Chapter 7 Practice Questions
1. A recession is a protracted period of decline in the national economy, typically defined as:
A. Two quarters or more of economic contraction
B. Two quarters or more of decline in the housing market
C. Two quarters or mores of shrinking M1
D. Two quarters or more of a falling PPI
2. Which of the following might cause the Federal Reserve to take action to stimulate the economy?
A. A rise in the CPI
B. A rise in the PPI
C. A drop in housing starts
D. A drop in unemployment
3. Which of the following may lead the Fed to loosen the money supply?
A. A rise in commodity prices
B. A drop in the strength of the dollar
C. A decline in GDP
D. M1 has risen sharply
4. All of the following might lead to the tightening of the money supply except:
A. A rise in the CPI
B. A rise in non-farm payroll in a fully employed economy
C. A widening in credit spreads
D. A rise in the trade deficit
5. A situation in which short-term securities pay higher yields than long-term securities is considered a(n) _____ yield curve.
A. Normal
B. Inverted
C. Flat
D. Barbell
6. All of the following are true of yield spreads except:
A. Spreads widen during recessionary periods.
B. Spreads narrow during periods of economic prosperity.
C. Compression of bond yields in general usually means the economy is declining.
D. A bond with a large credit spread means bondholders require a large risk premium.
7. Which of the following is a fiscal policy that may slow down the economy?
A. Reducing government spending
B. Cutting taxes
C. Decreasing the money supply
D. Raising the CPI
8. M1, the narrowest measure of the money supply, includes:
I. Currency held by the public
II. Demand deposits
III. Savings accounts
IV. Money market balances
A. III and IV
B. I and IV
C. I and II
D. II and III
9. A stronger dollar b