CFM Financial Markets & Economic Indicators 2 — Questions and Answers
Question 1: Which economic indicator measures the average change in prices paid by urban consumers for a basket of goods and services?
- Producer Price Index (PPI)
- Consumer Price Index (CPI) (Correct answer)
- GDP Deflator
- Personal Consumption Expenditures (PCE)
Correct answer: Consumer Price Index (CPI)
The CPI tracks price changes for a fixed basket of goods and services purchased by urban consumers, making it the primary measure of consumer inflation in the US.
Question 2: In the context of bond markets, what happens to bond prices when interest rates rise?
- Bond prices rise proportionally
- Bond prices fall (Correct answer)
- Bond prices remain unchanged
- Bond prices rise then fall
Correct answer: Bond prices fall
Bond prices and interest rates move inversely; when rates rise, existing bonds with lower coupon rates become less attractive, causing their prices to decline.
Question 3: Which market structure is characterized by many buyers and sellers trading standardized contracts for future delivery of commodities or financial instruments?
- Over-the-counter (OTC) market
- Futures exchange (Correct answer)
- Primary market
- Dark pool
Correct answer: Futures exchange
Futures exchanges, such as the CME Group, facilitate trading of standardized futures contracts with centralized clearing and price discovery.
Question 4: The yield curve is considered 'inverted' when:
- Short-term yields exceed long-term yields (Correct answer)
- Long-term yields exceed short-term yields
- All yields are equal across maturities
- Yields fluctuate randomly across maturities
Correct answer: Short-term yields exceed long-term yields
An inverted yield curve occurs when short-term interest rates are higher than long-term rates, historically considered a reliable recession predictor.
Question 5: Which Federal Reserve tool involves buying or selling government securities to influence the money supply and interest rates?
- Reserve requirement adjustment
- Discount rate changes
- Open market operations (Correct answer)
- Forward guidance
Correct answer: Open market operations
Open market operations (OMOs) are the Fed's primary monetary policy tool, conducted by the FOMC through buying or selling Treasury securities to expand or contract the money supply.
Question 6: What does a rising Purchasing Managers' Index (PMI) above 50 indicate about the manufacturing sector?
- Contraction in manufacturing activity
- Expansion in manufacturing activity (Correct answer)
- Stable manufacturing activity
- Declining export orders
Correct answer: Expansion in manufacturing activity
A PMI reading above 50 signals expansion in manufacturing activity, while below 50 indicates contraction, making it a leading economic indicator.
Question 7: Which type of market efficiency suggests that stock prices fully reflect all publicly available information?
- Weak-form efficiency
- Semi-strong form efficiency (Correct answer)
- Strong-form efficiency
- Adaptive market efficiency
Correct answer: Semi-strong form efficiency
Semi-strong form efficiency holds that stock prices instantly incorporate all publicly available information, making fundamental analysis unable to generate consistent excess returns.
CFM Financial Markets & Economic Indicators 2
Which economic indicator measures the average change in prices paid by urban consumers for a basket of goods and services?