Canadian Investment Funds Course Unit 4: Economic Factors and Financial Markets Introduction
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Questions and Answers

What does the Consumer Price Index (CPI) reflect?

  • The current market value of a basket of goods and services (correct)
  • The stock market value of goods and services
  • The total number of goods and services purchased by a household
  • The amount of money available for investment

    • Why is the Consumer Price Index (CPI) always calculated in relation to a base year?

  • To compare the consumer purchasing power with previous years
  • To reduce the overall inflation rate
  • To track short-term fluctuations in prices
  • To give an accurate reflection of the price of goods and services (correct)

    • What does an increase in the Consumer Price Index (CPI) indicate?

  • Investors have more money available to invest
  • Investors need to use less money for expenses
  • Less money available for investment and increased living expenses (correct)
  • No significant impact on investment or living expenses

    • What happens to the purchasing power with a rise in the rate of inflation?

    <p>Purchasing power falls</p> Signup and view all the answers

    What is the term used to describe a fall in the general price level in an economy?

    <p>Deflation</p> Signup and view all the answers

    Why are items in the Consumer Price Index (CPI) basket weighted?

    <p>To reflect consumer spending habits</p> Signup and view all the answers

    What is the index calculated by dividing the current market value of the CPI basket by its value in the base year, then multiplying by 100?

    <p>Consumer Price Index</p> Signup and view all the answers

    What economic indicator is the rate of change in the general price level over a year called?

    <p>Inflation rate</p> Signup and view all the answers

    What impact does increased mobility of capital have?

    <p>Increases efficiency and can lead to financial crises</p> Signup and view all the answers

    Why is sensitivity important in the world of investments?

    <p>To analyze the degree of influence of financial markets and the broader economy on investment capital</p> Signup and view all the answers

    What is the role of banks in the economy according to the text?

    <p>Help grow local infrastructures by lending money</p> Signup and view all the answers

    How do financial markets contribute to the long-term prosperity of an economy?

    <p>By converting idle savings into investment capital</p> Signup and view all the answers

    What happens when nations have low levels of savings according to the text?

    <p>Economic growth rates decrease</p> Signup and view all the answers

    How do corporations typically finance the expansion of their operations?

    <p>By issuing securities</p> Signup and view all the answers

    What effect does the growing amount of investment options have on investors?

    <p>Makes investors more selective in their choices</p> Signup and view all the answers

    Why is the ability to convert idle savings into investment capital critical for an economy?

    <p>To support long-term economic prosperity</p> Signup and view all the answers

    What is the formula to calculate the inflation rate as mentioned in the text?

    <p>Previous Year CPI Value - Current Year CPI Value ÷ Previous Year CPI Value X 100</p> Signup and view all the answers

    In the context of inflation, what is the impact of unanticipated inflation on lenders?

    <p>Decrease in real income</p> Signup and view all the answers

    If the inflation rate is 4.8% and CPI was 105 in the current year, what was the CPI in the previous year?

    <p>100</p> Signup and view all the answers

    How does unanticipated inflation affect borrowers in terms of loan repayments?

    <p>Decreases the real cost of loans</p> Signup and view all the answers

    What happens to Terence's real income when prices rise by 5% according to the example provided in the text?

    <p>It decreases by $3</p> Signup and view all the answers

    How does the redistribution of real income occur between lenders and borrowers due to unanticipated inflation?

    <p>Lenders lose real income while borrowers gain</p> Signup and view all the answers

    What does $102 represent in the example involving Caitlyn and Terence?

    <p>The real cost of the loan to Caitlyn</p> Signup and view all the answers

    When prices rise by 5%, what amount would Terence need to buy what $100 bought a year ago?

    <p>$105</p> Signup and view all the answers

    Which economic indicator is most directly related to the purchasing power of a currency?

    <p>Consumer Price Index (CPI)</p> Signup and view all the answers

    Which phase of the business cycle is characterized by a decline in economic activity?

    <p>Contraction</p> Signup and view all the answers

    Which fiscal policy tool is most commonly used to stimulate the economy during a recession?

    <p>Increasing Government Spending</p> Signup and view all the answers

    Which monetary policy tool is most commonly used to curb inflation?

    <p>Increasing Interest Rates</p> Signup and view all the answers

    What role does the Bank of Canada play in the Canadian financial system?

    <p>It acts as the lender of last resort for commercial banks.</p> Signup and view all the answers

    Which of the following economic indicators is lagging?

    <p>Unemployment Rate</p> Signup and view all the answers

    Which of the following is not an element of Canada's financial system?

    <p>Central Bank</p> Signup and view all the answers

    Which of the following is not a tool of monetary policy?

    <p>Fiscal Stimulus</p> Signup and view all the answers

    What is the main reason why corporations issue new shares?

    <p>To raise funds for various business needs</p> Signup and view all the answers

    How does the exchange rate affect Jane's investment decision?

    <p>A lower exchange rate increases the amount of U.S. dollars Jane can purchase</p> Signup and view all the answers

    What is the role of an investment dealer in the issuance of new shares?

    <p>An investment dealer is responsible for selling new shares to the primary market</p> Signup and view all the answers

    What is the meaning of the term 'primary market'?

    <p>The primary market is where shares are initially offered to investors</p> Signup and view all the answers

    How does Jane's initial investment in U.S. dollars increase over time?

    <p>The value of Jane's initial investment increases due to the growth of the U.S. Growth Fund</p> Signup and view all the answers

    What is the main benefit of a private corporation going public?

    <p>A private corporation going public can increase the value of its shares</p> Signup and view all the answers

    Why might a corporation issue new shares for the sale of an owner's share of the business?

    <p>To provide liquidity for the owner</p> Signup and view all the answers

    What is the relationship between the value of new shares and existing shares?

    <p>The value of new shares decreases the value of existing shares</p> Signup and view all the answers

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