Testbank Problem CH12

Essentials of Investments, 11e (Bodie)
Chapter 12 Macroeconomic and Industry Analysis
1) A top-down analysis of a firm's prospects starts with an analysis of the ________.

A) firm's position in its industry
B) U.S. economy or even the global economy
C) industry
D) specific firm under consideration
2) In 1980 the dollar-yen exchange rate was about $0.0045. In 2017 the yen-dollar exchange rate
was about 91 yen per dollar. A Japanese producer would have had to increase the dollar price of a
good sold in the United States by approximately ________ to maintain the same yen price in
2017.
A) 144%
B) 79.5%
C) 265.4%
D) 36%
Explanation: e0 =0 .0045; e1 = 1/91 =0 .010989

%Δe = (0.010989/.0045) – 1 = 144%
3) An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker
Toyota to either ________ on its U.S. sales.
A) lose market share or reduce its profit margin
B) gain market share or reduce its profit margin
C) lose market share or increase its profit margin
D) gain market share or increase its profit margin
4) You estimate that the present value of a firm's cash flow is valued at $15 million. The break up
value of the firm if you were to sell the major assets and divisions separately would be $20
million. This is an example of what Peter Lynch would call ________.
A) a stalwart
B) slow growth
C) a star
D) an asset play
5) 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
6) If you believe the economy is about to go into a recession, you might change your asset
allocation by selling ________ and buying ________.
A) growth stocks; long-term bonds
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B) long-term bonds; growth stocks
C) defensive stocks; growth stocks
D) defensive stocks; long-term bonds
7) The yield curve spread between the 10-year T-bond yield and the federal funds rate is a
________ economic indicator.
A) leading
B) lagging
C) coincident
D) mixed
8) The Conference Board's Consumer Confidence Index is released ________.

A) daily
B) weekly
C) monthly
D) quarterly
9) You can earn abnormal returns on your investments via macro forecasting ________.
A) if you can forecast the economy at all
B) if you can forecast the economy as well as the average forecaster
C) if you can forecast the economy better than the average forecaster
D) only if you can forecast the economy with perfect accuracy
10) Which of the following industries would most analysts classify as mature?
A) internet service providers
B) biotechnology
C) wireless communication
D) auto manufacturing
11) Which one of the following stocks represents industries with below-average sensitivity to the
state of the economy?
A) financials
B) technology
C) food and beverage
D) cyclicals
12) The most widely used monetary policy tool is ________.

A) altering the discount rate
B) altering reserve requirements
C) open market operations
D) increasing the budget deficit
13) According to ________ economists, the growth of the U.S. economy in the 1980s can be
attributed to lower marginal tax rates, which improved the incentives for people to work.
A) Keynesian
B) monetarist
C) supply-side
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D) demand-side
14) The market value of all final goods and services produced during a given time period is
called ________.
A) GDP
B) industrial production
C) capacity utilization
D) factory orders
15) A big increase in government spending is an example of a ________.

A) positive demand shock
B) positive supply shock
C) negative demand shock
D) negative supply shock
16) 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
17) Portfolio manager Peter Lynch would classify Coca-Cola as ________.

A) an asset play
B) a slow grower
C) a stalwart
D) a turnaround
18) Attempting to forecast future earnings and dividends is consistent with which of the
following approaches to securities analysis?
A) technical analysis
B) fundamental analysis
C) both technical analysis and fundamental analysis
D) indexing
19) The analysis of the determinants of firm value is called ________.

A) fundamental analysis
B) technical analysis
C) momentum analysis
D) indexing
20) Which of the following companies is the best example of a turnaround?

A) Coca-Cola
B) Microsoft
C) ExxonMobil
D) Chrysler
3
21) Inflation is caused by ________.
A) unions
B) rapid growth of the money supply
C) excess supply
D) low rates of capacity utilization
22) Everything else equal, if you expect a larger interest rate increase than other market
participants, you should ________.
A) buy long-term bonds
B) buy short-term bonds
C) buy common stocks
D) buy preferred stocks
23) To obtain an approximate estimate of the real interest rate, one must ________ the ________
the nominal risk-free rate.
A) add; default premium to
B) subtract; default premium from
C) add; expected inflation to
D) subtract; expected inflation from
24) Which of the following would not be considered a supply shock?

A) a change in the price of imported oil
B) frost damage to the orange crop
C) a change in the level of education of the average worker
D) an increase in the level of government spending
25) If economic conditions are such that very slow growth is expected in the foreseeable future,
one would want to invest in industries with ________ sensitivity to economic conditions.
A) below-average
B) average
C) above-average
D) Since growth is expected to be slow, sensitivity to economic conditions is not an issue.
26) Which of the following is not an example of fiscal policy?

A) Social Security spending
B) Medicare spending
C) Fed purchases of Treasury securities
D) changes in the tax rate
27) Supply-side economics tends to focus on ________.

A) government spending
B) price controls
C) monetary policy
D) increasing productive capacity
28) Which one of the following describes the amount by which government spending exceeds
government revenues?
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A) balance of trade
B) budget deficit
C) gross domestic product
D) output gap
29) Which one of the following is probably the most direct and immediate way to stimulate or
slow the economy, although it is not very useful for fine-tuning economic performance?
A) fiscal policy
B) monetary policy
C) supply-side policy
D) rising minimum wages
30) In macroeconomic terms, an increase in the price of imported oil or a decrease in the
availability of oil is an example of a ________.
A) demand shock
B) supply shock
C) monetary shock
D) refinery shock
31) ________ in interest rates are associated with stock market declines.
A) Anticipated increases
B) Unanticipated increases
C) Anticipated decreases
D) Unanticipated decreases
32) The average duration of unemployment is ________.

A) a leading economic indicator
B) a coincidental economic indicator
C) a lagging economic indicator
D) both a coincidental indicator and a lagging indicator
33) The ratio of the purchasing power of two economies is termed the ________.
A) balance of trade
B) real exchange rate
C) real interest rate
D) nominal exchange rate
34) Everything else equal, an increase in the government budget deficit would:
I. Increase the government's demand for funds
II. Shift the demand curve for funds to the left
III. Increase the interest rate in the economy
A) II only
B) I and II only
C) I and III only
D) I, II, and III
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35) Which of the following affects a firm's sensitivity of its earnings to the business cycle?
I. Financial leverage
II. Operating leverage
III. Type of product
A) II only
B) I and II only
C) I and III only
D) I, II, and III
36) Which of the following describes the rate at which your ability to purchase grows while you
hold an interest-earning investment?
A) the nominal exchange rate
B) the nominal interest rate
C) the real exchange rate
D) the real interest rate
37) An example of a highly cyclical industry is the ________.

A) automobile industry
B) tobacco industry
C) pharmaceutical industry
D) utility industry
38) The stock price index and contracts and orders for nondefense capital goods are ________.
A) leading economic indicators
B) coincidental economic indicators
C) lagging economic indicators
D) leading and coincidental indicators, respectively
39) Which one of the following is not a demand shock?

A) increase in government spending
B) increases in the money supply
C) reductions in consumer spending
D) improvements in education of U.S. workers
40) Which one of the following is not a U.S. supply shock?

A) unions force an increase in national wage rates.
B) the oil supply from the Middle East drops 30%.
C) extended droughts reduce U.S. food production 25%.
D) chinese purchases of U.S. exports increase.
41) Pharmaceuticals, food, and other necessities would be good performers during the ________
stage of the business cycle.
A) peak
B) contraction
C) trough
D) expansion
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42) Capital goods industries such as industrial equipment, transportation, and construction would
be good investments during the ________ stage of the business cycle.
A) peak
B) contraction
C) trough
D) expansion
43) If you are going to earn abnormal returns based on your macroeconomic analysis, it will
most likely have to be because ________.
A) you have more information than others
B) you are a better analyst than others
C) you have the same information as others
D) you are an equally good analyst as others
44) If the economy is going into a recession, a good industry to invest in would be the ________
industry.
A) automobile
B) banking
C) construction
D) medical services
45) Members of the Board of Governors of the Federal Reserve System are appointed by
________ to serve ________ terms.
A) the Senate; 10-year
B) the House of Representatives; 8-year
C) the President; 14-year
D) the Secretary of the Treasury; 6-year
46) A firm in the early stages of its industry life cycle will likely have ________.
A) low dividend payout rates
B) low rates of investment
C) low rates of return on investment
D) low R&D spending
47) Which of the following describes the percentage of the total labor force that has yet to find
work?
A) the capacity utilization rate
B) the participation rate
C) the unemployment rate
D) the natural rate
48) Which of the following is the rate at which the general level of prices for goods and services
is rising?
A) the exchange rate
B) the gross domestic product growth rate
C) the inflation rate
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D) the real interest rate
49) An analyst starts by examining the broad economic environment and then considers the
implications of the economy on the industry in which the firm operates. Finally, the firm's
position within the industry is examined. This is called ________ analysis.
A) bottom-up
B) outside-inside
C) top-down
D) upside-down
50) Assume that the Federal Reserve increases the money supply. This will cause:
I. Interest rates to decrease

II. Consumption and investment to decrease
III. Inflation to fall
A) I only
B) I and II only
C) II and III only
D) I, II, and III
51) The discount rate is the ________.

A) interest rate banks charge each other for overnight loans of deposits on reserve at the Fed
B) interest rate the Fed charges commercial banks on short-term loans
C) interest rate that the U.S. Treasury pays on its bills
D) interest rate that banks charge their best corporate customers
52) If the currency of your country is depreciating, this should ________ exports and ________
imports.
A) stimulate; stimulate
B) stimulate; discourage
C) discourage; stimulate
D) discourage; discourage
53) If interest rates increase, business investment expenditures are likely to ________ and
consumer durable expenditures are likely to ________.
54) Increases in the money supply will cause demand for investment and consumption goods to
________ in the short run and may cause prices to ________ in the long run.
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55) The nominal interest rate is 6%. The inflation rate is 3%. The exact real interest rate must be
________.
A) 2.91%
B) 3.85%
C) 1.45%
D) 2.12%
Explanation: Treal = - 1 = 2.91%
56) The nominal interest rate is 10%. The real interest rate is 4%. The inflation rate must be
________.
A) −6%
B) 4%
C) 5.77%
D) 14.4%
57) Order the following stages in the industry life cycle from the earliest to latest to occur after
the start-up phase:
I. Maturity
II. Relative decline
III. Consolidation
A) III, I, II
B) I, III, II
C) III, II, I
D) I, II, III
58) An investment strategy that entails shifting the portfolio into industry sectors that are
expected to outperform others based on macroeconomic forecasts is termed ________.
A) sector rotation
B) contraction/expansion analysis
C) life-cycle analysis
D) business-cycle shifting
59) Firm A produces gadgets. The price of gadgets is $2 each. Firm A has total fixed costs of
$1,000,000 and variable costs of $1 per gadget. The corporate tax rate is 40%. If the economy is
strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell
only half as many gadgets. If the economy enters a recession, the after-tax profit of firm A will
be ________.
A) $0
B) $90,000
C) $180,000
D) $270,000
Explanation:
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Firm A (Recession)
Sales $ 2,000,000
Variable Costs 1,000,000
Fixed Costs 1,000,000
Profit Before Tax 0
Tax 0
Profit After Tax 0
60) Firm B produces gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of
$300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 30%. If the economy is
strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell
only half as many gadgets. If the economy is strong, the after-tax profit of firm B will be
________.
A) $90,000
B) $210,000
C) $300,000
D) $630,000
Explanation:
Firm B (Strong Economy)
Sales $ 4,000,000
Variable Costs 2,800,000
Fixed Costs 300,000
Profit Before Tax 900,000
Tax 270,000
Profit After Tax 630,000
61) The fed funds rate is the ________.

A) interest rate that banks charge their best corporate customers
B) interest rate banks charge each other for overnight loans of deposits on reserve at the Fed
C) interest rate the Fed charges commercial banks on short-term loans
D) interest rate that the U.S. Treasury pays on its bills
62) Firm B produces gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of
$300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 40%. What is the
breakeven number of gadgets B must sell to make a zero after-tax profit?
A) 300,000
B) 400,000
C) 500,000
D) 600,000
Explanation: Breakeven = = 500,000 units
63) The goal of supply-side policies is to ________.

A) increase government involvement in the economy
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B) create an environment where workers and owners of capital have the maximum incentive and
ability to produce and develop goods
C) maximize tax revenues of the government
D) focus more on wealth redistribution policies
64) An industry analysis for manufacturers of a small personal care gadget observed the
following characteristics:
1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at
10%-15% per year over the next 3 years, still well above the economic growth rate.
2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which
remain largely unexploited.
3. Some manufacturers have created a new niche in the industry by selling directly to customers
through mail order. Sales for this industry segment are growing at 40% per year.
4. The current penetration rate in the United States is 60% of households and will be difficult to
increase.
5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are
common.
6. Some manufacturers are able to develop new, unexploited niche markets in the United States
based on company reputation, quality, and service.
7. Several manufacturers have recently merged, and it is expected that consolidation in the
industry will increase.
8. New manufacturers continue to enter the market.
Characteristics 4 and 5 would indicate that the industry is in the ________ stage.
A) start-up
B) consolidation
C) maturity
D) relative decline
increase.
common.
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Characteristics ________ would be typical of an industry that is in the start-up stage.

A) 4 and 7
B) 1 and 4
C) 2 and 5
D) none of these options
increase.
common.
Characteristics ________ would be typical of an industry that is in the consolidation stage.

A) 6 and 7
B) 1 and 4
C) 5 and 6
D) 2 and 8
increase.
common.
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Which of the characteristics would be typical of an industry that is in the maturity stage?
A) 1, 2, and 3
B) 4 and 5
C) 6, 7, and 8
D) all of these options
68) Countercyclical fiscal policy is best described by which of the following statements?
A) Government surpluses are planned during economic booms, and deficits are planned during
economic recessions.
B) The annual budget should always be balanced.
C) Deficits should always equal surpluses.
D) Government deficits are planned during economic booms, and surpluses are planned during
economic recessions.
69) A supply-side economist would likely agree with which of the following statements?
A) Real output and aggregate employment are primarily determined by aggregate demand.
B) Real income will rise when government expenditures and tax rates increase.
C) Real output and aggregate employment are primarily determined by tax rates.
D) Increasing the money supply will increase real output without causing higher inflation.
70) Which of the following actions should the central bank take if monetary authorities want to
reduce the supply of money to slow the rate of inflation?
A) Sell government bonds, reducing money supply, increasing interest rates, and slowing
aggregate demand.
B) Buy government bonds, reducing money supply, increasing interest rates, and slowing
aggregate demand.
C) Decrease the discount rate, lowering interest rates and causing both costs and prices to fall.
D) Increase taxes, reducing costs and causing prices to fall.
71) The decline in the value of the dollar relative to the yen will have what impact on the
purchase of U.S. goods in Japan?
A) U.S. goods will increase in cost, and Japan will import more.
B) U.S. goods will increase in cost, and Japan will import less.
C) U.S. goods will decrease in cost, and Japan will import more.
D) U.S. goods will increase in cost, and Japan will export less.
72) Which of the following are examples of cyclical industries?
I. Washing Machines
II. Computer chip manufacturers
III. Kellogg's Frosted Flakes
IV. Pfizer
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A) I and II only
B) I, II, and III only
C) II, III, and IV only
D) I, II, III, and IV
73) You would expect the beta of cyclical industries to be ________ and the beta of defensive
industries to be ________.
A) greater than 1; less than 1
B) less than 1; less than 1
C) less than 1; greater than 1
D) greater than 1; greater than 1
74) What economic variable is most closely associated with increasing corporate profits?
A) exchange rates
B) inflation
C) gross domestic product
D) budget deficits
75) The federal government decides to pay for the transition to private social security accounts
with a one-time $1 trillion bond issue. What will be the biggest concern to businesses relative to
the "crowding out" effect?
A) higher interest rates due to the new government borrowing
B) inflation resulting from more government purchases
C) a negative supply shock
D) shortage of investment due to new accounts
76) An expanding economy requires more workers. If the supply of workers becomes inadequate
to meet the demand, what is the likely impact on the economy?
A) an economic slowdown is likely
B) employment trends will reverse and unemployment will occur
C) government deficits will result from capacity utilization
D) inflation may result from upward wage pressures
77) An expanding economy puts stress on the manufacturing ability of a company. When a firm
turns business down during periods of economic expansion, a problem exists in the area of
________.
A) asset allocation
B) capacity utilization
C) employment management
D) strategic planning
78) The expansion of the money supply at a rate that exceeds the increase in goods and services
will likely result in ________.
A) expanding economy
B) increased inflation
C) interest rate declines
D) lower GDP
14
79) The supply of funds in the economy is controlled primarily by ________.
A) the Federal Reserve System
B) Congress
C) money center banks
D) the Treasury department
80) The classification system used to classify firms into industries is now called the ________
code.
A) SIC
B) NAICS
C) ISO 57
D) ISM
81) During 2004 China increased its use of global oil by 40%. This followed a 100% increase
during the previous 5 years. How do economists refer to this kind of economic event?
A) demand shock
B) equilibrium event
C) expanding commodity event
D) supply shock
82) Whenever OPEC attempts to influence the price of oil by significantly altering production,
economists refer to this type of event as a ________.
A) demand shock
B) equilibrium event
C) expanding commodity event
D) supply shock
83) Items that are ________ and product purchases for which ________ is not important tend to
be less cyclical in nature.
A) necessities; income
B) luxuries; leverage
C) discretionary goods; time of purchase
D) produced with high fixed costs; entertainment
84) Cash cows are typically found in the ________ stage of the industry life cycle.
A) start-up
B) consolidation
C) maturity
D) relative decline
85) At what point in the industry life cycle are inefficiencies in competitors most likely to be
removed?
A) start-up stage
B) consolidation stage
C) maturity stage
D) relative decline stage
15
86) Stalwarts are typically found in the ________ stage of the industry life cycle.
A) start-up
B) consolidation
C) maturity
D) relative decline
87) Large-growth companies generally emerge in the ________ stage.

A) start-up
B) consolidation
C) maturity
D) relative decline
88) Which of the following are barriers to entry?
I. Large economies of scale required to be profitable

II. Established brand loyalty
III. Patent protection for the firm's product
IV. Rapid industry growth
A) I and II only
B) I, II, and III only
C) II, III, and IV only
D) III and IV only
89) Stock prices tend to ________ when corporate earnings ________.

A) rise; rise
B) rise; fall
C) fall; rise
D) none of the options
90) Stock prices are ________ measures of firm value.

A) backward-looking
B) forward-looking
C) coincident
D) lagging
91) Which industry had the highest ROE in 2016 according to the text?
A) electric utilities
B) business software
C) aerospace
D) money center banks
92) Which industry had the highest stock price performance in 2017 according to the text?
A) biotech
B) electric utilities
C) computer systems
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D) airlines
93) Which industry would you expect to find the highest dividend payout yields?
A) biotech
B) technology
C) electric utility
D) business software
17

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Essentials of Investments, 11e (Bodie)

Chapter 12 Macroeconomic and Industry Analysis

1) A top-down analysis of a firm's prospects starts with an analysis of the ________.

Explanation: e0 =0 .0045; e1 = 1/91 =0 .010989

8) The Conference Board's Consumer Confidence Index is released ________.

12) The most widely used monetary policy tool is ________.

15) A big increase in government spending is an example of a ________.

16) GDP refers to ________.

17) Portfolio manager Peter Lynch would classify Coca-Cola as ________.

19) The analysis of the determinants of firm value is called ________.

20) Which of the following companies is the best example of a turnaround?

24) Which of the following would not be considered a supply shock?

26) Which of the following is not an example of fiscal policy?

27) Supply-side economics tends to focus on ________.

32) The average duration of unemployment is ________.

37) An example of a highly cyclical industry is the ________.

39) Which one of the following is not a demand shock?

40) Which one of the following is not a U.S. supply shock?

I. Interest rates to decrease

51) The discount rate is the ________.

Explanation: Treal = - 1 = 2.91%

61) The fed funds rate is the ________.

Explanation: Breakeven = = 500,000 units

63) The goal of supply-side policies is to ________.

Characteristics ________ would be typical of an industry that is in the start-up stage.

Characteristics ________ would be typical of an industry that is in the consolidation stage.

72) Which of the following are examples of cyclical industries?

87) Large-growth companies generally emerge in the ________ stage.

88) Which of the following are barriers to entry?

I. Large economies of scale required to be profitable

89) Stock prices tend to ________ when corporate earnings ________.

90) Stock prices are ________ measures of firm value.

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89) Stock prices tend to when corporate earnings .