Practice: 1.3.2 Business Economic Factors

Section 1: Knowledge of Capital Markets. 12 question(s) in this unit's pool (2 above the exam). Free up to ten a day; the coach picks which ones based on what you have already answered and when each is next due.

Section 1: Knowledge of Capital MarketsSIE outline 1.3.2
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Today's practice

Pick an answer, say how sure you are, then reveal. Every wrong choice gets its own explanation. Questions you have already answered correctly and confidently stay out of the way until they are due for review again.

Question 1Exam level

A rise in new building permits typically happens before the broader economy exits a contraction. What kind of indicator is that?

How sure are you?

Correct: A. Moving before the cycle turns is the definition of a leading indicator.
B. A lagging indicator only confirms a turn that already happened, the opposite timing.
C. A coincident indicator moves with the cycle in real time, not ahead of it.
D. An inflation indicator tracks the price level on its own axis, not cycle timing.

Unit: SIE outline 1.3.2

Question 2Exam level

Industrial production moves up and down in step with the business cycle itself, in real time. What kind of indicator is that?

How sure are you?

Correct: A. Moving with the cycle in real time is the definition of a coincident indicator.
B. A leading indicator moves before the turn, not with it.
C. A lagging indicator only confirms a turn after it happens.
D. A cyclical stock is a stock category, not an economic indicator.

Unit: SIE outline 1.3.2

Question 3Exam level

A homebuilder's stock rises sharply during expansions and falls sharply during contractions, tracking consumer confidence closely. What kind of stock is that, on the outline's own classification?

How sure are you?

Correct: A. Rising and falling with the business cycle, tied to consumer confidence, is the definition of a cyclical stock.
B. A defensive stock holds steady regardless of the cycle, the opposite behavior.
C. A growth stock is valued for future earnings and reinvestment, not cycle sensitivity specifically.
D. A lagging indicator is an economic data series, not a stock category.

Unit: SIE outline 1.3.2

Question 4Exam level

Monetarist theory, as the outline names it, favors managing the economy through which lever?

How sure are you?

Correct: A. Monetarist theory favors managing the money supply, with policy set by steady rules rather than discretionary intervention.
B. That describes Keynesian theory, the competing named theory, not monetarist.
C. Congress does not set the federal funds rate under either named theory; the FOMC does.
D. Exchange-rate policy is a separate international factor, not monetarist theory's named lever.

Unit: SIE outline 1.3.2

Question 5Exam level

Which of the following is classified as a lagging economic indicator?

How sure are you?

Correct: C. Employers are slow to cut staff and slow to rehire, so the unemployment rate turns after the cycle does.
A. The interest-rate spread moves ahead of a turn, which is leading, not lagging.
B. GDP measures output as it happens, which is coincident.
D. A building permit is filed before construction begins, which is about as leading as an indicator gets.

Unit: SIE outline 1.3.2

Question 6Exam level

A contraction deepens. Which group of shares is described as defensive?

How sure are you?

Correct: B. People keep eating and keep the lights on in every phase of the cycle, so those earnings hold up.
A. A luxury car is the archetypal postponable purchase, a cyclical sector.
C. Construction machinery is bought out of capital budgets, cut early in a downturn.
D. Air travel and resort stays are discretionary spending that falls with income.

Unit: SIE outline 1.3.2

Question 7Exam level

A company reports $4 million of net income for the year, yet its cash balance fell. Which statement shows where the cash went?

How sure are you?

Correct: C. The statement of cash flows sorts cash movement into operating, investing and financing activities; it is the only place a falling cash balance beside a profit is explained.
A. The balance sheet reports the cash balance at a moment, never what moved it.
B. The income statement reports the profit itself, never cash movement.
D. The notes disclose policy and detail; they do not restate net income.

Unit: SIE outline 1.3.2

Question 8Harder

Prices are rising, output is flat, and unemployment is climbing, all in the same period. What is this called?

How sure are you?

Correct: C. Rising prices together with stalled output and climbing unemployment is stagflation.
A. Inflation alone is a rising price level; it does not by itself include stalled output and rising unemployment.
B. Deflation is a falling price level, the opposite of what this fact pattern describes.
D. An expansion has rising output and falling unemployment; this fact pattern describes neither.

Unit: SIE outline 1.3.2

Question 9Harder

An economist argues that in a downturn, the government should increase spending and cut taxes to replace lost private demand. Whose view is this?

How sure are you?

Correct: A. The Keynesian view says total demand drives output, and that government should replace collapsed private demand through spending or tax cuts, fiscal policy.
B. The Monetarist view favors steady control of money growth, not fiscal spending or tax cuts.
C. The two schools prescribe different levers on purpose; this description fits only one of them.
D. Spending and tax policy are fiscal tools, Congress and the Treasury's domain, not the Federal Reserve's.

Unit: SIE outline 1.3.2

Question 10Harder

A report reads: "As of December 31, the company held total assets of $80 million." Which statement is this?

How sure are you?

Correct: B. "As of" a single date, reporting assets, is the balance sheet's own language, a snapshot at one moment.
A. The income statement covers a period and reports revenue and expenses, not "as of" a date.
C. The statement of cash flows tracks cash movement over a period, not total assets at a moment.
D. The phrase "as of" plus "total assets" is exactly the balance sheet's own signature language.

Unit: SIE outline 1.3.2

Question 11Above the exam

A steelmaker's income statement shows falling revenue for the year just as a contraction deepens, while a utility company's income statement for the same year shows revenue nearly unchanged. Which is correct: the phase, and which company is behaving as expected for its stock type?

How sure are you?

Correct: B. A deepening contraction is the stated phase. Steel is a cyclical sector, so falling revenue in a downturn is exactly expected; utilities are a defensive sector, so nearly unchanged revenue is exactly expected too.
A. Both companies are behaving exactly as their stock type predicts, not unexpectedly.
C. Falling output and revenue describe a contraction, not an expansion.
D. Reverses the two labels; steady demand through a downturn is the defensive pattern, not the cyclical one.

Unit: SIE outline 1.3.2

Question 12Above the exam

Interest rates rise sharply. What happens to the prices of outstanding bonds, and separately, to the valuation of a growth stock whose earnings are expected mainly ten years from now?

How sure are you?

Correct: B. Rising rates push outstanding bond prices down, since their older coupons are worth less against new ones, and the same rate move presses on a growth stock's valuation, since its worth sits in distant earnings that are now discounted harder.
A. Reverses both effects; rising rates push bond prices down, and pressure growth valuations, not the reverse.
C. A growth stock has no coupon, but its future earnings are still discounted at the prevailing rate, so it is not immune.
D. Gets the bond direction backwards and invents a fixed opposite relationship between the two that the source does not state; both move down together under rising rates.

Unit: SIE outline 1.3.2