Chapter 1 Practice Questions

1. 1. A recession is a protracted period of decline in the national economy, typically defined as:
2. A. More than two quarters of decreasing GDP
3. B. More than two quarters of decline in the housing market
4. C. More than two quarters of shrinking M1
5. D. More than two quarters of a falling PPI
6. 2. The Federal Reserve would like to stimulate the economy. Which of the following actions would do so?
7. A. Buy Treasuries
8. B. Raise the discount rate
9. C. Raise the bank reserve requirements
10. D. Raise the margin requirements
11. 3. All of the following are tools that the Federal Reserve uses to implement monetary policy except:
12. A. Open market operations
13. B. Discount window lending
14. C. Altering bank reserve requirements
15. D. Altering the value of the dollar
16. 4. Which of the following might cause the Federal Reserve to take action to stimulate the economy?
17. A. A rise in the CPI
18. B. A rise in the PPI
19. C. A drop in housing starts
20. D. A drop in unemployment
21. 5. Which of the following may lead the Fed to loosen the money supply?
22. A. A rise in commodity prices
23. B. A drop in the strength of the dollar
24. C. A decline in GDP
25. D. MI has risen sharply
26. 6. All of the following might lead to the tightening of the money supply except:
27. A. A rise in the CPI
28. B. A rise in non-farm payroll in a fully-employed economy
29. C. A widening in credit spreads
30. D. A rise in the trade deficit
31. 7. A situation in which short-term securities pay higher yields than long-term securities is considered a(n) _ yield curve.
32. A. Normal
33. B. Inverted
34. C. Flat
35. D. Barbell
36. 8. All of the following are true of yield spreads except:
37. A. Spreads widen during recessionary periods.
38. B. Spreads narrow during periods of economic prosperity.
39. C. Compression of bond yields in general usually means that the economy is declining.
40. D. A bond with a large credit spread means that bondholders