Series 65 Economic Factors and Business Information

Question 1

Marta's bank sells $40 million of Treasury bills to the Federal Reserve's open-market desk, and the Fed pays by crediting the bank's reserve account. What happens to reserves and to short-term rates?

Accepted Answer

Reserves increase, and short-term rates tend to fall.

Question 2

Owen's bank buys $25 million of Treasury notes from the Fed, and the bank pays from its reserve account. What is the direct money-market result?

Accepted Answer

Reserve balances fall, and short-term rates tend to rise.

Question 3

Priya tells a client the desk will purchase agency securities in the open market specifically to add reserves. Which reserve and rate pairing should she describe?

Accepted Answer

Reserves increase and the federal funds rate tends to ease.

Question 4

Leo watches the Fed sell government securities to dealers, and the dealers' banks lose reserve balances. What should he expect for short-term interest rates?

Accepted Answer

Short-term rates tend to rise, because fewer reserves make overnight funds scarcer.

Question 5

Hana reads that the open-market desk bought Treasury bills from dealers this morning. What should she tell a client about bank reserves and short-term rates?

Accepted Answer

The bill purchase adds reserves, so short-term rates tend to decline.

Question 6

Caleb's bank is the buyer in a Fed sale of notes, and settlement reduces that bank's reserve balance. Which description fits the operation?

Accepted Answer

The note sale drains reserves, and short-term rates tend to firm.

Question 7

Nina compares today's open-market purchase with yesterday's reserve level. The desk bought securities and credited the sellers. What should she expect?

Accepted Answer

A higher reserve level than yesterday and softer short-term rates.

Question 8

Yusuf sees a wire that the Fed sold bills to primary dealers and collected payment in reserves. How do bank reserves and the overnight rate move?

Accepted Answer

Reserves decrease, and the overnight rate tends to rise.

Question 9

Elena notes the desk bought longer-term Treasuries and paid the dealers by crediting reserve accounts. What is the effect on short-term funding?

Accepted Answer

Added reserves tend to push short-term rates down, even though the bonds bought were longer term.

Question 10

Andre sees a tax cut that widens the federal budget deficit, while the Fed is selling securities and lifting the funds rate. Which policy is doing what?

Accepted Answer

The wider deficit is expansionary fiscal policy, and the security sales are tight monetary policy.

Question 11

Keisha reads that a spending bill widens the deficit by $80 billion in the same month the Fed drains reserves. What is each policy doing to demand?

Accepted Answer

The larger deficit adds demand through fiscal policy, and the reserve drain restrains demand through monetary policy.

Question 12

Samir hears a colleague call the rising funds rate the deficit acting as monetary policy. The deficit has widened, and the Fed has been draining reserves on purpose. What is accurate?

Accepted Answer

The deficit is fiscal policy. The higher funds rate from the Fed's reserve drainage is tight monetary policy.

Question 13

Ruth tracks two facts: government borrowing is up to fund a larger deficit, and the central bank is holding the policy rate high without adding reserves. Which mix is that?

Accepted Answer

Easy fiscal policy beside tight monetary policy.

Question 14

Diego's client asks why short rates are high while the government deficit is larger. The Fed has been a net seller of securities. What should Diego say the two policies are?

Accepted Answer

The deficit is loose fiscal policy, and the Fed's sales are tight monetary policy, so the levers pull opposite ways.

Question 15

Camille studies a highway program financed by new borrowing, which widens the deficit, while the Fed raises its lending rate and shrinks reserves. What is the policy mix?

Accepted Answer

Stimulative fiscal policy and restrictive monetary policy.

Question 16

Ivan notes tax receipts fell and the deficit grew, while the Fed moved its overnight-rate target up. Which statement labels the levers correctly?

Accepted Answer

The growing deficit from lower receipts is expansionary fiscal policy, and the higher overnight-rate target is tight monetary policy.

Question 17

Lila must label two actions taken the same week. The Treasury finances a larger budget shortfall, and the Fed sells bills. Which labels fit?

Accepted Answer

The larger shortfall is expansionary fiscal policy, and the bill sales are contractionary monetary policy.

Question 18

Nora sees the budget gap widened on purpose to support spending, while the monetary authority keeps bank reserves tight. What can she conclude?

Accepted Answer

Fiscal policy is expansionary and monetary policy is tight, so the two policies are not reinforcing each other.

Question 19

Felix tracks a consumer price index that was 250 last year and is 260 this year. What inflation rate does that index change show?

Accepted Answer

4 percent.

Question 20

Grace's deposit pays a 6 percent nominal rate this year, and the consumer price index rises 4 percent. What is the approximate real rate on her deposit?

Accepted Answer

2 percent, the nominal rate minus inflation.

Question 21

Hugo's salary rises from $50,000 to $52,000 in a year when consumer prices rise 6 percent. What happens to his real pay?

Accepted Answer

Real pay falls about 2 percent, because the raise is smaller than inflation.

Question 22

Ida holds a bond that pays a $1,000 coupon fixed in dollars. Over the year the consumer price index rises 5 percent. About what is that coupon worth in beginning-of-year purchasing power?

Accepted Answer

$952.38, the coupon divided by 1.05.

Question 23

Jonah's lease was $1,800 last year. The consumer price index moved from 200 to 210, and the lease adds that inflation rate. What is the new annual rent?

Accepted Answer

$1,890, last year's rent times 1.05.

Question 24

Keiko reads that nominal GDP grew 8 percent and the price level rose 3 percent. What is the approximate growth in real GDP?

Accepted Answer

5 percent.

Question 25

Luis holds $20,000 of cash for a year while the consumer price index rises 2.5 percent. By about how many dollars does the purchasing power of that cash fall?

Accepted Answer

$487.80.

Question 26

Mina earns $30 an hour. She wants next year's hourly wage to keep the same purchasing power after 4 percent inflation. What wage does that?

Accepted Answer

$31.20.

Question 27

Oscar sees the consumer price index move from 125 to 130 and says inflation is 5 percent because the index rose 5 points. What is the inflation rate?

Accepted Answer

4 percent.

Question 28

Paula plots a 3-month Treasury yield at 5.2 percent and a 10-year Treasury yield at 3.9 percent. What shape is that yield curve?

Accepted Answer

Inverted, because the short rate sits above the long rate.

Question 29

Quinn compares a 2-year AA corporate bond at 4.8 percent with a 2-year Treasury at 3.1 percent. What is the credit spread, and what does it measure?

Accepted Answer

1.7 percentage points, or 170 basis points, the extra yield for credit risk.

Question 30

Rosa watches an investment-grade spread move from 90 basis points to 160 basis points while the Treasury yield is unchanged. What does the wider spread suggest?

Accepted Answer

Perceived credit risk is higher, because investors demand more yield over Treasuries.

Question 31

Seth records a 2-year Treasury at 4.0 percent, a 10-year at 4.1 percent, and a 30-year at 4.15 percent. How should he describe the curve?

Accepted Answer

Nearly flat, because the yields barely differ across maturities.

Question 32

Talia sees a 1-year Treasury at 2 percent and a 10-year Treasury at 5 percent. What does that curve show?

Accepted Answer

An upward slope, with long rates above short rates, which is a term structure rather than a credit spread.

Question 33

Victor's BBB bond yields 6.4 percent and the Treasury of the same maturity yields 4.0 percent. Last quarter the spread was 1.5 percent. What happened?

Accepted Answer

The spread is 2.4 percent, wider than 1.5 percent, so the credit-risk premium rose.

Question 34

Wendy follows a high-yield spread that narrows from 500 basis points to 320 basis points, while Treasury yields stay put. What does the narrower spread suggest?

Accepted Answer

The premium for credit risk fell, so the market is pricing less default risk than before.

Question 35

Amir lines up a 6-month bill at 4.6 percent, a 2-year note at 4.1 percent, and a 10-year note at 3.4 percent. What shape is this Treasury curve?

Accepted Answer

Inverted, because each longer maturity yields less than the shorter one.

Question 36

Bianca's corporate bond yield rose from 5.0 percent to 5.6 percent. The Treasury of the same maturity rose from 4.0 percent to 4.1 percent. What happened to the credit spread?

Accepted Answer

It widened from 1.0 percent to 1.5 percent, a larger premium for credit risk.

Question 37

Chris adds a country's accounts, in trillions: consumption 12, investment 3, government spending 4, exports 2, and imports 3. What is GDP?

Accepted Answer

18.

Question 38

Dana is given consumption 800, investment 200, government spending 300, and net exports 50, all in billions. A classmate also adds imports of 40. What is GDP?

Accepted Answer

1,350.

Question 39

Ellis has consumption 70, investment 15, government spending 20, exports 10, and imports 8, in billions of dollars. What is GDP?

Accepted Answer

107.

Question 40

Farah starts from GDP of 500 billion. Consumption then rises by 10 billion, imports rise by 4 billion, and every other component stays put. What is the new GDP?

Accepted Answer

506.

Question 41

Gus lists consumption 40, investment 10, government spending 12, exports 6, and imports 9. What are net exports and GDP?

Accepted Answer

Net exports are -3 and GDP is 59.

Question 42

Helen knows consumption is 90, investment is 25, and government spending is 30. Exports equal imports. What is GDP?

Accepted Answer

145.

Question 43

Imani is told consumption will rise by 15 billion, while investment, government spending, and net exports stay the same. What happens to GDP?

Accepted Answer

GDP rises by 15 billion, the same amount as consumption.

Question 44

Jorge uses consumption 210, investment 60, government spending 80, exports 40, and imports 55. What is GDP?

Accepted Answer

335.

Question 45

Kira's worksheet, in trillions, shows household spending 6.0, business capital spending 1.5, government purchases 2.0, foreign sales 0.8, and purchases from abroad 1.1. What is GDP?

Accepted Answer

9.2.

Question 46

Lena quit a bookkeeping job three weeks ago and is interviewing for similar bookkeeping roles that are open in her city. Which kind of unemployment is hers?

Accepted Answer

Frictional, from ordinary job search while matching openings exist.

Question 47

Marco ran a loom that his mill replaced with automated equipment. Hospitals nearby are hiring, but they need clinical certificates he does not have. What kind of unemployment is this while the economy is growing?

Accepted Answer

Structural, because his skills no longer match the jobs that are open.

Question 48

Nadia was laid off when her plant's orders collapsed in a recession. Similar plants are not hiring, and she expects a recall if demand returns. What kind of unemployment is this?

Accepted Answer

Cyclical, because the job loss comes from weak economy-wide demand.

Question 49

Omar asks whether the unemployment rate turns before the business cycle or after it. How should that rate be classed?

Accepted Answer

A lagging indicator, because the unemployment rate usually confirms the cycle after the turn.

Question 50

Pia sees new building permits jump and initial jobless claims fall, while the unemployment rate has not declined yet. Which reading fits those three figures?

Accepted Answer

Permits and initial claims are leading. The unemployment rate is lagging and can stay high after a turn.

Question 51

Rafael's programming language is no longer used, and local postings ask for a different stack. The economy is in a strong expansion and other industries are hiring. What is his unemployment?

Accepted Answer

Structural, a skills mismatch that can persist even when demand is healthy.

Question 52

Sofia finished one teaching contract and starts another next month in the same subject and with the same license. She is interviewing during the gap. What kind of unemployment is the gap?

Accepted Answer

Frictional, a short search between matched jobs.

Question 53

Theo notes the recession was dated as ending last quarter, yet the unemployment rate is still rising. What does that pattern fit?

Accepted Answer

A lagging unemployment rate, since firms often rehire only after output has turned.

Question 54

Uma watches new factory orders and stock prices turn down while payroll employment is still growing. How do those indicators line up?

Accepted Answer

New orders and stock prices are leading, while payroll employment is coincident and turns later than those signals.

Question 55

Vera's U.S. firm earns its foreign sales in euros. The dollar strengthens against the euro, and euro revenue is unchanged. What happens to revenue reported in dollars?

Accepted Answer

Dollar revenue falls, because each euro converts into fewer dollars.

Question 56

Walter imports components priced in yen. The yen invoice is unchanged, and the dollar strengthens against the yen. What happens to his dollar cost?

Accepted Answer

The dollar cost falls, because fewer dollars are needed to pay the same yen bill.

Question 57

Ximena's U.S. factory prices its machines in dollars for foreign buyers. The dollar strengthens, and she does not change the dollar price. What happens to the buyer's local-currency cost?

Accepted Answer

It rises, so the same dollar price takes more of the buyer's currency.

Question 58

Yuri advises a U.S. retailer that imports goods and also owns a U.S. exporter that converts foreign-currency receipts into dollars. The dollar strengthens. Which pair of effects fits?

Accepted Answer

Import prices in dollars tend to fall, and converted foreign revenue tends to fall.

Question 59

Zara's British unit earns 2 million pounds. The pound was worth $1.30 and is now worth $1.15. What is the dollar value of that revenue now, and how much did it drop?

Accepted Answer

$2,300,000 now, down $300,000 from $2,600,000.

Question 60

Aaron must pay a 10 million yen parts bill. The rate moved from 150 yen per dollar to 160 yen per dollar. What is the new dollar cost of that bill?

Accepted Answer

$62,500.

Question 61

Beatriz sells equipment on dollar invoices to a buyer who earns in pesos. The dollar strengthens against the peso, and she keeps the dollar price. What is the likely demand effect?

Accepted Answer

The buyer needs more pesos per dollar, so the order is more likely to shrink.

Question 62

Colin's software firm gets half its revenue in euros. The dollar strengthens, the euro price list is unchanged, and European unit sales are unchanged. What happens to dollar revenue from Europe?

Accepted Answer

It declines, because each euro brings in fewer dollars.

Question 63

Diana's client buys imported cars and also owns a U.S. firm that earns most of its sales in foreign currency. The dollar strengthens. What happens to both?

Accepted Answer

The cars get cheaper in dollars, and the firm's foreign sales translate into fewer dollars.

Question 64

Edgar's firm billed customers for sales that have not been collected, so accounts receivable rose. Where does that sales revenue belong, and must operating cash match it?

Accepted Answer

The revenue is on the income statement when earned, and operating cash flow can be lower until collection.