1.3.2 Business Economic Factors Flashcards
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A company’s quarterly earnings report showed a significant decline in net income, primarily due to increased borrowing costs. What economic factor is most likely responsible for the rise in borrowing costs?
A. Decreased consumer confidence
B. Increased inflation rates
C. Higher interest rates
D. Lower unemployment rates
C. Higher interest rates
` Higher interest rates increase the cost of borrowing money, which can lead to a decrease in net income for companies with significant debt.
If a nation’s GDP grows more slowly than expected, what immediate effect might this have on the nation’s stock market?
A. Increased stock market volatility
B. Decrease in stock prices
C. Surge in stock prices
D. No impact on stock prices
B. Decrease in stock prices
Explanation: Slower-than-expected GDP growth can signal a weakening economy, leading investors to sell off stocks, resulting in a decrease in stock prices.
An investor notices that the Federal Reserve has hinted at future interest rate hikes. What should the investor expect to happen to bond prices?
A. Increase
B. Decrease
C. Remain unchanged
D. Fluctuate unpredictably
Explanation: Generally, when interest rates rise, existing bonds with lower interest rates become less attractive, causing their prices to decrease.
A sharp rise in unemployment is announced. Which of the following sectors is likely to be least affected?
A. Luxury goods
B. Consumer staples
C. Technology
D. Automotive
B. Consumer staples
Explanation: Consumer staples, such as food and household items, are necessities, and demand for these goods typically remains stable regardless of economic conditions.
The inflation rate has been rising steadily. Which type of investment might benefit from this trend?
A. Long-term bonds
B. Real estate
C. Cash
D. Short-term bonds
B. Real estate
Explanation: Real estate often acts as a hedge against inflation, as property values and rents tend to increase with inflation.
An emerging market country has recently implemented policies that significantly reduce regulatory hurdles for new businesses. What is the likely short-term impact on the stock market of this country?
A .Increase in stock market values
B. Decrease in stock market values
C. No change in stock market values
D. Decrease in liquidity
Answer: A
Explanation: Reducing regulatory hurdles can stimulate economic growth and investment, likely leading to an increase in stock market values.
Which of the following economic indicators would most directly indicate an upcoming recession?
A. A decrease in the unemployment rate
B. An increase in new housing starts
C. A decrease in consumer spending
D. An increase in stock prices
C. A decrease in consumer spending
Explanation: A decrease in consumer spending can signal a lack of confidence in the economy, which is a precursor to economic slowdowns and potential recessions.
The Federal Reserve announces a decrease in the federal funds rate. What is the most likely immediate reaction in the stock market?
A. A fall in stock prices
B. An increase in stock prices
C. No change in stock prices
D. Increased volatility without a clear direction
B. An increase in stock prices
Explanation: Lower interest rates can lead to lower borrowing costs and higher corporate profits, which typically boost stock prices.
A significant increase in crude oil prices is observed. What effect is this most likely to have on transportation stocks?
A. Positive impact due to increased operating costs
B. Negative impact due to increased operating costs
C. Positive impact due to increased demand for oil
D. No impact
B. Negative impact due to increased operating costs
Explanation: Higher crude oil prices increase fuel costs, which can negatively affect transportation companies’ profitability, thereby hurting their stock prices.
If a country is experiencing high inflation, which of the following measures is the central bank most likely to take?
A. Increase interest rates
B. Decrease interest rates
C. Increase government spending
D. Decrease taxes
A. Increase interest rates
**Explanation: **Central banks often increase interest rates to curb inflation by reducing spending and borrowing.
An investor is looking at the impact of exchange rates on international investments. If the U.S. dollar strengthens against the euro, what is the likely effect on a U.S. investor’s returns from European stocks?
A. Increase
B. Decrease
C. No change
D. Become more volatile
B. Decrease
Explanation: If the U.S. dollar strengthens, returns from European stocks, when converted back to dollars, are worth less, reducing the investor’s returns.
Which of the following businesses would likely benefit from a decrease in interest rates?
A. A debt-free technology startup
B. A highly leveraged real estate company
C. A cash-rich investment fund
D. A non-profit organization
B. A highly leveraged real estate company
Explanation: A highly leveraged real estate company would benefit from lower borrowing costs resulting from decreased interest rates.
The government of a large economy announces a significant increase in infrastructure spending. What is the most likely immediate effect on the construction sector?
A. Increase in sector activity
B. Decrease in sector activity
C. No change in sector activity
D. Decrease in employment in the sector
A. Increase in sector activity
Explanation: Increased infrastructure spending typically leads to higher demand for construction services, boosting sector activity.
During a period of deflation, which type of investment is least likely to perform well?
A. Real estate
B. Treasury bonds
C. Commodities
D. Technology stocks
C. Commodities
Explanation: Commodities often perform poorly during deflation as prices for goods decrease.
A country reports higher-than-expected retail sales. What is the likely impact on consumer discretionary stocks?
A. Positive impact
B. Negative impact
C. No impact
D. Decreased liquidity
A. Positive impact
Explanation: Higher retail sales indicate strong consumer spending, which generally leads to better performance of consumer discretionary stocks.
