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 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 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 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 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 phase of the business cycle is characterized by rising stock prices but increased investor nervousness?

A) Late expansion.

B) Initial recovery.

C) Slowdown.

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The late expansion phase of the business cycle is characterized by high confidence and employment, increases in inflation, rising bond yields, and rising stock prices. Investor nervousness increases risk during this period. The central bank also limits the growth of the money supply.

burning0spear

Suppose that Government A decreased the tariff on foreign goods and that Government B has moved to a lower marginal tax rate. Analyzing the effects on the long-term growth rate in the economy, which of the following would be most accurate?

A) Government A’s growth rate will decrease and Government B’s growth rate will decrease.

B) Government A’s growth rate will decrease and Government B’s growth rate will increase.

C) Government A’s growth rate will increase and Government B’s growth rate will increase.

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If the government decreases the tariff on foreign goods, competition should increase, increasing economic efficiency, and the long-term growth rate. The same is true of a cut in the tax rate (i.e., the long-term growth should increase).

burning0spear

Which of the following regarding the use of monetary policy to stimulate growth or rein in inflation in an economy is most accurate?

A) Neither the direction of a change in interest rates nor the level of interest rates are important.

B) Only the direction of a change in interest rates is important.

C) Both the direction of a change in interest rates and the level of interest rates are important.

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Both the direction of a change in interest rates and the level of interest rates are important. If, for example, rates are increased to say 4% to combat inflation but this is still low compared to the neutral rate of 6% in a country, then this rate may still be low enough to allow growth and inflation to continue.

burning0spear

If inflation is targeted at 3%, exports are expected to rise by 5%, consumer spending is expected to increase at 1% and real GDP growth is expected at 2%, what would be the neutral interest rate in the economy?

A) 3%.

B) 5%.

C) 11%.

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The equilibrium interest rate in a country (the rate at which a balance between growth and inflation is achieved) is referred to as the neutral rate. It is generally thought that the neutral rate is composed of an inflation component and a real growth component. If inflation is targeted at 3% and the economy is expected to grow by 2%, then the neutral rate would be 5%. Exports and consumer spending are components of GDP and are thus already figured into the 2% GDP growth.

burning0spear

Which of the following would indicate the greatest stimulation of economic growth?

A) Tax receipts increase due to changes in the economy.

B) Tax receipts increase due to a new government policy.

C) Tax receipts decline due to a new government policy.

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Only changes in the deficit directed by government policy will influence growth. A tax cut, which would result in lower tax receipts over the short-term, would stimulate the economy. Changes in the deficit that occur naturally over the course of the business cycle are not stimulative or restrictive. In an expanding economy, deficits will decline because tax receipts increase and disbursements to the unemployed decrease. The opposite occurs during a recession.