burning0spear

Which asset would perform the worst during deflationary periods?

A) Real estate wholly owned.

B) Real estate financed with debt.

C) Corporate bonds.

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Deflation reduces the value of investments financed with debt. In the case of real estate, if the property is levered with debt, losses in its value lead to steeper declines in the investor’s equity position. As a result, investors flee in an attempt to preserve their equity and prices fall further. Bond prices will rise during deflationary periods when inflation and interest rates are declining.

burning0spear

Which inflation rate would allow for the greatest consistent long term growth of equity value?

A) 8%.

B) 2%.

C) 5%.

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Low inflation can be a positive for equities given that there are prospects for economic growth free of central bank interference. Inflation rates above three percent can be negative though because it increases the likelihood that the central bank will restrict economic growth. Declining inflation or deflation is also problematic because this usually results in declining economic growth and asset prices. The firms most affected are those that are highly levered. They would face declining profits yet would still be obligated to pay back the same amount in interest and principal.

burning0spear

Which of the following statements regarding spending and the business cycle is least accurate?

A) The inventory cycle is shorter than the business cycle.

B) Business spending is less volatile than consumer spending.

C) As a percentage of GDP, consumer spending is much larger than business spending.

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Business spending is more volatile than consumer spending. Spending by businesses on inventory and investments are quite volatile over the business cycle. As a percentage of GDP, consumer spending is much larger than business spending. The inventory cycle typically lasts two to four years whereas the business cycle has a typical duration of nine to eleven years.

burning0spear

Which of the following is NOT an input to the Taylor rule?

A) The expected GDP.

B) The neutral rate.

C) The discount rate.

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The Taylor rule determines the target interest rate using the neutral rate, expected GDP relative to its long-term trend, and expected inflation relative to its targeted amount.

burning0spear

Which of the following is consistent with a flat yield curve?

A) Monetary policy is restrictive and fiscal policy is restrictive.

B) Monetary policy is restrictive while fiscal policy is expansive.

C) Monetary policy is expansive while fiscal policy is restrictive.

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If monetary policy is restrictive while fiscal policy is expansive, the yield curve will be flat.

burning0spear

Which of the following is consistent with a likely weak economy in the future?

A) Monetary policy is restrictive while fiscal policy is expansive.

B) Monetary policy is restrictive and fiscal policy is restrictive.

C) Monetary policy is expansive and fiscal policy is expansive.

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When both fiscal and monetary policies are restrictive, the yield curve is downward sloping (i.e., it is inverted as short-term rates are higher than long-term rates), and the economy is likely to contract in the future.

burning0spear

Which of the following is consistent with a steeply upwardly sloping yield curve?

A) Monetary policy is expansive and fiscal policy is expansive.

B) Monetary policy is expansive while fiscal policy is restrictive.

C) Monetary policy is restrictive and fiscal policy is restrictive.

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When both fiscal and monetary policies are expansive, the yield curve is sharply, upwardly sloping (i.e., short-term rates are lower than long-term rates), and the economy is likely to expand in the future.

burning0spear

If population growth is expected to grow by 3%, labor force participation is expected to grow by 0.25%, spending on new capital inputs is projected to grow at 2.75% and total factor productivity will grow by 0.75%. What is the long-term projected growth rate?

A) 5.75%.

B) 6.75%.

C) 6.00%.

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The sum of the components is 3% + 0.25% + 2.75% + 0.75% = 6.75%, so the economy is projected to grow by this amount.

burning0spear

Which of the following is NOT a governmental structural policy that would promote the long-term growth in an economy?

A) A promotion of competition.

B) A redistributive tax system.

C) Minimal government interference in the economy.

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When wealth is redistributed through the government’s tax policy, economic inefficiency is created. Tax policies should promote economic growth as much as possible.

burning0spear

Which of the following is NOT a substantial component of the change in the long-term growth rate in an economy?

A) Changes in consumer spending.

B) Changes in employment levels.

C) Changes in spending on new capital inputs.

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Although consumer spending is the largest component of GDP, it is fairly stable over time. To forecast a country’s long-term economic growth trend, the trend growth rate can be decomposed into two main components: changes in employment levels and changes in productivity. The former component can be further broken down into population growth and the rate of labor force participation. The productivity component can be broken down into spending on new capital inputs and total factor productivity growth.