kim226

Which of the following economic indicators is classified as a leading indicator for the United States economy?

A) Industrial production.

B) Index of consumer expectations.

C) Average duration of unemployment.

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Consumer expectations are a leading indicator. Industrial production is a coincident indicator. Average duration of unemployment is a lagging indicator.

kim226

At a recent board meeting of Pembroke Financial Inc., members of the board were discussing recent fiscal and monetary policy changes in the U.S. It became a heated discussion when each member expressed their opinions on what will be happening to long-run aggregate supply (LAS), aggregate demand, and the overall economy as a result of policy shifts. Joe Frankel and Martin Bentz, two vocal members of the board, made the following statements during the meeting:
Frankel: LAS can be thought of as the potential GDP of the economy. Potential GDP is positively related to the quantity of labor in the economy and the technology level of the economy, but is inversely related to the quantity of capital in the economy. So, potential GDP will rise if the quantity of labor increases, the level of technology increases, or the quantity of capital decreases.
Bentz: The level of real output on the LAS curve is the economy’s level of production when it is operating at zero unemployment. A zero unemployment rate is referred to as full employment.
With respect to these statements:

A) only Bentz is incorrect.

B) only Frankel is incorrect.

C) both are incorrect.

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LAS can be thought of as the potential real output of the economy. The potential real output of an economy is positively related to: the quantity of labor in the economy; the quantity of capital (productive resources) in the economy, and the technology that the economy possesses.
The level of real output (real GDP) on the LAS curve is the economy’s level of production when the economy is operating at full employment. However, full employment does not mean zero unemployment. There will always be some unemployment. Therefore, there is a natural rate of unemployment corresponding to the level of real GDP along the LAS curve, and that level is referred to as full employment GDP.

kim226

The most recent economic indicators show rising stock prices, an increase in average weekly hours in manufacturing, and lengthening periods of unemployment. Which phase of the business cycle is most consistent with these changes?

A) Expansion.

B) Peak.

C) Contraction.

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Increases in stock prices and average hours predict expansion. The fact that unemployment is still lengthening suggests the economy has been in recession since unemployment is a lagging indicator, but does not preclude the beginnings of an expansion.

kim226

The spread between the yield on 10-year government bonds and the overnight bank lending rate has decreased from 300 basis points to 200 basis points. As an economic indicator, this most likely suggests that the business cycle:

A) has passed a trough.

B) has entered a contraction.

C) is approaching a peak.

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The slope of the yield curve, as measured by the spread between long-term and short-term interest rates, is considered a leading indicator of the business cycle. A decline in the yield spread is consistent with expectations that an expansion is near its peak.

kim226

An analyst obtains the following monthly economic data (at annual rates, except stock prices and duration of unemployment):

	March	February	January
Stock prices	+4%	+8%	−6%
Average duration of employment	45 weeks	42 weeks	40 weeks
M2 money supply	+7%	+8%	+3%
Industrial production	+1%	−3%	−6%
Commercial & industrial loans	−8%	−4%	−6%

These indicators are most consistent with economic activity that is currently:

A) at a peak.

B) in a contraction.

C) at a trough.

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The stock market and M2 are both leading indicators, suggesting that a recovery is coming. Duration of unemployment and C&I loans are both lagging indicators, suggesting that a recession has occurred. Industrial production is a coincident indicator and the fact that it has stopped declining suggests that the economy has reached a trough and is beginning the recovery.

kim226

An economic forecaster points to declining stock prices, money supply, and building permits, along with improving vendor performance and a narrowing of the spread between 10-year Treasuries and the federal funds rate in order to justify her economic viewpoint. She is most likely:

A) stating that the economy is currently at a trough.

B) predicting a recession.

C) expecting an economic recovery.

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All the indicators she cites are leading indicators that show deteriorating economic conditions, consistent with a forecast of recession.

kim226

Lily Olsen, CFA, obtains the following monthly economic data for the United States (at annual rates, except duration of unemployment):

	April	May	June
M2 money supply	+4%	+8%	−6%
Average duration of unemployment	35 weeks	32 weeks	30 weeks
Payroll employment	+7%	+4%	0%
Manufacturers' new orders – capital goods	+4%	−2%	−7%
Industrial production	+6%	+3%	+1%
Average weekly hours	+1%	−3%	−5%
Manufacturers' new orders – consumer	+3%	+1%	−1%

These indicators are most consistent with economic activity that is currently:

A) at a peak.

B) at a trough.

C) in recession.

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Manufacturers’ orders and M2 are leading indicators, suggesting that a recession is coming. Duration of unemployment is a lagging indicator, suggesting that an expansion has occurred. Payroll employment, industrial production, and weekly hours are coincident indicators. The fact that employment growth and industrial production have slowed dramatically and weekly hours are already falling suggests that the economy has reached a peak and is beginning to contract. It would be premature to suggest that it is in recession, however, when production and employment growth are still positive.

terpsichorefan

thanks for sharing. the part of identifying the business cycle phase is very useful.

mirabelle9042

thanks , i think it's hard for me to tell current business cycle phase based on those data of different indicators.