-term bonds pay lower yiel