A. “THE MOST INFLUENTIAL U.S. ECONOMIC INDICATORS” (STUDY SESSION 4...

5. A. “The Most Influential U.S. Economic Indicators” (Study Session 4) a) discuss the importance of individual economic indicators to the financial markets; b) evaluate the impact of a change in each of the economic indicators on an investment in bonds, an investment in stocks, and on the exchange rates; c) compare and contrast the value of different economic indicators in identifying economic turning points. 2006 Level III Guideline Answers Morning Session - Page 34

Question: 12 Topic: Economics Minutes: 12 Guideline Answer: Template for Question 12

Unemployment Rate

State, viewing each economic indicator in isolation, the most likely impact the release of the current Justify each of your responses with one reason Investment related to economics month data would have on the value of each of the following investments (circle one) Continually rising unemployment reflects a weakening economy and diminishing inflationary pressures. This potentially leads to lower interest rates and therefore Rise i. 5-Year U.S. higher bond prices. Government bond Remain unchanged Fall Continually rising unemployment leads to a decline in overall demand and a weakening economy, likely leading to lower corporate earnings. Lower earnings ii. S&P 500

^®

will depress equity prices. Remain unchanged Equity Index fund Morning Session - Page 35Template for Question 12 (continued)

Retail Sales Change

Declining retail sales may lead to a weakening economy and diminishing inflationary pressures, resulting in lower interest rates and higher bond prices. Declining retail sales may lead equity investors to question consumers’ ability to spend, suggesting weakening corporate profits and providing downward pressure on stock prices. Morning Session - Page 36