Investments Ch17

Ch17 Q1: A top-down analysis of a firm starts with

A) the relative value of the firm.

B) the absolute value of the firm.

C) the domestic economy.

D) the global economy.

E) the industry outlook.

✓ D) the global economy.

A top down analysis of a firm starts with the global economy.

Ch17 Q2: An example of a highly cyclical industry is

A) the automobile industry.

B) the tobacco industry.

C) the food industry.

D) the automobile industry and the tobacco industry.

E) the tobacco industry and the food industry.

✓ A) the automobile industry.

Consumer durables, such as automobiles, are highly cyclical as purchases can be delayed until good times. Necessities, low-ticket items, and addictive products are purchased in good times and bad.

Ch17 Q3: Demand-side economics is concerned with

A) government spending and tax levels.

B) monetary policy.

C) fiscal policy.

D) None of the above.

E) All of the options are correct.

✓ E) All of the options are correct.

Demand-side economics is concerned with monetary and fiscal policy (government spending and taxing).

Ch17 Q4: The most widely used monetary tool is

A) altering the discount rate.

B) altering the reserve requirements.

C) open-market operations.

D) altering marginal tax rates.

E) None of the options are correct.

✓ C) open-market operations.

The Federal Reserve's open market operations are the most widely used and most effective monetary tool for influencing interest rates.

Ch17 Q5: The "real," or inflation-adjusted, exchange rate is

A) the balance of trade.

B) the budget deficit.

C) the purchasing-power ratio.

D) unimportant to the U.S. economy.

E) None of the options are correct.

✓ C) the purchasing-power ratio.

The ratio of one country's purchasing power to another's is called the "real," or inflation-adjusted, exchange rate and is an important measure of the relative costs of domestic versus foreign goods.

Ch17 Q6: The "normal" range of price-earnings ratios for the S&P 500 Index is

A) between 2 and 10.

B) between 5 and 15.

C) less than 8.

D) between 12 and 25.

E) greater than 20.

✓ D) between 12 and 25.

Stock prices commonly trade at between 12 and 25 times earnings.

Ch17 Q7: Monetary policy is determined by

A) government budget decisions.

B) presidential mandates.

C) the Board of Governors of the Federal Reserve System.

D) congressional actions.

E) None of the options are correct.

✓ C) the Board of Governors of the Federal Reserve System.

The Board of Governors of the Federal Reserve System determines monetary policy through open market operations, changes in the discount rate, and reserve requirement adjustments.

Ch17 Q8: A trough is

A) a transition from an expansion in the business cycle to the start of a contraction.

B) a transition from a contraction in the business cycle to the start of an expansion.

C) a depression that lasts more than three years.

D) only something used by farmers to feed pigs and not an investment term.

✓ B) a transition from a contraction in the business cycle to the start of an expansion.

The trough occurs when the economy has hit "rock bottom" in the business cycle and recovery is ahead.

Ch17 Q9: A peak is

A) a transition from an expansion in the business cycle to the start of a contraction.

B) a transition from a contraction in the business cycle to the start of an expansion.

C) a depression that lasts more than three years.

D) only a feature of geography and not an investment term.

E) None of the options are correct.

✓ A) a transition from an expansion in the business cycle to the start of a contraction.

The peak occurs when the economy has hit the top in the business cycle.

Ch17 Q10: If the economy is growing, firms with high operating leverage will experience

A) higher increases in profits than firms with low operating leverage.

B) similar increases in profits as firms with low operating leverage.

C) smaller increases in profits than firms with low operating leverage.

D) no change in profits.

E) None of the options are correct.

✓ A) higher increases in profits than firms with low operating leverage.

As sales increase, firms with high operating leverage spread these fixed costs over more units and thus increase profits.

Ch17 Q11: If the economy is shrinking, firms with high operating leverage will experience

A) larger decreases in profits than firms with low operating leverage.

B) similar decreases in profits as firms with low operating leverage.

C) smaller decreases in profits than firms with low operating leverage.

D) no change in profits.

✓ A) larger decreases in profits than firms with low operating leverage.

As sales decrease, firms with high operating leverage spread these fixed costs over fewer units and thus decrease profits.

Ch17 Q12: If the economy is growing, firms with low operating leverage will experience

A) higher increases in profits than firms with high operating leverage.

B) similar increases in profits as firms with high operating leverage.

C) smaller increases in profits than firms with high operating leverage.

D) no change in profits.

✓ C) smaller increases in profits than firms with high operating leverage.

As sales increase, firms with high operating leverage spread these fixed costs over more units and thus increase profits.

Ch17 Q13: If the economy is shrinking, firms with low operating leverage will experience

A) larger decreases in profits than firms with high operating leverage.

B) similar decreases in profits as firms with high operating leverage.

C) smaller decreases in profits than firms with high operating leverage.

D) no change in profits.

✓ C) smaller decreases in profits than firms with high operating leverage.

As sales decrease, firms with high operating leverage spread these fixed costs over fewer units and thus decrease profits.

Ch17 Q14: Industrial production refers to

A) the amount of personal disposable income in the economy.

B) the difference between government spending and government revenues.

C) the total manufacturing output in the economy.

D) the total production of goods and services in the economy.

✓ C) the total manufacturing output in the economy.

Industrial production is a measure of the productive output of the manufacturing sector of the economy.

Ch17 Q15: GDP refers to

A) the amount of personal disposable income in the economy.

B) the difference between government spending and government revenues.

C) the total manufacturing output in the economy.

D) the total production of goods and services in the economy.

E) None of the options are correct.

✓ D) the total production of goods and services in the economy.

GDP is a measure of the productive output of the country, both in terms of goods and services.

Ch17 Q16: A rapidly growing GDP indicates a(n) ______ economy with ______ opportunity for a firm to increase sales.

A) stagnant; little

B) stagnant; ample

C) expanding; little

D) expanding; ample

E) stable; no

✓ D) expanding; ample

GDP is a measure of the productive output of the country and indicates the opportunities firms have to expand sales.

Ch17 Q17: A declining GDP indicates a(n) ______ economy with ______ opportunity for a firm to increase sales.

A) stagnant or shrinking; little

B) stagnant or shrinking; ample

C) expanding; little

D) expanding; ample

E) stable; no

✓ A) stagnant or shrinking; little

GDP is a measure of the productive output of the country and indicates the opportunities firms have to expand sales.

Ch17 Q18: The average duration of unemployment and changes in the consumer price index for services are

A) leading economic indicators.

B) coincidental economic indicators.

C) lagging economic indicators.

D) composite economic indicators.

✓ C) lagging economic indicators.

These indicators (C) lag the general economy and are indicators that the economy is about to change directions.

Ch17 Q19: A firm in an industry that is very sensitive to the business cycle will likely have a stock beta

A) greater than 1.0.

B) equal to 1.0.

C) less than 1.0 but greater than 0.0.

D) equal to or less than 0.0.

E) There is no relationship between beta and sensitivity to the business cycle.

✓ A) greater than 1.0.

Cyclical stocks are more volatile than the market in general and thus have betas greater than 1.0.

Ch17 Q20: If the economy were going into a recession, an attractive industry to invest in would be the

A) automobile industry.

B) medical services industry.

C) construction industry.

D) automobile and construction industries.

E) medical services and construction industries.

✓ B) medical services industry.

Medical services are necessities and thus perform about the same regardless of the business cycle. Automobile and construction industries are cyclical and perform poorly during recessions.

Ch17 Q21: The stock price index and new orders for nondefense capital goods are

A) leading economic indicators.

B) coincidental economic indicators.

C) lagging economic indicators.

D) not useful as economic indicators.

✓ A) leading economic indicators.

Contracts and orders for plant and equipment are indicative of future economic times and thus are leading economic indicators. The stock price index is one of the best leading economic indicators, a reflection of market efficiency.

Ch17 Q22: A firm in the early stages of the industry life cycle will likely have

A) high market penetration.

B) high risk.

C) rapid growth.

D) high market penetration and rapid growth.

E) high risk and rapid growth.

✓ E) high risk and rapid growth.

In the early stages of the industry life cycle, the firm is likely to be high in risk.

Ch17 Q23: Assume the U.S. government was to decide to increase the budget deficit. Holding all else constant, this will cause ______ to decrease.

A) interest rates

B) government borrowing

C) unemployment

D) interest rates and government borrowing

E) None of the options are correct.

✓ E) None of the options are correct.

Increasing the deficit raises government borrowing, increases the demand for funds, and thus increases the interest rates. Deficit spending is also used to stimulate the economy by encouraging increasing the output of the economy.

Ch17 Q24: Assume the U.S. government was to decide to decrease the budget deficit. Holding all else constant, this will cause ______ to decrease.

A) interest rates

B) government borrowing

C) unemployment

D) interest rates and government borrowing

E) None of the options are correct.

✓ D) interest rates and government borrowing

Decreasing the deficit lowers government borrowing, decreases the demand for funds, and thus decreases the interest rates.

Ch17 Q25: Assume that the Federal Reserve decreases the money supply. This action will cause ________ to decrease.

A) interest rates

B) the unemployment rate

C) investment in the economy

D) trade balance

✓ C) investment in the economy

Decreasing the money supply is an economic contraction strategy, resulting in a decreased output of the economy.

Ch17 Q26: If the currency of your country is depreciating, the result should be to ______ exports and to _______ imports.

A) increase; increase

B) increase; decrease

C) decrease; increase

D) decrease; decrease

E) not affect; not affect

✓ B) increase; decrease

Depreciating currency means that country's goods and services are cheaper and thus that country's exports are stimulated. Likewise, goods and services of other countries are now more expensive, and thus importing is discouraged.

Ch17 Q27: If the currency of your country is appreciating, the result should be to ______ exports and to _______ imports.

A) increase; increase

B) increase; decrease

C) decrease; increase

D) decrease;decrease

E) not affect; not affect

✓ C) decrease; increase

An appreciating currency means that country's goods and services are more expensive to foreigners and thus that country's exports are discouraged. Likewise, goods and services of other countries are now less expensive, and thus imports are stimulated.

Ch17 Q28: Increases in the money supply will cause demand for investment and consumption goods to _______ in the short run and cause prices to ________ in the long run.

A) increase; increase

B) increase; decrease

C) decrease; increase

D) decrease; hold steady

E) be unaffected; be unaffected

✓ A) increase; increase

An increase in the money supply results in increased demand for goods and services, which ultimately is reflected in higher prices for these goods and services.

Ch17 Q29: The North American Industry Classification System (NAICS) codes

A) are for firms that operate in the NAFTA region.

B) group firms by industry.

C) are a perfect classification system for firms.

D) are for firms that operate in the NAFTA region and group firms by industry.

E) are for firms that operate in the NAFTA region and are a perfect classification system for firms.

✓ D) are for firms that operate in the NAFTA region and group firms by industry.

The NAICS is a grouping of NAFTA firms by industry. However, the classification system is not perfect as firms with dissimilar clients may be classified in one category.

Ch17 Q30: If interest rates increase, business investment expenditures are likely to ______, and consumer durable expenditures are likely to _________.

A) increase; increase

B) increase; decrease

C) decrease; increase

D) decrease' decrease

E) be unaffected; be unaffected

✓ D) decrease; decrease

If interest rates increase, business investment expenditures are likely to decrease and consumer durable expenditures are likely to decrease.

Ch17 Q31: Fiscal policy generally has a _______ direct impact than monetary policy on the economy, and the formulation and implementation of fiscal policy is ______ than that of monetary policy.

A) more; quicker

B) more; slower

C) less; quicker

D) less; slower

E) Cannot tell from the information given

✓ B) more; slower

Fiscal policy has a more direct impact on the economy than does monetary policy. However, the formulation and implementation of fiscal policy is much slower than monetary policy. Monetary policy is determined by the Federal Reserve System. Fiscal policy must be deliberated, passed, and implemented by both the executive and legislative branches of the federal government.

Ch17 Q32: Fiscal policy is difficult to implement quickly because

A) it requires political negotiations.

B) much of government spending is nondiscretionary and cannot be changed.

C) increases in tax rates affect consumer spending gradually.

D) it requires political negotiations, and much of government spending is nondiscretionary and cannot be changed.

E) it requires political negotiations, and increases in tax rates affect consumer spending gradually.

✓ D) it requires political negotiations, and much of government spending is nondiscretionary and cannot be changed.

Fiscal policy must be negotiated and can change only discretionary items within the budget, making it more difficult to implement. However, fiscal policy changes affect consumer spending almost immediately.

Ch17 Q33: Inflation

A) is the rate at which the general level of prices is increasing.

B) rates are high when the economy is considered to be "overheated."

C) is unrelated to unemployment rates.

D) is the rate at which the general level of prices is increasing, and rates are high when the economy is considered to be "overheated."

E) is the rate at which the general level of prices is increasing and is unrelated to unemployment rates.

✓ D) is the rate at which the general level of prices is increasing, and rates are high when the economy is considered to be "overheated."

is the rate at which the general level of prices is increasing and rates are high when the economy is considered to be "overheated are true. The government attempts to walk the fine line of the trade-offs between unemployment and inflation.

Ch17 Q34: Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets.

A) $0.

B) $6,000.

C) $30,000.

D) $60,000.

E) None of the options are correct.

✓ C) $30,000.

$1,100,000− 500,000 FC− 0.5($1,100,000) VC = ($50,000)(1− 0.4) = $30,000.

Ch17 Q35: Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets.

A) $0.

B) $6,000.

C) $36,000.

D) $60,000.

E) None of the options are correct.

✓ E) None of the options are correct.

$1,100,000− $240,000 FC− 0.75(1,100,000) VC = $35,000 (1− 0.4) = $21,000.

Ch17 Q36: Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets.

A) $0.

B) $6,000.

C) $36,000.

D) $60,000.

✓ D) $60,000.

$1,200,000− $500,000 FC− 0.5(1,200,000) VC = $100,000 (1− 0.4) = $60,000.

Ch17 Q37: Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets.

A) $0.

B) $6,000.

C) $36,000.

D) $60,000.

✓ C) $36,000.

$1,200,000− $240,000 FC− 0.75(1,200,000) VC = $60,000 (1− 0.40) = $36,000.

Ch17 Q38: Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets.

A) 11.0

B) 2.86

C) 9.09

D) 1.00

✓ A) 11.0

DOL = [(60,000− 30,000)/30,000]/[(1,200,000− 1,100,000)/(1,100,000)] = 1.000/0.0909 = 11.0.

Ch17 Q39: Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets.

A) .714

B) 9.09

C) 7.86

D) 7.14

✓ C) 7.86

DOL = [(36,000− 21,000)/21,000]/[(1,200,000− 1,100,000)/(1,100,000) = 0.7143/0.0909 = 7.86.

Ch17 Q40: Classifying firms into groups, such as _________, provides an alternative to the industry life cycle.

A) slow-growers

B) stalwarts

C) countercyclicals

D) slow-growers and stalwarts

E) slow-growers and countercyclicals

✓ D) slow-growers and stalwarts

The groups in this classification are slow-growers, stalwarts, fast-growers, cyclicals, turnarounds, and asset plays.

Ch17 Q41: Supply-side economists wishing to stimulate the economy are most likely to recommend

A) a decrease in the money supply.

B) a decrease in production output.

C) an increase in the real interest rate.

D) a decrease in the tax rate.

E) an increase in mortgage rates.

✓ D) a decrease in the tax rate.

Supply-siders argue that lowering tax rates stimulates investment.

Ch17 Q42: Which of the following are not examples of defensive industries?

A) Food producers

B) Durable goods producers

C) Pharmaceutical firms

D) Public utilities

✓ B) Durable goods producers

Durable good producers represent a cyclical industry, while the others are examples of defensive industries.

Ch17 Q43: Which of the following are examples of defensive industries?

A) Food producers

B) Durable goods producers

C) Pharmaceutical firms

D) Public utilities

E) Food producers, pharmaceutical firms, and public utilities

✓ E) Food producers, pharmaceutical firms, and public utilities

Durable goods producers represent a cyclical industry, while the others are examples of defensive industries.

Ch17 Q44: ________ is a proposition that a strong proponent of supply-side economics would most likely stress.

A) Higher marginal tax rates will lead to a reduction in the size of the budget deficit and lower interest rates as they depend on government revenues

B) Higher marginal tax rates promote economic inefficiency and thereby retard aggregate output as they encourage investors to undertake low productivity projects with substantial tax shelter benefits

C) Income redistribution payments will exert little impact on real aggregate supply as they do not consume resources directly

D) A tax reduction will increase the disposable income of households, and thus, the primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus

E) None of the options is a likely statement for a supply-side proponent.

✓ B) Higher marginal tax rates promote economic inefficiency and thereby retard aggregate output as they encourage investors to undertake low productivity projects with substantial tax shelter benefits

Supply-side economists focus on incentives and marginal tax rates.

Ch17 Q45: The industry life cycle is described by which of the following stage(s)?

A) Start-up

B) Consolidation

C) Absolute decline

D) Start-up and consolidation

E) All of the options are correct.

✓ D) Start-up and consolidation

The four stages of the industry life cycle are: start-up, consolidation, maturity, and relative decline.

Ch17 Q46: In the start-up stage of the industry life cycle,

A) it is difficult to predict which firms will succeed and which firms will fail.

B) industry growth is very rapid.

C) firms pay a high level of dividends.

D) it is difficult to predict which firms will succeed and which firms will fail, and industry growth is very rapid.

E) industry growth is very rapid, and firms pay a high level of dividends.

✓ D) it is difficult to predict which firms will succeed and which firms will fail, and industry growth is very rapid.

In the start-up stage, it is very difficult to predict which firms will succeed and which firms will fail, as no historical data are available. In this stage, industry growth is very rapid (if the industry is successful) and firms pay little or no dividends.

Ch17 Q47: In the consolidation stage of the industry life cycle,

A) it is difficult to predict which firms will succeed and which firms will fail.

B) industry growth is very rapid.

C) the performance of firms will more closely track the performance of the overall industry.

D) it is difficult to predict which firms will succeed and which firms will fail, and industry growth is very rapid.

E) industry growth is very rapid, and the performance of firms will more closely track the performance of the overall industry.

✓ C) the performance of firms will more closely track the performance of the overall industry.

In the consolidation stage of the industry life cycle, the performance of firms will more closely track the performance of the overall industry.

Ch17 Q48: In the maturity stage of the industry life cycle,

A) the product has reached full potential.

B) profit margins are narrower.

C) producers are forced to compete on price to a greater extent.

D) the product has reached full potential and profit margins are narrower.

E) the product has reached full potential, profit margins are narrower, and producers are forced to compete on price to a greater extent.

✓ E) the product has reached full potential, profit margins are narrower, and producers are forced to compete on price to a greater extent.

In the maturity stage of the industry life cycle, the product has reached full potential, profit margins are narrower, and producers are forced to compete on price to a greater extent.

Ch17 Q49: In the decline stage of the industry life cycle,

A) the product may have reached obsolescence.

B) the industry will grow at a rate less than the overall economy.

C) the industry may experience negative growth.

D) the product may have reached obsolescence, and the industry will grow at a rate less than the overall economy.

E) the product may have reached obsolescence, the industry will grow at a rate less than the overall economy, and the industry may experience negative growth.

✓ E) the product may have reached obsolescence, the industry will grow at a rate less than the overall economy, and the industry may experience negative growth.

In the decline stage of the industry life cycle, the product may have reached obsolescence, the industry will grow at a rate less than the overall economy, and the industry may experience negative growth.

Ch17 Q50: A variety of factors relating to industry structure affect the performance of the firm, including

A) threat of entry.

B) rivalry between existing competitors.

C) the state of the economy.

D) threat of entry and the state of the economy.

E) threat of entry and rivalry between existing competitors.

✓ E) threat of entry and rivalry between existing competitors.

A variety of factors relating to industry structure affect the performance of the firm, including threat of entry and rivalry between existing competitors.

Ch17 Q51: The process of estimating the dividends and earnings that can be expected from the firm based on determinants of value is called

A) business-cycle forecasting.

B) macroeconomic forecasting.

C) technical analysis.

D) fundamental analysis.

E) None of the options are correct.

✓ D) fundamental analysis.

Fundamental analysis is the analysis of the determinants of value such as earnings prospects. It includes both macroeconomic analysis and industry analysis.

Ch17 Q52: The stock market exhibiting the highest U.S. dollar return in 2018 was

A) Brazil.

B) Singapore.

C) Greece.

D) South Korea.

E) China.

✓ A) Brazil.

See Table 17.1.

Ch17 Q53: The life cycle stage in which industry leaders are likely to emerge is the

A) start-up stage.

B) maturity stage.

C) consolidation stage.

D) relative decline stage.

E) All of the options are correct.

✓ C) consolidation stage.

Industry leaders are most likely to emerge during the consolidation stage after products become established.

Ch17 Q54: Investment manager Peter Lynch refers to firms that are in bankruptcy or soon might be as

A) slow growers.

B) stalwarts.

C) cyclicals.

D) asset plays.

E) turnarounds.

✓ E) turnarounds.

Lynch classifies firms into six categories. Turnarounds may offer tremendous investment potential if they can recover.

Ch17 Q55: A top-down analysis of a firm's prospects starts with

A) an examination of the firm's industry.

B) an evaluation of the firm's position within its industry.

C) a forecast of interest-rate movements.

D) an assessment of the broad economic environment.

E) the application of the CAPM to find the firm's theoretical return.

✓ D) an assessment of the broad economic environment.

A top-down analysis first looks at the broad economy, then the industry, then the firm's position within the industry.

Ch17 Q56: In 2009 the P/E multiples of the S&P 500 companies was approximately

A) 8

B) 12

C) 19

D) 25

E) 35

✓ D) 25

Figure 17.2 shows that 2009 was another year in which the P/E multiple was much higher than even 25 times earnings. This reflects the fact that earnings in that year, at the height of the deep recession, were dramatically below trend projections.

Ch17 Q57: The industry with the highest ROE in 2018 was

A) grocery and food.

B) trucking.

C) business software.

D) computer systems.

E) integrated oil and gas.

✓ A) grocery and food.

See Figure 17.5.

Ch17 Q58: The industry with the lowest ROE in 2018 was

A) money center banks.

B) chemical products.

C) business software.

D) biotech.

E) tobacco.

✓ E) tobacco.

See Figure 17.5.

Ch17 Q59: The industry with the lowest return in 2018 was

A) construction.

B) telecom services.

C) health care.

D) business software.

E) money center banks.

✓ A) construction.

See Figure 17.6.

Ch17 Q60: The industry with the highest return in 2018 was

A) trucking.

B) software applications

C) health plans.

D) asset management.

E) money center banks.

✓ B) software applications

See Figure 17.6.

Ch17 Q61: Investors can ______ invest in an industry with the highest expected return by purchasing ______.

A) most easily; industry-specific iShares

B) not; industry-specific iShares

C) most easily; industry-specific ADRs

D) not; individual stocks

E) None of the options are correct.

✓ A) most easily; industry-specific iShares

Investors can most easily invest in an industry with the highest expected return by purchasing industry-specific iShares.

Ch17 Q62: Which of the following are key economic statistics that are used to describe the state of the macroeconomy?

A) I, II, and V

B) I, III, and V

C) I, II, and III

D) I, II, III, and V

E) I, II, III, IV, and V

✓ E) I, II, III, IV, and V

All of the factors are key economic statistics.

Ch17 Q63: An example of a positive demand shock is

A) a decrease in the money supply.

B) a decrease in government spending.

C) a decrease in foreign export demand.

D) a decrease in the price of imported oil.

E) a decrease in tax rates.

✓ E) a decrease in tax rates.

Increases in the items mentioned in the money supply, government spending, and foreign export demand would be unfavorable demand shocks. Imported oil price changes are supply shocks. A decrease in tax rates is the only favorable demand shock mentioned.

Ch17 Q64: An example of a negative demand shock is

A) a decrease in the money supply.

B) a decrease in government spending.

C) an increase in foreign export demand.

D) a decrease in the price of imported oil.

E) a decrease in the money supply and a decrease in government spending.

✓ E) a decrease in the money supply and a decrease in government spending.

Decreases in the items mentioned in answers a decrease in the money supply and a decrease in government spending would be unfavorable demand shocks. Imported oil price changes are supply shocks. An increase in foreign export demand would be a favorable demand shock.

Ch17 Q65: During which stage of the industry life cycle would a firm experience stable growth in sales?

A) Consolidation

B) Relative decline

C) Maturity

D) Start-up

E) Stabilization

✓ A) Consolidation

One of the features of the consolidation phase is stable growth. There is no "stabilization" stage. During start-up there is rapid growth, during the maturity phase there is slowing growth, and during the relative decline phase there is minimal or negative growth.

Ch17 Q66: The stock market exhibiting the highest local currency return in 2018 was

A) Russia

B) China.

C) Singapore.

D) Mexico.

E) Brazil.

✓ E) Brazil.

See Table 17.1.

Ch17 Q67: Sector rotation

A) should always be carried out.

B) is never worthwhile.

C) is shifting the portfolio more heavily toward an industry or sector that is expected to perform well in the future.

D) can be implemented without cost.

✓ C) is shifting the portfolio more heavily toward an industry or sector that is expected to perform well in the future.

Sector rotation is shifting the portfolio more heavily toward an industry or sector that is expected to perform well in the future.

Ch17 Q68: According to Michael Porter, there are five determinants of competition. An example of _____ is the threat new competitors pose to existing competitors in an industry.

A) threat of entry

B) rivalry between existing competitors

C) pressure from substitute products

D) bargaining power of buyers

E) bargaining power of suppliers

✓ A) threat of entry

According to Michael Porter, there are five determinants of competition. An example of threat of entry is when new entrants to an industry put pressure on prices and profits.

Ch17 Q69: According to Michael Porter, there are five determinants of competition. An example of _____ is when competitors seek to expand their share of the market.

A) threat of entry

B) rivalry between existing competitors

C) pressure from substitute products

D) bargaining power of buyers

E) bargaining power of suppliers

✓ B) rivalry between existing competitors

According to Michael Porter, there are five determinants of competition. An example of rivalry between existing competitors is when competitors seek to expand their share of the market.

Ch17 Q70: According to Michael Porter, there are five determinants of competition. An example of _____ is when the availability limits the prices that can be charged to customers.

A) threat of entry

B) rivalry between existing competitors

C) pressure from substitute products

D) bargaining power of buyers

E) bargaining power of suppliers

✓ C) pressure from substitute products

According to Michael Porter, there are five determinants of competition. An example of pressure from substitute products is when the availability limits the prices that can be charged to customers.

Ch17 Q71: According to Michael Porter, there are five determinants of competition. An example of _____ is when a buyer purchases a large fraction of an industry's output and can demand price concessions.

A) threat of entry

B) rivalry between existing competitors

C) pressure from substitute products

D) bargaining power of buyers

E) bargaining power of suppliers

✓ D) bargaining power of buyers

According to Michael Porter, there are five determinants of competition. An example of bargaining power of buyers is when a buyer purchases a large fraction of an industry's output and can demand price concessions.

Ch17 Q72: Assume the U.S. government was to decide to increase the budget field. Holding all else constant, this will cause ______ to increase.

A) interest rates

B) government borrowing

C) unemployment

D) interest rates and government borrowing

E) None of the options are correct.

✓ D) interest rates and government borrowing

Decreasing the deficit lowers government borrowing, decreases the demand for funds, and thus decreases the interest rates. Increasing the deficit does the opposite.

Ch17 Q73: If interest rates decrease, business investment expenditures are likely to ______, and consumer durable expenditures are likely to _________.

A) increase; increase

B) increase; decrease

C) decrease; increase

D) decrease; decrease

E) be unaffected; be unaffected

✓ A) increase; increase

If interest rates decrease, business investment expenditures are likely to increase and consumer durable expenditures are likely to increase.

Ch17 Q74: An example of a defensive industry is

A) the automobile industry.

B) the airline industry.

C) the food industry.

D) the automobile industry and the tobacco industry.

E) the airline industry and the food industry.

✓ C) the food industry.

Consumer durables, such as automobiles, are highly cyclical as purchases can be delayed until good times. Necessities, low-ticket items, and addictive products are purchased in good times and bad.

Ch17 Q75: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers.

A) $1,680,000.

B) $1,400,000.

C) $2,000,000.

D) $0.

E) None of the options are correct.

✓ A) $1,680,000.

1,400,000(1.20) = $1,680,000.

Ch17 Q76: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers.

A) $1,680,000.

B) $1,170,000.

C) $750,000.

D) $420,000.

✓ B) $1,170,000.

1,400,000($0.30) + $750,000 = $1,170,000.

Ch17 Q77: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers.

A) $1,680,000.

B) $1,170,000.

C) $510,000.

D) $204,000.

✓ C) $510,000.

$1,680,000 − 1,170,000 = 510,000 (see response to questions 75 and 76).

Ch17 Q78: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers.

A) $1,680,000.

B) $750,000.

C) $510,000.

D) $204,000.

✓ D) $204,000.

$510,000(0.4) = $204,000 (see response to question 77).

Ch17 Q79: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers.

A) $1,680,000.

B) $750,000.

C) $510,000.

D) $204,000.

E) $306,000.

✓ E) $306,000.

$510,000− 204,000 = $306,000 (see response to questions 77 and 78).

Ch17 Q80: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers.

A) $1,680,000.

B) $1,400,000.

C) $2,000,000.

D) $2,400,000.

✓ D) $2,400,000.

2,000,000(1.20) = $2,400,000

Ch17 Q81: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers.

A) $1,680,000.

B) $1,170,000.

C) $1,350,000.

D) $420,000.

✓ C) $1,350,000.

2,000,000(0.30) + $750,000 = $1,350,000.

Ch17 Q82: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers.

A) $1,680,000.

B) $1,050,000.

C) $510,000.

D) $204,000.

✓ B) $1,050,000.

$2,400,000− 1,350,000 = $1,050,000 (see response to questions 80 and 81)

Ch17 Q83: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers.

A) $420,000.

B) $750,000.

C) $510,000.

D) $204,000.

✓ A) $420,000.

$1,050,000(0.4) = $420,000 (see response to question 82).

Ch17 Q84: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers.

A) $0.

B) $6,000.

C) $36,000.

D) $60,000.

E) $630,000.

✓ E) $630,000.

$1,050,000− $420,000 = 630,000 (see response to questions 82 and 83).

Ch17 Q85: If a firm's sales decrease by 15%, and profits decrease by 20% during a recession, the firm's operating leverage is

A) 1.33.

B) 0.75.

C) 5.

D) −5.

✓ A) 1.33.

−20/−15 = 1.33.

Ch17 Q86: Markets reacted positively to the United States Mexico Canada Agreement (USMCA) as a replacement for NAFTA. If the agreement failed to be ratified by congress, the resulting negative economic impact would be an example of __________.

A) political risk.

B) interest rate risk.

C) volatility.

D) currency risk.

✓ A) political risk.

Markets react to news, be it good or bad, when an event occurs.

Ch17 Q87: Profits made by Canadian investors in Russia, become negative when repatriated to Canada. This is an example of ________.

A) political risk.

B) interest rate risk.

C) volatility.

D) curency risk.

✓ D) curency risk.

The change in the value of a currency can improve or negate the actual returns earned in a non-domestic currency.

Ch17 Q88: Japan announces a tariff on rice imported from China. In doing so, the resulting impact on consumers is similar to that of ___________.

A) budget deficits.

B) unemployment.

C) deflation.

D) tax increases.

✓ D) tax increases.

Tariffs act to increase the cost of goods for consumers. Since it is imposed by government and generates revenue to the government from domestic consumers, it resembles the mechanics of a tax.

Ch17 Q89: Unemployment declines dramatically. This is a ___________________.

A) leading economic indicators.

B) coincidental economic indicators.

C) lagging economic indicators.

D) not useful as economic indicators.

✓ C) lagging economic indicators.

Table 17.2

Ch17 Q90: Industrial production increases. This is a ___________________.

A) leading economic indicators.

B) coincidental economic indicators.

C) lagging economic indicators.

D) not useful as economic indicators.

✓ B) coincidental economic indicators.

Table 17.2