IAR Economics & Economic Indicators 1 — Questions and Answers
Question 1: Which of the following is considered a leading economic indicator?
- Unemployment rate
- Average duration of unemployment
- Building permits (Correct answer)
- Prime interest rate charged by banks
Correct answer: Building permits
Building permits are a leading indicator because they signal future construction activity and economic expansion before it occurs.
Question 2: When the Federal Reserve raises the federal funds rate, what is the typical effect on bond prices?
- Bond prices rise as yields become more attractive
- Bond prices fall as existing bond yields become less competitive (Correct answer)
- Bond prices are unaffected since they are set at issuance
- Bond prices rise due to increased demand from institutional investors
Correct answer: Bond prices fall as existing bond yields become less competitive
When interest rates rise, newly issued bonds offer higher yields, making existing lower-yield bonds less attractive, so their prices fall to compensate.
Question 3: GDP measures the total value of goods and services produced in a country. Which component typically represents the largest share of U.S. GDP?
- Government spending
- Business investment
- Consumer spending (Correct answer)
- Net exports
Correct answer: Consumer spending
Consumer spending (personal consumption expenditures) accounts for approximately 70% of U.S. GDP, making it the largest component.
Question 4: An investment adviser is explaining the yield curve to a client. A normal (upward-sloping) yield curve typically indicates:
- Investors expect economic contraction ahead
- Longer-term bonds carry higher yields than short-term bonds (Correct answer)
- Short-term interest rates exceed long-term rates
- The economy is currently in recession
Correct answer: Longer-term bonds carry higher yields than short-term bonds
A normal yield curve slopes upward because investors demand higher yields for longer-term bonds to compensate for greater duration risk and uncertainty.
Question 5: Which monetary policy tool does the Federal Reserve use most frequently to implement its policy decisions?
- Adjusting reserve requirements
- Changing the discount rate
- Open market operations (Correct answer)
- Setting margin requirements
Correct answer: Open market operations
Open market operations—buying and selling U.S. Treasury securities—are the Fed's primary and most frequently used tool for influencing the money supply and interest rates.
Question 6: The Consumer Price Index (CPI) is best described as a measure of:
- Changes in prices paid by producers for raw materials
- Changes in prices paid by urban consumers for a basket of goods and services (Correct answer)
- The total output of the U.S. economy adjusted for inflation
- The rate at which the money supply is growing
Correct answer: Changes in prices paid by urban consumers for a basket of goods and services
The CPI tracks changes in the prices urban consumers pay for a representative basket of goods and services, serving as the primary measure of inflation.
Question 7: During a period of stagflation, an investment adviser would expect to see:
- High economic growth combined with low unemployment
- Declining inflation accompanied by strong GDP growth
- High inflation occurring simultaneously with high unemployment and slow growth (Correct answer)
- A rapid expansion of money supply with falling interest rates
Correct answer: High inflation occurring simultaneously with high unemployment and slow growth
Stagflation is the simultaneous occurrence of high inflation, high unemployment, and stagnant economic growth, which occurred notably in the U.S. during the 1970s.
IAR Economics & Economic Indicators 1
Which of the following is considered a leading economic indicator?