Certified Public Accountant CPA Questions + Answers Part 9
Posted: Tue Feb 22, 2022 6:12 pm
QUESTION 91
Under the Revised Model Business Corporation Act, which of the following actions by a corporation would entitle a stockholder to dissent from the action and obtain payment of the fair value of his/her shares?
A. Anamendmenttothearticlesofincorporationthatmateriallyandadverselyaffectsrightsinrespectofadissenter'ssharesbecauseitaltersorabolishesa preferential right of the shares.
II. Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the stockholder is entitled to vote on the plan.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. "Both I and II."
Rule: Shareholders who vote against a share exchange are entitled to payment for fair value of their shares.
Rule: Preferred shareholders who dissent to having their preferential rights altered or abolished have dissenters' rights to be paid the fair value of their shares. Choices "a", "b", and "d" are incorrect, per the above rules.
QUESTION 92
The apparent authority of a partner to bind the partnership in dealing with third parties:
A. Willbeeffectivelylimitedbyaformalresolutionofthepartnersofwhichthirdpartiesareaware. B. Willbeeffectivelylimitedbyaformalresolutionofthepartnersofwhichthirdpartiesareunaware. C. Would permit a partner to submit a claim against the partnership to arbitration.
D. Must be derived from the express powers and purposes contained in the partnership agreement.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. This is really an agency question on apparent authority. Apparent authority is authority that a third party reasonably believes an agent has. If the third party is aware of a restriction on the agent's authority, the third party cannot reasonably believe that the agent has the restricted authority.
Choice "b" is incorrect. A formal resolution of the partners will not be effective to destroy authority if a third party is aware of the resolution, but not if the third party is unaware of the resolution. Choice "c" is incorrect. Submitting a claim to arbitration is an extraordinary act. A partner has apparent authority only to enter into
transactions apparently carrying on in the usual way the business of the partnership. There is no apparent authority to enter into an extraordinary transaction. Choice "d" is incorrect. Apparent authority is derived from what a reasonable person believes concerning the authority of a partner based on the partnership's actions toward the third party; authority derived from the express powers and purposes contained in the partnership agreement is actual authority.
QUESTION 93
Grey and Carr entered into a written partnership agreement to operate a hardware store. Their agreement was silent as to the duration of the partnership. Grey wishes to withdraw from the partnership. Which of the following statements is correct?
A. UnlessCarrconsentstoawithdrawal,Greymustapplytoacourtandobtainadecreeallowingwithdrawal. B. GreymaynotwithdrawunlessCarrconsents.
C. Grey may withdraw only after notice of the proposed dissolution is given to all partnership creditors.
D. Grey may withdraw from the partnership at any time.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct.
Rule: Where a partnership agreement does not state the duration of the partnership, the partners may withdraw at any time. The partner need not obtain consent of the other partners or of the court.
Choices "a" and "b" are incorrect, per the above rule.
Choice "c" is incorrect. A partner has no duty to inform creditors of his intent to withdraw in order for the withdrawal to be effective (although notice is needed to limit the partner's personal liability).
QUESTION 94
The limited liability of the shareholders of a closely-held corporation will most likely be disregarded if the shareholders:
A. Lendmoneytothecorporation.
B. Arealsocorporateofficers,directors,oremployees.
C. Undercapitalized the corporation when it was formed.
D. Formed the corporation solely to limit their personal liability.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The "corporate veil" can be pierced in situations in which the corporation was undercapitalized at formation, where it is the alter ego of the shareholders, or when it used to perpetrate a fraud.
Choice "a" is incorrect. Shareholders may lend money to their corporation. This does not make such shareholders personally liable for the corporation's debt. Choice "b" is incorrect. Officers, directors, and employees are not personally liable for the corporation's debt, and there is no reason to change this role merely because such persons also own shares.
Choice "d" is incorrect. The desire to limit liability is a valid reason to adopt the corporate form and will not, by itself, allow the "corporate veil" to be pierced.
QUESTION 95
Acorn and Bean were general partners in a farm machinery business. Acorn contracted, on behalf of the partnership, to purchase 10 tractors from Cobb Corp. Unknown to Cobb, Acorn was not authorized by the partnership agreement to make such contracts. Bean refused to allow the partnership to accept delivery of the tractors and Cobb sought to enforce the contract. Cobb will:
A. LosebecauseAcorn'sactionwasbeyondthescopeofAcorn'simpliedauthority.
B. PrevailbecauseAcornhadimpliedauthoritytobindthepartnership.
C. Prevail because Acorn had apparent authority to bind the partnership.
D. Lose because Acorn's express authority was restricted, in writing, by the partnership agreement.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A general partner has apparent authority to bind the partnership and other partners in respect to all ordinary transactions within the apparent scope of the partnership business. A farm machinery business probably regularly purchases tractors. Thus, there was apparent authority here.
Choices "a" and "b" are incorrect. Implied authority is authority that an agent reasonably believes he or she was given by the principal along with any express authority. Because Acorn knew that he did not have express authority to make the contracts here, he could not reasonably believe that he had implied authority to do so.
Choice "d" is incorrect. The seller was not aware of Acorn's lack of express authority. Therefore, Cobb relied on Acorn's apparent authority.
QUESTION 96
In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved. In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.
A. TheACHAssociatesoralpartnershipagreementwasvalid.
B. TheACHAssociatesoralpartnershipagreementwasinvalidbecausethepartnershiplastedformorethanoneyear.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A partnership agreement does not have to be in writing to be valid. If the partners want to enforce an agreement to be partners for more than one year, that agreement must be in writing, but merely having the partnership last for more than one year does not make an oral partnership agreement invalid.
QUESTION 97
In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved. In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.
A. Anchor,Chain,andHookjointlyowningandconductingabusinessforprofitestablishesapartnershiprelationship. B. Anchor,Chain,andHookjointlyowningincomeproducingpropertyestablishesapartnershiprelationship.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A partnership is defined as an association of two or more persons who agree to carry on as co-owners a business for profit. Merely owning income-producing property jointly is not sufficient.
QUESTION 98
In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved. In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.
A. Anchor'sshareofACHAssociates'1993profitswas$20,000.
B. Hook'sshareofACHAssociates'1993profitswas$30,000.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Unless otherwise agreed, partners share profits equally. Here, the partners agreed to share profits on the basis of their contributions, which were in a ratio of 1:2:3 respectively for Anchor, Chain, and Hook. Thus, Anchor's share of the 1993 profits was $10,000, Chain's share was $20,000, and Hook's share was $30,000.
QUESTION 99
In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved.
In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.
A. Anchor'scapitalaccountwouldbereducedby1/3ofany1994losses. B. Hook'scapitalaccountwouldbereducedby1/2ofany1994losses.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. If the partnership agreement is silent on how losses will be shared, they are shared in the same manner as profits. Here, the partners agreed to share profits on the basis of their contributions, which were in a ratio of 1:2:3 respectively for Anchor, Chain, and Hook. Thus, Anchor is liable for one-sixth of the loss, Chain is liable for 1/3 of the loss, and Hook is liable for 1/2 of the loss.
QUESTION 100
In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved. In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased
cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.
A. AceAutomobileCo.wouldloseasuitbroughtagainstACHAssociatesbecauseHook,asageneralpartner,hasnoauthoritytobindthepartnership. B. AceAutomobileCo.wouldwinasuitbroughtagainstACHAssociatesbecauseHook'sauthoritycontinuesduringdissolution.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A partner's authority to bind the partnership continues after dissolution to persons who have extended credit to the partnership previously and who are without notice of the dissolution. The facts state that Hook had previously purchased cars for the partnership from Ace, and presumably the purchases were on credit. Since nothing in the facts indicates that Ace was given notice of the dissolution, the partnership will be bound.
QUESTION 101
In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved.
In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.
Determine whether (A) or (B) is correct. Select the answer that corresponds to the correct statement.
A. ACHAssociatesandHookwouldbetheonlypartiesliabletopayanyjudgmentrecoveredbyAceAutomobileCo.
B. Anchor,Chain,andHookwouldbejointlyandseverallyliabletopayanyjudgmentrecoveredbyAceAutomobileCo.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Since Ace brought suit against both the partnership and the individual partners, if judgment is rendered against the partnership, all partners could be held jointly and severally liable.
QUESTION 102
In 1990, Amber Corp., a closely held corporation, was formed by Adams, Frank, and Berg as incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which provided that they would vote for each other as directors and officers. In 1994, stock in the corporation was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds 25%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock. Adams, Frank, and Berg have been directors and officers of the corporation since the corporation was formed. Regular meetings of the board of directors and annual stockholders meetings have been held. For this question refer to the formation of Amber Corp. and the rights and duties of its stockholders, directors, and officers.
A. AmberCorp.mustbeformedunderastate'sgeneralcorporationstatute.
B. AmberCorp.'sarticlesofincorporationmustincludethenamesofallstockholders.
C. Amber Corp. must include its corporate bylaws in the incorporation documents filed with the state.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A corporation must be formed by compliance with the state's corporation statute. Choice "b" is incorrect. The articles need not contain the names of the stockholders. Choice "c" is incorrect. Bylaws do not have to be in the articles; they are usually adopted at the first directors' meeting.
QUESTION 103
In 1990, Amber Corp., a closely held corporation, was formed by Adams, Frank, and Berg as incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which provided that they would vote for each other as directors and officers. In 1994, stock in the corporation was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds 25%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock. Adams, Frank, and Berg have been directors and officers of the corporation since the corporation was formed. Regular meetings of the board of directors and annual stockholders meetings have been held. For this question refer to the formation of Amber Corp. and the rights and duties of its stockholders, directors, and officers. Amber Corp.'s initial bylaws ordinarily would be adopted by its:
A. Stockholders. B. Officers.
C. Directors.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Bylaws usually are adopted by the initial directors.
QUESTION 104
In 1990, Amber Corp., a closely held corporation, was formed by Adams, Frank, and Berg as incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which provided that they would vote for each other as directors and officers. In 1994, stock in the corporation was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds 25%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock. Adams, Frank, and Berg have been directors and officers of the corporation since the corporation was formed. Regular meetings of the board of directors and annual stockholders meetings have been held. For this question refer to the formation of Amber Corp. and the rights and duties of its stockholders, directors, and officers. Amber Corp.'s day-to-day business ordinarily would be operated by its:
A. Directors.
B. Stockholders. C. Officers.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Stockholders have no day-to-day control; management power of a corporation is vested in the directors, but they usually delegate day-to-day management duties to the officers.
QUESTION 105
An increase (shift right) in aggregate demand causes:
A. AnincreaseinthepricelevelandadecreaseinrealGDP. B. AdecreaseinthepricelevelandanincreaseinrealGDP. C. AnincreaseinthepricelevelandanincreaseinrealGDP. D. A decrease in the price level and a decrease in real GDP.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. As shown above, an increase in aggregate demand causes the equilibrium price level to rise and equilibrium output (real GDP) to increase. Choice "a" is incorrect. As shown above, equilibrium output increases, not decreases. Choice "b" is incorrect. As shown above, the equilibrium price level increases, not decreases. Choice "d" is incorrect. As shown above, the equilibrium price level increases, not decreases.
QUESTION 106
The trough of a business cycle is generally characterized by:
A. Shortagesofessentialrawmaterialsandrisingcosts.
B. Increasingpurchasingpowerandincreasingcapitalinvestments.
C. Unused productive capacity and an unwillingness to risk investments. D. Declining purchasing power and unused productive capacity.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The trough of a business cycle is an economic low point with no positive indicators for the future. It is characterized by unused productive capacity and an unwillingness to risk new investments.
Choice "a" is incorrect. Shortages may occur during a peak. Choice "b" is incorrect. Increasing purchasing power and increasing capital investments come with
recovery.
Choice "d" is incorrect. Declining purchasing power comes with inflation; unlikely in a trough.
QUESTION 107
During a recession:
A. Output(realGDP)willbeincreasing.
B. Thenaturalrateofunemploymentwillincreasedramatically. C. Potential output will exceed actual output.
D. Actualoutputwillexceedpotentialoutput.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. During a recession, potential output (real GDP) will exceed actual output (real GDP).
Choice "a" is incorrect. Real GDP is falling during a recession. Choice "b" is incorrect. The natural rate of unemployment will not be affected by the various phases of the business cycle. Actual unemployment will change with the cycle. Choice "d" is incorrect. Actual output will not exceed potential output except at the peak of the cycle, and perhaps not then.
QUESTION 108
A recession can be caused by:
A. Anincreaseinaggregatedemand. B. Adecreaseinaggregatesupply. C. A decrease in aggregate demand. D. Both "b" and "c".
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Both choices "b" and "c" can cause a recession. A recession is defined as a period of falling GDP and rising unemployment. GDP will fall if there is a decrease in aggregate demand or a decrease in aggregate supply.
Choice "a" is incorrect. An increase in aggregate demand will cause GDP to increase NOT decrease. Choice "b" is incorrect, per the above Explanation: .
Choice "c" is incorrect, per the above Explanation: .
QUESTION 109
A period during which real GDP is rising and unemployment is falling is called a(n):
A. Recession. B. Peak.
C. Expansion. D. Trough.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. During an expansion, real GDP is rising and unemployment is falling. Choice "a" is incorrect. A recession is when real GDP is falling NOT rising. Choice "b" is incorrect. A peak is the highest point of economic activity. It is the point where real GDP is at its highest level in the cycle and unemployment is at its lowest level in the cycle. Choice "d" is incorrect. A trough is the lowest level of economic activity. It is the point where real GDP is at its lowest level in the cycle and unemployment is at its highest level in the cycle.
QUESTION 110
Which of the following might be considered the most expansionary set of fiscal policies?
A. Increasegovernmentpurchases,increaseintaxes.
B. Increasegovernmentpurchases,decreaseintaxes.
C. Decrease in taxes, increase in the money supply.
D. Increase in government purchases, increase in the money supply.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Expansionary fiscal policy involves increasing government purchases and/or decreasing taxes. Both increases in government spending and
decreases in taxes cause the aggregate demand curve to shift right and thus cause real GDP (output) to increase. Choice "a" is incorrect. An increase in taxes is an example of contractionary fiscal policy. Choice "c" is incorrect. An increase in the money supply is expansionary monetary policy (not fiscal policy).
Choice "d" is incorrect per above Explanation: .
QUESTION 111
An increase in government spending will tend to cause:
A. RealGDPtofallandunemploymenttorise. B. RealGDPtoriseandunemploymenttofall. C. Real GDP to rise and unemployment to rise. D. Real GDP to fall and unemployment to fall.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An increase in government spending causes an increase in aggregate demand (i.e., causes the aggregate demand curve to shift right). As a result, an increase in government spending causes real GDP to rise and unemployment to fall.
Choice "a" is incorrect. Real GDP will rise, not fall.
Choice "c" is incorrect. Unemployment will fall, not rise.
Choice "d" is incorrect. Real GDP will rise, not fall.
QUESTION 112
An increase in the personal income tax will tend to cause:
A. RealGDPtofallandunemploymenttorise. B. RealGDPtoriseandunemploymenttofall. C. Real GDP to rise and unemployment to rise. D. Real GDP to fall and unemployment to fall.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. An increase in the personal income tax will cause a decrease in aggregate demand (i.e., causes the aggregate demand curve to shift left). As a result, an increase in taxes causes real GDP to fall and unemployment to rise.
Choice "b" is incorrect. Real GDP will fall, not rise.
Choice "c" is incorrect. Real GDP will fall, not rise.
Choice "d" is incorrect. Unemployment will rise, not fall.
QUESTION 113
Which one of the following most accurately describes the normal sequence of a business cycle?
A. Expansion,contraction,trough,andpeak. B. Expansion,peak,contraction,andtrough. C. Peak, contraction, expansion, and trough. D. Trough, contraction, expansion, and peak.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The sequence of a typical business cycle includes an expansionary phase, a peak of economic activity, a contractionary phase, and a trough of economic activity. Choice "a" is incorrect. A peak does not follow a trough. Choice "c" is incorrect. A trough does not follow an expansion. Choice "d" is incorrect. A contraction does not follow a trough.
QUESTION 114
Within the framework of the aggregate demand/aggregate supply model, an increase in short run aggregate supply will cause:
A. Realoutputtoexpandandthepriceleveltofall. B. Realoutputtodeclineandthepriceleveltorise. C. Real output to expand and the price level to rise. D. Real output to decline and the price level to fall.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A shift right in short run aggregate supply causes output to increase and the price level to fall.
Choice "b" is incorrect. Real output would rise, not fall. Choice "c" is incorrect. The price level would fall, not rise. Choice "d" is incorrect. Real output would rise, not fall.
QUESTION 115
Which one of the following is most likely to accompany a reduction in aggregate demand?
A. Anincreaseinthepricelevel.
B. Adecreaseinemployment.
C. An increase in real GDP.
D. A decrease in the unemployment rate.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. As aggregate demand falls, the unemployment rate rises so employment would decrease.
Choice "a" is incorrect. The price level would fall, not rise.
Choice "c" is incorrect. Real GDP would fall, not rise.
Choice "d" is incorrect. The unemployment rate would rise, not fall.
QUESTION 116
If an economy is currently experiencing both full employment and price stability, a major tax reduction will probably cause:
A. Anincreaseintheunemploymentrate.
B. Anaccelerationintheinflationrate,unlessgovernmentexpendituresarealsoreduced. C. No change in real GDP or the price level.
D. A decrease in consumption.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A tax cut shifts the aggregate demand curve to the right causing the price level and therefore the inflation rate to rise.
Choice "a" is incorrect. The unemployment rate would fall, not rise. Choice "c" is incorrect. The price level would rise, not remain unchanged. Choice "d" is incorrect. Consumption would rise as disposable income rises, not fall.
QUESTION 117
A large increase in nominal wages, perhaps orchestrated by unions, would most likely result in:
A. AnincreaseinrealGDPandadecreaseinthepricelevel. B. AdecreaseinrealGDPandanincreaseinthepricelevel. C. A decrease in real GDP and a decrease in the price level. D. An increase in real GDP and an increase in the price level.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An increase in nominal wages represents an increase in input costs. This would shift the aggregate supply curve to the left resulting in a decrease in real GDP and an increase in the overall price level.
Choice "a" is incorrect. Real GDP would decrease, not increase. Choice "c" is incorrect. The price level would increase, not decrease. Choice "d" is incorrect. Real GDP would decrease, not increase.
QUESTION 118
Economic fluctuations (or business cycles) are best described as:
A. Longrunincreasesinanationsstandardofliving.
B. Changesintheprofitsofagivenfirmfromoneyeartothenext.
C. Fluctuations of equal duration and equal severity in the level of economic activity over time. D. Fluctuations in the level of economic activity, relative to a long-term growth trend.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. By the definition of business cycles. Choice "a" is incorrect. This is economic growth.
Choice "b" is incorrect. Business cycles refer to overall economic activity not the activity of one firm. Choice "c" is incorrect. Business cycles are not predictable and are not of equal duration nor of equal severity.
QUESTION 119
Which of the following would most likely cause real GDP to increase the most:
A. Ariseininterestratesandariseininputcosts.
B. Afallininterestratesandafallininputcosts.
C. A rise in wealth and a rise in interest rates.
D. A rise in consumer confidence and a fall in government spending.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A decline in interest rates would cause the aggregate demand curve to shift right, which increases real GDP. Similarly, a decline in input costs would cause the aggregate supply curve to shift right, which also increases real GDP.
Choice "a" is incorrect. Both of these events would cause real GDP to decline. Choice "c" is incorrect. A rise in interest rates would cause real GDP to decline, not increase. Choice "d" is incorrect. A decline in government spending would cause real GDP to decline, not increase.
QUESTION 120
At the peak of a business cycle:
A. Output(realGDP)tendstobebelowthepotentiallevelofoutput.
B. Thereislikelytobeanexcesssupplyoflaborandbusinessinventoriesarelikelytobehigh.
C. The overall price level is likely to be falling.
D. Capacity constraints and labor shortages are likely to put upward pressure on the overall price level.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The peak of a business cycle marks the highest point of economic activity. At that point, firms are likely to face capacity constraints and labor shortages, which will put upward pressure on the overall price level.
Choice "a" is incorrect. Real GDP is likely to be above, not below, its potential level. Choice "b" is incorrect. Business inventories are likely to be low, not high, and there is likely to be excess demand for labor not an excess supply of labor.
Choice "c" is incorrect. The overall price level is likely to be rising not falling.
QUESTION 121
Which of the following segments of the economy will be least affected by the business cycle?
A. Commercialconstructionindustry. B. Machineryandequipmentindustry. C. Residential construction industry. D. Healthcare industry.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The business cycle is the rise and fall of economic activity relative to its long- term growth trend. During a contraction or a recession, most industries experience a decline in sales and profits. Similarly, during an expansion, most industries experience an increase in sales and profits. However, health care services are typically not affected by business cycles. People need medical services regardless of whether or not the economy is doing well. Thus, the health care industry is the least affected by the business cycle.
Choice "a" is incorrect. During a downturn in economic activity (recession or contraction), firm investment in new plants and equipment typically drops off substantially. Thus, the demand for commercial construction is typically low during a contraction and high during an expansion. Thus, the commercial construction industry is sensitive to the business cycle. Choice "b" is incorrect. During a downturn in economic activity (recession or contraction) firm investment in new plants and equipment typically drops off substantially. Thus, the machinery and equipment industry is sensitive to business cycles. Sales grow during an expansion, but they tend to decline during a contraction or recession.
Choice "c" is incorrect. The residential construction industry is sensitive to interest rates, unemployment rates, and consumer wealth. All of these fluctuate with the business cycle. As a result, the residential construction industry is sensitive to the business cycle.
QUESTION 122
An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?
A. Toenabletheauditortoaccuratelyidentifysignificantdeficiencies.
B. Toassisttheauditortoaccuratelyinterpretinformationobtainedduringanaudit. C. To allow the auditor to more accurately perform tests of controls.
D. To decide whether it will be necessary to perform analytical procedures.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. As part of audit planning, the auditor should obtain an understanding of the entity's business. This understanding enables the auditor to better understand events, transactions, and practices that may affect the financial statements, to plan and perform appropriate audit tests, and to properly understand and evaluate the results of those tests. Choice "a" is incorrect. Obtaining an understanding of the entity's business would not be particularly helpful in identifying significant deficiencies. Significant deficiencies in internal control are typically identified during the fieldwork stage of the audit.
Choice "c" is incorrect. Obtaining an understanding of the entity's business would not result in a more accurate performance of tests of controls. Accurate performance of audit tests is dependent upon factors such as existence of an appropriate audit trail, client cooperation, training and supervision of audit staff, etc. Choice "d" is incorrect. Analytical procedures are always required in an audit during the planning and overall review stages.
QUESTION 123
Which of the following statements is correct if there is an increase in the resources available within an economy?
A. Moregoodsandserviceswillbeproducedintheeconomy.
B. Theeconomywillbecapableofproducingmoregoodsandservices. C. The standard of living in the economy will rise.
D. The technological efficiency of the economy will improve.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. If there is an increase in the resources available in an economy, the economy will be capable of producing more goods and services. This increase is really an increase in the long-run aggregate supply (potential GDP). On the aggregate supply and demand chart, the long-run aggregate supply line
(LRAS) is the vertical line that represents the potential or equilibrium level of output. If that line shifts to the right, then the economy is capable of expanding, but it will not automatically expand just because the line shifts to the right.
Choice "a" is incorrect. Just because there is an increase in the resources available in an economy, it does not mean that more goods and services will automatically be produceD. There would have to be increased demand (a shift upward in the aggregate demand line) for more goods and services to actually be produced.
Choice "c" is incorrect. If there is an increase in the resources available in an economy, the standard of living in the economy will not necessarily rise. It could rise, but it will not necessarily do that. Choice "d" is incorrect. If there is an increase in the resources available in an economy, the technological efficiency of the economy will not automatically improve. This statement is backwards. An increase in technological efficiency of an economy will normally increase the resources available in the economy by increasing productivity.
Economic Measures and Reasons for Changes in the Economy
QUESTION 124
A period of inflation:
A. Increasesthepricelevel,whichbenefitsthosewhoareentitledtoreceivespecificamountsofmoney.
B. Enhancesthepositiverelationshipbetweenthepricelevelandthepurchasingpowerofmoney.
C. Harms anyone who has an obligation to pay a specific amount and benefits anyone who is entitled to receive a specific amount. D. Increases the price level, which is negatively related to the purchasing power of money.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A period of inflation increases the price level, which is negatively related to the purchasing power of money (inflation erodes the value of money). Choice "a" is incorrect. When price levels increase, those with fixed amounts of money are hurt. Choice "b" is incorrect. The relationship between price levels and the purchasing power of money is negative, or inverse.
Choice "c" is incorrect. Inflation helps anyone with a fixed obligation since the debt can be repaid in inflated dollars. Those receiving a specific fixed amount are harmed.
QUESTION 125
Which of the following is not consistent with full employment?
A. Anunemploymentrategreaterthanzero. B. Structuralunemployment.
C. Cyclical unemployment.
D. Frictional unemployment.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. When the economy is operating at full employment, there is no cyclical unemployment. When the economy is operating at full employment, there is still some unemployment known as the natural rate of unemployment, which does not include cyclical unemployment. Choice "a" is incorrect. There is still some unemployment (frictional, structural, and seasonal) when the economy is operating at full employment.
Choice "b" is incorrect, per the above Explanation: .
Choice "d" is incorrect, per the above Explanation: .
QUESTION 126
Cyclical unemployment results from:
A. Skillsofworkersnotcorrespondingtojobsavailable.
B. Thetimeittakestomatchqualifiedworkerswithavailablejobs. C. Seasonal decreases in demand for labor.
D. A recession in the economy.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Cyclical Unemployment is caused by the business cycle. It tends to rise during a recession and fall during an expansion.
Choice "a" is incorrect. This is an example of structural unemployment. Choice "b" is incorrect. This is an example of frictional unemployment. Choice "c" is incorrect. This is an example of seasonal unemployment.
QUESTION 127
During a period of high inflation, which of the following groups in society would be most likely to gain?
A. Thosewithafixedincome.
B. Thosewithafixedamountofdebt.
C. Those holding a large amount of money.
D. Workers under contract without a cost of living adjustment.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. During a period of high inflation, those with a fixed amount of debt will repay their debt with inflated dollars and are thus likely to gain. Choice "a" is incorrect. Those with a fixed income will see the purchasing power of their income erode and are thus likely to be hurt.
Choice "c" is incorrect. Those holding a large amount of money will see the purchasing power of their money erode and are thus likely to be hurt.
Choice "d" is incorrect. Cost of living adjustments take inflation into account, thus these individuals are likely to be unaffected.
QUESTION 128
Frictional unemployment refers to unemployment resulting from:
A. Theskillsofworkersdonotcorrespondtotheskillsdemandedbyemployers. B. Thetimeneededtomatchqualifiedjobseekerswithavailablejobs.
C. Seasonal decreases in demand for labor.
D. A recession in the economy.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Frictional unemployment is the unemployment that arises from workers routinely changing jobs or from workers being temporarily laid off. It results from the time needed to match qualified job seekers with available jobs.
Choice "a" is incorrect. This is structural unemployment.
Choice "c" is incorrect. This is seasonal unemployment.
Choice "d" is incorrect. This is cyclical unemployment.
QUESTION 129
The measure most often used to compare standards of living across countries or across time is:
A. Governmentspending.
B. RealGDP.
C. Real consumption expenditures. D. Real GDP per capita.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Real GDP per capita is real GDP divided by population. Real GDP per capita is typically used to compare standards of living across countries or across time. By dividing real GDP by population, this measure adjusts for differences in the size of countries and for differences in population over time.
Choice "a" is incorrect. Government spending is not a measure of the standard of living of a country. Choice "b" is incorrect. Countries with larger populations tend to have higher levels of real GDP. This however does not mean they have a higher standard of living. To adjust for differences in population, real GDP per capita is typically used to compare standards of living, not real GDP. Choice "c" is incorrect. Real consumption expenditures are only a part of real GDP and thus do not measure all economic activity. Furthermore, real consumption expenditures do not adjust for differences in population. It is therefore not used as a measure of the standard of living.
QUESTION 130
The determination of gross domestic product (GDP) by the expenditure approach would include:
A. Netexports.
B. Businessprofits.
C. Compensation to employees.
D. A capital consumption allowance.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The expenditure approach to computing GDP includes: Consumption
Net exports
Government expenditures
Capital investment
Choices "b", "c", and "d" are incorrect, per the Explanation: above.
QUESTION 131
Under the expenditure approach, GDP can be calculated as the sum of:
A. Consumption,moneysupply,governmentpurchases,andexports.
B. Consumption,investment,transferpayments,andimports.
C. Consumption, investment, government purchases, and net exports.
D. Consumption, investment, government purchases, and foreign exchange.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Under the expenditure approach, GDP is calculated as the sum of: consumption expenditures + investment expenditures + government purchases + net exports.
Choice "a" is incorrect. See definition above.
Choice "b" is incorrect. See definition above.
Choice "d" is incorrect. See definition above.
QUESTION 132
The discount rate set by the Federal Reserve is the:
A. Ratethatcommercialbankschargeforloanstoeachother.
B. Ratethatcommercialbankschargeforloanstothegeneralpublic. C. Rate that the central bank charges for loans to commercial banks. D. Ratio of a bank's reserves to its demand deposits.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The discount rate refers to the rate established by the Federal Reserve for shortterm (often overnight) loans the Fed makes to member banks. Choice "a" is incorrect. The discount rate is the rate the Federal Reserve charges.
Choice "b" is incorrect per above Explanation: .
Choice "d" is incorrect. This would be the bank's reserve ratio - not the discount rate.
QUESTION 133
All of the following actions are valid tools that the Federal Reserve Bank uses to control the supply of money, except:
A. Sellinggovernmentsecurities.
B. Changingthereserveratio.
C. Raising or lowering the discount rate.
D. Printing money when the money supply appears low.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The treasury prints money. The Fed must increase the money supply through:
1. Federal open market committee (FOMC) purchasing or selling government securities,
2. Raising or lowering the discount rate, or
3. Changing the reserve ratio.
Choices "a", "b", and "c" are incorrect because they are all valid tools to control the supply of money.
QUESTION 134
If the Federal Reserve wanted to implement an expansionary monetary policy, which one of the following actions would the Federal Reserve take?
A. Raisethereserverequirementandthediscountrate.
B. PurchaseadditionalU.S.governmentsecuritiesandlowerthediscountrate. C. Raise the discount rate and sell U.S. government securities.
D. Lower the discount rate and raise the reserve requirement.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Fed purchases of government securities increase the money supply (putting money into circulation), and lowering the discount rate encourages borrowing by member banks and increases the money supply. Hence, these measures would help implement an expansionary monetary policy. Choice "a" is incorrect. Raising the reserve requirement and the discount rate would have the opposite effect of decreasing the money supply.
Choice "c" is incorrect. Raising the discount rate and selling government securities would reduce the money supply.
Choice "d" is incorrect. Raising the reserve requirement would decrease the money supply, but lowering the discount rate would increase the money supply.
QUESTION 135
To decrease the money supply, the Fed might:
A. Sellgovernmentsecuritiesontheopenmarket. B. Buygovernmentsecuritiesontheopenmarket. C. Decrease the required reserve ratio.
D. Lower the discount rate.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. To decrease the money supply, the Fed can: (1) sell government securities in the open market, (2) increase the discount rate, and (3) increase the required reserve ratio. Choice "b" is incorrect. The Fed should sell (not buy) securities on the open market. Choice "c" is incorrect. The Fed should increase (not decrease) the required reserve ratio. Choice "d" is incorrect. The Fed should increase (not decrease) the discount rate.
QUESTION 136
Which of the following correctly lists the three ways to increase the money supply?
A. Raisetherequiredreserveratio,increasethediscountrate,sellbondsintheopenmarket. B. Raisetherequiredreserveratio,increasethediscountrate,buybondsintheopenmarket. C. Lower the required reserve ratio, increase the discount rate, buy bonds in the open market. D. Lower the required reserve ratio, decrease the discount rate, buy bonds in the open market.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The three ways the Fed can increase the money supply are: (1) buy (purchase) government securities in the open market, (2) lower the discount rate, and (3) lower the required reserve ratio.
Choice "a" is incorrect, per above Explanation: .
Choice "b" is incorrect, per above Explanation: .
Choice "c" is incorrect, per above Explanation: .
QUESTION 137
An increase in the money supply leads to:
A. Adeclineininterestrates,anincreaseininvestmentandanincreaseinaggregatedemand. B. Adeclineininterestrates,adecreaseininvestmentandanincreaseinaggregatedemand. C. An increase in interest rates, a decrease in investment and a decrease in aggregate demand. D. Anincreaseinthemoneysupplyhasnoeffectoninterestratesorinvestment.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Expansionary monetary policy results when the Fed increases the money supply. Expansionary monetary policy affects the economy through the following chain of events: (1) an increase in the money supply causes interest rates to fall, (2) falling interest rates stimulate the desired levels of firm investment and household consumption, (3) increases in desired investment and consumption cause an increase in aggregate demand, and (4) aggregate demand shifts to the right causing real GDP and the price level to rise.
Choice "b" is incorrect. An increase in the money supply causes investment to increase, not decrease. Choice "c" is incorrect. An increase in the money supply causes interest rates to decrease, not increase, investment to increase, not decrease and aggregate demand to increase, not decrease.
Choice "d" is incorrect per above Explanation: .
QUESTION 138
Which of the following is most likely to cause an increase in the amount of frictional unemployment in an economy?
A. Aninventionthatrendersanindustryobsolete.
B. Adownturninaggregatebusinessactivity.
C. An increase in the average age of the work force. D. A reduction in the average age of the work force.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Younger workers tend to move between jobs more frequently. Choice "a" is incorrect. This would lead to structural unemployment. Choice "b"
is incorrect. This would lead to cyclical unemployment. Choice "c" is incorrect. Older workers tend to be voluntarily between jobs less frequently than younger workers.
Under the Revised Model Business Corporation Act, which of the following actions by a corporation would entitle a stockholder to dissent from the action and obtain payment of the fair value of his/her shares?
A. Anamendmenttothearticlesofincorporationthatmateriallyandadverselyaffectsrightsinrespectofadissenter'ssharesbecauseitaltersorabolishesa preferential right of the shares.
II. Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the stockholder is entitled to vote on the plan.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. "Both I and II."
Rule: Shareholders who vote against a share exchange are entitled to payment for fair value of their shares.
Rule: Preferred shareholders who dissent to having their preferential rights altered or abolished have dissenters' rights to be paid the fair value of their shares. Choices "a", "b", and "d" are incorrect, per the above rules.
QUESTION 92
The apparent authority of a partner to bind the partnership in dealing with third parties:
A. Willbeeffectivelylimitedbyaformalresolutionofthepartnersofwhichthirdpartiesareaware. B. Willbeeffectivelylimitedbyaformalresolutionofthepartnersofwhichthirdpartiesareunaware. C. Would permit a partner to submit a claim against the partnership to arbitration.
D. Must be derived from the express powers and purposes contained in the partnership agreement.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. This is really an agency question on apparent authority. Apparent authority is authority that a third party reasonably believes an agent has. If the third party is aware of a restriction on the agent's authority, the third party cannot reasonably believe that the agent has the restricted authority.
Choice "b" is incorrect. A formal resolution of the partners will not be effective to destroy authority if a third party is aware of the resolution, but not if the third party is unaware of the resolution. Choice "c" is incorrect. Submitting a claim to arbitration is an extraordinary act. A partner has apparent authority only to enter into
transactions apparently carrying on in the usual way the business of the partnership. There is no apparent authority to enter into an extraordinary transaction. Choice "d" is incorrect. Apparent authority is derived from what a reasonable person believes concerning the authority of a partner based on the partnership's actions toward the third party; authority derived from the express powers and purposes contained in the partnership agreement is actual authority.
QUESTION 93
Grey and Carr entered into a written partnership agreement to operate a hardware store. Their agreement was silent as to the duration of the partnership. Grey wishes to withdraw from the partnership. Which of the following statements is correct?
A. UnlessCarrconsentstoawithdrawal,Greymustapplytoacourtandobtainadecreeallowingwithdrawal. B. GreymaynotwithdrawunlessCarrconsents.
C. Grey may withdraw only after notice of the proposed dissolution is given to all partnership creditors.
D. Grey may withdraw from the partnership at any time.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct.
Rule: Where a partnership agreement does not state the duration of the partnership, the partners may withdraw at any time. The partner need not obtain consent of the other partners or of the court.
Choices "a" and "b" are incorrect, per the above rule.
Choice "c" is incorrect. A partner has no duty to inform creditors of his intent to withdraw in order for the withdrawal to be effective (although notice is needed to limit the partner's personal liability).
QUESTION 94
The limited liability of the shareholders of a closely-held corporation will most likely be disregarded if the shareholders:
A. Lendmoneytothecorporation.
B. Arealsocorporateofficers,directors,oremployees.
C. Undercapitalized the corporation when it was formed.
D. Formed the corporation solely to limit their personal liability.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The "corporate veil" can be pierced in situations in which the corporation was undercapitalized at formation, where it is the alter ego of the shareholders, or when it used to perpetrate a fraud.
Choice "a" is incorrect. Shareholders may lend money to their corporation. This does not make such shareholders personally liable for the corporation's debt. Choice "b" is incorrect. Officers, directors, and employees are not personally liable for the corporation's debt, and there is no reason to change this role merely because such persons also own shares.
Choice "d" is incorrect. The desire to limit liability is a valid reason to adopt the corporate form and will not, by itself, allow the "corporate veil" to be pierced.
QUESTION 95
Acorn and Bean were general partners in a farm machinery business. Acorn contracted, on behalf of the partnership, to purchase 10 tractors from Cobb Corp. Unknown to Cobb, Acorn was not authorized by the partnership agreement to make such contracts. Bean refused to allow the partnership to accept delivery of the tractors and Cobb sought to enforce the contract. Cobb will:
A. LosebecauseAcorn'sactionwasbeyondthescopeofAcorn'simpliedauthority.
B. PrevailbecauseAcornhadimpliedauthoritytobindthepartnership.
C. Prevail because Acorn had apparent authority to bind the partnership.
D. Lose because Acorn's express authority was restricted, in writing, by the partnership agreement.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A general partner has apparent authority to bind the partnership and other partners in respect to all ordinary transactions within the apparent scope of the partnership business. A farm machinery business probably regularly purchases tractors. Thus, there was apparent authority here.
Choices "a" and "b" are incorrect. Implied authority is authority that an agent reasonably believes he or she was given by the principal along with any express authority. Because Acorn knew that he did not have express authority to make the contracts here, he could not reasonably believe that he had implied authority to do so.
Choice "d" is incorrect. The seller was not aware of Acorn's lack of express authority. Therefore, Cobb relied on Acorn's apparent authority.
QUESTION 96
In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved. In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.
A. TheACHAssociatesoralpartnershipagreementwasvalid.
B. TheACHAssociatesoralpartnershipagreementwasinvalidbecausethepartnershiplastedformorethanoneyear.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A partnership agreement does not have to be in writing to be valid. If the partners want to enforce an agreement to be partners for more than one year, that agreement must be in writing, but merely having the partnership last for more than one year does not make an oral partnership agreement invalid.
QUESTION 97
In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved. In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.
A. Anchor,Chain,andHookjointlyowningandconductingabusinessforprofitestablishesapartnershiprelationship. B. Anchor,Chain,andHookjointlyowningincomeproducingpropertyestablishesapartnershiprelationship.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A partnership is defined as an association of two or more persons who agree to carry on as co-owners a business for profit. Merely owning income-producing property jointly is not sufficient.
QUESTION 98
In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved. In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.
A. Anchor'sshareofACHAssociates'1993profitswas$20,000.
B. Hook'sshareofACHAssociates'1993profitswas$30,000.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Unless otherwise agreed, partners share profits equally. Here, the partners agreed to share profits on the basis of their contributions, which were in a ratio of 1:2:3 respectively for Anchor, Chain, and Hook. Thus, Anchor's share of the 1993 profits was $10,000, Chain's share was $20,000, and Hook's share was $30,000.
QUESTION 99
In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved.
In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.
A. Anchor'scapitalaccountwouldbereducedby1/3ofany1994losses. B. Hook'scapitalaccountwouldbereducedby1/2ofany1994losses.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. If the partnership agreement is silent on how losses will be shared, they are shared in the same manner as profits. Here, the partners agreed to share profits on the basis of their contributions, which were in a ratio of 1:2:3 respectively for Anchor, Chain, and Hook. Thus, Anchor is liable for one-sixth of the loss, Chain is liable for 1/3 of the loss, and Hook is liable for 1/2 of the loss.
QUESTION 100
In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved. In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased
cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.
A. AceAutomobileCo.wouldloseasuitbroughtagainstACHAssociatesbecauseHook,asageneralpartner,hasnoauthoritytobindthepartnership. B. AceAutomobileCo.wouldwinasuitbroughtagainstACHAssociatesbecauseHook'sauthoritycontinuesduringdissolution.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A partner's authority to bind the partnership continues after dissolution to persons who have extended credit to the partnership previously and who are without notice of the dissolution. The facts state that Hook had previously purchased cars for the partnership from Ace, and presumably the purchases were on credit. Since nothing in the facts indicates that Ace was given notice of the dissolution, the partnership will be bound.
QUESTION 101
In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved.
In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.
Determine whether (A) or (B) is correct. Select the answer that corresponds to the correct statement.
A. ACHAssociatesandHookwouldbetheonlypartiesliabletopayanyjudgmentrecoveredbyAceAutomobileCo.
B. Anchor,Chain,andHookwouldbejointlyandseverallyliabletopayanyjudgmentrecoveredbyAceAutomobileCo.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Since Ace brought suit against both the partnership and the individual partners, if judgment is rendered against the partnership, all partners could be held jointly and severally liable.
QUESTION 102
In 1990, Amber Corp., a closely held corporation, was formed by Adams, Frank, and Berg as incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which provided that they would vote for each other as directors and officers. In 1994, stock in the corporation was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds 25%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock. Adams, Frank, and Berg have been directors and officers of the corporation since the corporation was formed. Regular meetings of the board of directors and annual stockholders meetings have been held. For this question refer to the formation of Amber Corp. and the rights and duties of its stockholders, directors, and officers.
A. AmberCorp.mustbeformedunderastate'sgeneralcorporationstatute.
B. AmberCorp.'sarticlesofincorporationmustincludethenamesofallstockholders.
C. Amber Corp. must include its corporate bylaws in the incorporation documents filed with the state.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A corporation must be formed by compliance with the state's corporation statute. Choice "b" is incorrect. The articles need not contain the names of the stockholders. Choice "c" is incorrect. Bylaws do not have to be in the articles; they are usually adopted at the first directors' meeting.
QUESTION 103
In 1990, Amber Corp., a closely held corporation, was formed by Adams, Frank, and Berg as incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which provided that they would vote for each other as directors and officers. In 1994, stock in the corporation was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds 25%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock. Adams, Frank, and Berg have been directors and officers of the corporation since the corporation was formed. Regular meetings of the board of directors and annual stockholders meetings have been held. For this question refer to the formation of Amber Corp. and the rights and duties of its stockholders, directors, and officers. Amber Corp.'s initial bylaws ordinarily would be adopted by its:
A. Stockholders. B. Officers.
C. Directors.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Bylaws usually are adopted by the initial directors.
QUESTION 104
In 1990, Amber Corp., a closely held corporation, was formed by Adams, Frank, and Berg as incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which provided that they would vote for each other as directors and officers. In 1994, stock in the corporation was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds 25%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock. Adams, Frank, and Berg have been directors and officers of the corporation since the corporation was formed. Regular meetings of the board of directors and annual stockholders meetings have been held. For this question refer to the formation of Amber Corp. and the rights and duties of its stockholders, directors, and officers. Amber Corp.'s day-to-day business ordinarily would be operated by its:
A. Directors.
B. Stockholders. C. Officers.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Stockholders have no day-to-day control; management power of a corporation is vested in the directors, but they usually delegate day-to-day management duties to the officers.
QUESTION 105
An increase (shift right) in aggregate demand causes:
A. AnincreaseinthepricelevelandadecreaseinrealGDP. B. AdecreaseinthepricelevelandanincreaseinrealGDP. C. AnincreaseinthepricelevelandanincreaseinrealGDP. D. A decrease in the price level and a decrease in real GDP.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. As shown above, an increase in aggregate demand causes the equilibrium price level to rise and equilibrium output (real GDP) to increase. Choice "a" is incorrect. As shown above, equilibrium output increases, not decreases. Choice "b" is incorrect. As shown above, the equilibrium price level increases, not decreases. Choice "d" is incorrect. As shown above, the equilibrium price level increases, not decreases.
QUESTION 106
The trough of a business cycle is generally characterized by:
A. Shortagesofessentialrawmaterialsandrisingcosts.
B. Increasingpurchasingpowerandincreasingcapitalinvestments.
C. Unused productive capacity and an unwillingness to risk investments. D. Declining purchasing power and unused productive capacity.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The trough of a business cycle is an economic low point with no positive indicators for the future. It is characterized by unused productive capacity and an unwillingness to risk new investments.
Choice "a" is incorrect. Shortages may occur during a peak. Choice "b" is incorrect. Increasing purchasing power and increasing capital investments come with
recovery.
Choice "d" is incorrect. Declining purchasing power comes with inflation; unlikely in a trough.
QUESTION 107
During a recession:
A. Output(realGDP)willbeincreasing.
B. Thenaturalrateofunemploymentwillincreasedramatically. C. Potential output will exceed actual output.
D. Actualoutputwillexceedpotentialoutput.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. During a recession, potential output (real GDP) will exceed actual output (real GDP).
Choice "a" is incorrect. Real GDP is falling during a recession. Choice "b" is incorrect. The natural rate of unemployment will not be affected by the various phases of the business cycle. Actual unemployment will change with the cycle. Choice "d" is incorrect. Actual output will not exceed potential output except at the peak of the cycle, and perhaps not then.
QUESTION 108
A recession can be caused by:
A. Anincreaseinaggregatedemand. B. Adecreaseinaggregatesupply. C. A decrease in aggregate demand. D. Both "b" and "c".
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Both choices "b" and "c" can cause a recession. A recession is defined as a period of falling GDP and rising unemployment. GDP will fall if there is a decrease in aggregate demand or a decrease in aggregate supply.
Choice "a" is incorrect. An increase in aggregate demand will cause GDP to increase NOT decrease. Choice "b" is incorrect, per the above Explanation: .
Choice "c" is incorrect, per the above Explanation: .
QUESTION 109
A period during which real GDP is rising and unemployment is falling is called a(n):
A. Recession. B. Peak.
C. Expansion. D. Trough.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. During an expansion, real GDP is rising and unemployment is falling. Choice "a" is incorrect. A recession is when real GDP is falling NOT rising. Choice "b" is incorrect. A peak is the highest point of economic activity. It is the point where real GDP is at its highest level in the cycle and unemployment is at its lowest level in the cycle. Choice "d" is incorrect. A trough is the lowest level of economic activity. It is the point where real GDP is at its lowest level in the cycle and unemployment is at its highest level in the cycle.
QUESTION 110
Which of the following might be considered the most expansionary set of fiscal policies?
A. Increasegovernmentpurchases,increaseintaxes.
B. Increasegovernmentpurchases,decreaseintaxes.
C. Decrease in taxes, increase in the money supply.
D. Increase in government purchases, increase in the money supply.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Expansionary fiscal policy involves increasing government purchases and/or decreasing taxes. Both increases in government spending and
decreases in taxes cause the aggregate demand curve to shift right and thus cause real GDP (output) to increase. Choice "a" is incorrect. An increase in taxes is an example of contractionary fiscal policy. Choice "c" is incorrect. An increase in the money supply is expansionary monetary policy (not fiscal policy).
Choice "d" is incorrect per above Explanation: .
QUESTION 111
An increase in government spending will tend to cause:
A. RealGDPtofallandunemploymenttorise. B. RealGDPtoriseandunemploymenttofall. C. Real GDP to rise and unemployment to rise. D. Real GDP to fall and unemployment to fall.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An increase in government spending causes an increase in aggregate demand (i.e., causes the aggregate demand curve to shift right). As a result, an increase in government spending causes real GDP to rise and unemployment to fall.
Choice "a" is incorrect. Real GDP will rise, not fall.
Choice "c" is incorrect. Unemployment will fall, not rise.
Choice "d" is incorrect. Real GDP will rise, not fall.
QUESTION 112
An increase in the personal income tax will tend to cause:
A. RealGDPtofallandunemploymenttorise. B. RealGDPtoriseandunemploymenttofall. C. Real GDP to rise and unemployment to rise. D. Real GDP to fall and unemployment to fall.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. An increase in the personal income tax will cause a decrease in aggregate demand (i.e., causes the aggregate demand curve to shift left). As a result, an increase in taxes causes real GDP to fall and unemployment to rise.
Choice "b" is incorrect. Real GDP will fall, not rise.
Choice "c" is incorrect. Real GDP will fall, not rise.
Choice "d" is incorrect. Unemployment will rise, not fall.
QUESTION 113
Which one of the following most accurately describes the normal sequence of a business cycle?
A. Expansion,contraction,trough,andpeak. B. Expansion,peak,contraction,andtrough. C. Peak, contraction, expansion, and trough. D. Trough, contraction, expansion, and peak.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The sequence of a typical business cycle includes an expansionary phase, a peak of economic activity, a contractionary phase, and a trough of economic activity. Choice "a" is incorrect. A peak does not follow a trough. Choice "c" is incorrect. A trough does not follow an expansion. Choice "d" is incorrect. A contraction does not follow a trough.
QUESTION 114
Within the framework of the aggregate demand/aggregate supply model, an increase in short run aggregate supply will cause:
A. Realoutputtoexpandandthepriceleveltofall. B. Realoutputtodeclineandthepriceleveltorise. C. Real output to expand and the price level to rise. D. Real output to decline and the price level to fall.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A shift right in short run aggregate supply causes output to increase and the price level to fall.
Choice "b" is incorrect. Real output would rise, not fall. Choice "c" is incorrect. The price level would fall, not rise. Choice "d" is incorrect. Real output would rise, not fall.
QUESTION 115
Which one of the following is most likely to accompany a reduction in aggregate demand?
A. Anincreaseinthepricelevel.
B. Adecreaseinemployment.
C. An increase in real GDP.
D. A decrease in the unemployment rate.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. As aggregate demand falls, the unemployment rate rises so employment would decrease.
Choice "a" is incorrect. The price level would fall, not rise.
Choice "c" is incorrect. Real GDP would fall, not rise.
Choice "d" is incorrect. The unemployment rate would rise, not fall.
QUESTION 116
If an economy is currently experiencing both full employment and price stability, a major tax reduction will probably cause:
A. Anincreaseintheunemploymentrate.
B. Anaccelerationintheinflationrate,unlessgovernmentexpendituresarealsoreduced. C. No change in real GDP or the price level.
D. A decrease in consumption.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A tax cut shifts the aggregate demand curve to the right causing the price level and therefore the inflation rate to rise.
Choice "a" is incorrect. The unemployment rate would fall, not rise. Choice "c" is incorrect. The price level would rise, not remain unchanged. Choice "d" is incorrect. Consumption would rise as disposable income rises, not fall.
QUESTION 117
A large increase in nominal wages, perhaps orchestrated by unions, would most likely result in:
A. AnincreaseinrealGDPandadecreaseinthepricelevel. B. AdecreaseinrealGDPandanincreaseinthepricelevel. C. A decrease in real GDP and a decrease in the price level. D. An increase in real GDP and an increase in the price level.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An increase in nominal wages represents an increase in input costs. This would shift the aggregate supply curve to the left resulting in a decrease in real GDP and an increase in the overall price level.
Choice "a" is incorrect. Real GDP would decrease, not increase. Choice "c" is incorrect. The price level would increase, not decrease. Choice "d" is incorrect. Real GDP would decrease, not increase.
QUESTION 118
Economic fluctuations (or business cycles) are best described as:
A. Longrunincreasesinanationsstandardofliving.
B. Changesintheprofitsofagivenfirmfromoneyeartothenext.
C. Fluctuations of equal duration and equal severity in the level of economic activity over time. D. Fluctuations in the level of economic activity, relative to a long-term growth trend.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. By the definition of business cycles. Choice "a" is incorrect. This is economic growth.
Choice "b" is incorrect. Business cycles refer to overall economic activity not the activity of one firm. Choice "c" is incorrect. Business cycles are not predictable and are not of equal duration nor of equal severity.
QUESTION 119
Which of the following would most likely cause real GDP to increase the most:
A. Ariseininterestratesandariseininputcosts.
B. Afallininterestratesandafallininputcosts.
C. A rise in wealth and a rise in interest rates.
D. A rise in consumer confidence and a fall in government spending.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A decline in interest rates would cause the aggregate demand curve to shift right, which increases real GDP. Similarly, a decline in input costs would cause the aggregate supply curve to shift right, which also increases real GDP.
Choice "a" is incorrect. Both of these events would cause real GDP to decline. Choice "c" is incorrect. A rise in interest rates would cause real GDP to decline, not increase. Choice "d" is incorrect. A decline in government spending would cause real GDP to decline, not increase.
QUESTION 120
At the peak of a business cycle:
A. Output(realGDP)tendstobebelowthepotentiallevelofoutput.
B. Thereislikelytobeanexcesssupplyoflaborandbusinessinventoriesarelikelytobehigh.
C. The overall price level is likely to be falling.
D. Capacity constraints and labor shortages are likely to put upward pressure on the overall price level.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The peak of a business cycle marks the highest point of economic activity. At that point, firms are likely to face capacity constraints and labor shortages, which will put upward pressure on the overall price level.
Choice "a" is incorrect. Real GDP is likely to be above, not below, its potential level. Choice "b" is incorrect. Business inventories are likely to be low, not high, and there is likely to be excess demand for labor not an excess supply of labor.
Choice "c" is incorrect. The overall price level is likely to be rising not falling.
QUESTION 121
Which of the following segments of the economy will be least affected by the business cycle?
A. Commercialconstructionindustry. B. Machineryandequipmentindustry. C. Residential construction industry. D. Healthcare industry.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The business cycle is the rise and fall of economic activity relative to its long- term growth trend. During a contraction or a recession, most industries experience a decline in sales and profits. Similarly, during an expansion, most industries experience an increase in sales and profits. However, health care services are typically not affected by business cycles. People need medical services regardless of whether or not the economy is doing well. Thus, the health care industry is the least affected by the business cycle.
Choice "a" is incorrect. During a downturn in economic activity (recession or contraction), firm investment in new plants and equipment typically drops off substantially. Thus, the demand for commercial construction is typically low during a contraction and high during an expansion. Thus, the commercial construction industry is sensitive to the business cycle. Choice "b" is incorrect. During a downturn in economic activity (recession or contraction) firm investment in new plants and equipment typically drops off substantially. Thus, the machinery and equipment industry is sensitive to business cycles. Sales grow during an expansion, but they tend to decline during a contraction or recession.
Choice "c" is incorrect. The residential construction industry is sensitive to interest rates, unemployment rates, and consumer wealth. All of these fluctuate with the business cycle. As a result, the residential construction industry is sensitive to the business cycle.
QUESTION 122
An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?
A. Toenabletheauditortoaccuratelyidentifysignificantdeficiencies.
B. Toassisttheauditortoaccuratelyinterpretinformationobtainedduringanaudit. C. To allow the auditor to more accurately perform tests of controls.
D. To decide whether it will be necessary to perform analytical procedures.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. As part of audit planning, the auditor should obtain an understanding of the entity's business. This understanding enables the auditor to better understand events, transactions, and practices that may affect the financial statements, to plan and perform appropriate audit tests, and to properly understand and evaluate the results of those tests. Choice "a" is incorrect. Obtaining an understanding of the entity's business would not be particularly helpful in identifying significant deficiencies. Significant deficiencies in internal control are typically identified during the fieldwork stage of the audit.
Choice "c" is incorrect. Obtaining an understanding of the entity's business would not result in a more accurate performance of tests of controls. Accurate performance of audit tests is dependent upon factors such as existence of an appropriate audit trail, client cooperation, training and supervision of audit staff, etc. Choice "d" is incorrect. Analytical procedures are always required in an audit during the planning and overall review stages.
QUESTION 123
Which of the following statements is correct if there is an increase in the resources available within an economy?
A. Moregoodsandserviceswillbeproducedintheeconomy.
B. Theeconomywillbecapableofproducingmoregoodsandservices. C. The standard of living in the economy will rise.
D. The technological efficiency of the economy will improve.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. If there is an increase in the resources available in an economy, the economy will be capable of producing more goods and services. This increase is really an increase in the long-run aggregate supply (potential GDP). On the aggregate supply and demand chart, the long-run aggregate supply line
(LRAS) is the vertical line that represents the potential or equilibrium level of output. If that line shifts to the right, then the economy is capable of expanding, but it will not automatically expand just because the line shifts to the right.
Choice "a" is incorrect. Just because there is an increase in the resources available in an economy, it does not mean that more goods and services will automatically be produceD. There would have to be increased demand (a shift upward in the aggregate demand line) for more goods and services to actually be produced.
Choice "c" is incorrect. If there is an increase in the resources available in an economy, the standard of living in the economy will not necessarily rise. It could rise, but it will not necessarily do that. Choice "d" is incorrect. If there is an increase in the resources available in an economy, the technological efficiency of the economy will not automatically improve. This statement is backwards. An increase in technological efficiency of an economy will normally increase the resources available in the economy by increasing productivity.
Economic Measures and Reasons for Changes in the Economy
QUESTION 124
A period of inflation:
A. Increasesthepricelevel,whichbenefitsthosewhoareentitledtoreceivespecificamountsofmoney.
B. Enhancesthepositiverelationshipbetweenthepricelevelandthepurchasingpowerofmoney.
C. Harms anyone who has an obligation to pay a specific amount and benefits anyone who is entitled to receive a specific amount. D. Increases the price level, which is negatively related to the purchasing power of money.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A period of inflation increases the price level, which is negatively related to the purchasing power of money (inflation erodes the value of money). Choice "a" is incorrect. When price levels increase, those with fixed amounts of money are hurt. Choice "b" is incorrect. The relationship between price levels and the purchasing power of money is negative, or inverse.
Choice "c" is incorrect. Inflation helps anyone with a fixed obligation since the debt can be repaid in inflated dollars. Those receiving a specific fixed amount are harmed.
QUESTION 125
Which of the following is not consistent with full employment?
A. Anunemploymentrategreaterthanzero. B. Structuralunemployment.
C. Cyclical unemployment.
D. Frictional unemployment.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. When the economy is operating at full employment, there is no cyclical unemployment. When the economy is operating at full employment, there is still some unemployment known as the natural rate of unemployment, which does not include cyclical unemployment. Choice "a" is incorrect. There is still some unemployment (frictional, structural, and seasonal) when the economy is operating at full employment.
Choice "b" is incorrect, per the above Explanation: .
Choice "d" is incorrect, per the above Explanation: .
QUESTION 126
Cyclical unemployment results from:
A. Skillsofworkersnotcorrespondingtojobsavailable.
B. Thetimeittakestomatchqualifiedworkerswithavailablejobs. C. Seasonal decreases in demand for labor.
D. A recession in the economy.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Cyclical Unemployment is caused by the business cycle. It tends to rise during a recession and fall during an expansion.
Choice "a" is incorrect. This is an example of structural unemployment. Choice "b" is incorrect. This is an example of frictional unemployment. Choice "c" is incorrect. This is an example of seasonal unemployment.
QUESTION 127
During a period of high inflation, which of the following groups in society would be most likely to gain?
A. Thosewithafixedincome.
B. Thosewithafixedamountofdebt.
C. Those holding a large amount of money.
D. Workers under contract without a cost of living adjustment.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. During a period of high inflation, those with a fixed amount of debt will repay their debt with inflated dollars and are thus likely to gain. Choice "a" is incorrect. Those with a fixed income will see the purchasing power of their income erode and are thus likely to be hurt.
Choice "c" is incorrect. Those holding a large amount of money will see the purchasing power of their money erode and are thus likely to be hurt.
Choice "d" is incorrect. Cost of living adjustments take inflation into account, thus these individuals are likely to be unaffected.
QUESTION 128
Frictional unemployment refers to unemployment resulting from:
A. Theskillsofworkersdonotcorrespondtotheskillsdemandedbyemployers. B. Thetimeneededtomatchqualifiedjobseekerswithavailablejobs.
C. Seasonal decreases in demand for labor.
D. A recession in the economy.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Frictional unemployment is the unemployment that arises from workers routinely changing jobs or from workers being temporarily laid off. It results from the time needed to match qualified job seekers with available jobs.
Choice "a" is incorrect. This is structural unemployment.
Choice "c" is incorrect. This is seasonal unemployment.
Choice "d" is incorrect. This is cyclical unemployment.
QUESTION 129
The measure most often used to compare standards of living across countries or across time is:
A. Governmentspending.
B. RealGDP.
C. Real consumption expenditures. D. Real GDP per capita.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Real GDP per capita is real GDP divided by population. Real GDP per capita is typically used to compare standards of living across countries or across time. By dividing real GDP by population, this measure adjusts for differences in the size of countries and for differences in population over time.
Choice "a" is incorrect. Government spending is not a measure of the standard of living of a country. Choice "b" is incorrect. Countries with larger populations tend to have higher levels of real GDP. This however does not mean they have a higher standard of living. To adjust for differences in population, real GDP per capita is typically used to compare standards of living, not real GDP. Choice "c" is incorrect. Real consumption expenditures are only a part of real GDP and thus do not measure all economic activity. Furthermore, real consumption expenditures do not adjust for differences in population. It is therefore not used as a measure of the standard of living.
QUESTION 130
The determination of gross domestic product (GDP) by the expenditure approach would include:
A. Netexports.
B. Businessprofits.
C. Compensation to employees.
D. A capital consumption allowance.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The expenditure approach to computing GDP includes: Consumption
Net exports
Government expenditures
Capital investment
Choices "b", "c", and "d" are incorrect, per the Explanation: above.
QUESTION 131
Under the expenditure approach, GDP can be calculated as the sum of:
A. Consumption,moneysupply,governmentpurchases,andexports.
B. Consumption,investment,transferpayments,andimports.
C. Consumption, investment, government purchases, and net exports.
D. Consumption, investment, government purchases, and foreign exchange.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Under the expenditure approach, GDP is calculated as the sum of: consumption expenditures + investment expenditures + government purchases + net exports.
Choice "a" is incorrect. See definition above.
Choice "b" is incorrect. See definition above.
Choice "d" is incorrect. See definition above.
QUESTION 132
The discount rate set by the Federal Reserve is the:
A. Ratethatcommercialbankschargeforloanstoeachother.
B. Ratethatcommercialbankschargeforloanstothegeneralpublic. C. Rate that the central bank charges for loans to commercial banks. D. Ratio of a bank's reserves to its demand deposits.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The discount rate refers to the rate established by the Federal Reserve for shortterm (often overnight) loans the Fed makes to member banks. Choice "a" is incorrect. The discount rate is the rate the Federal Reserve charges.
Choice "b" is incorrect per above Explanation: .
Choice "d" is incorrect. This would be the bank's reserve ratio - not the discount rate.
QUESTION 133
All of the following actions are valid tools that the Federal Reserve Bank uses to control the supply of money, except:
A. Sellinggovernmentsecurities.
B. Changingthereserveratio.
C. Raising or lowering the discount rate.
D. Printing money when the money supply appears low.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The treasury prints money. The Fed must increase the money supply through:
1. Federal open market committee (FOMC) purchasing or selling government securities,
2. Raising or lowering the discount rate, or
3. Changing the reserve ratio.
Choices "a", "b", and "c" are incorrect because they are all valid tools to control the supply of money.
QUESTION 134
If the Federal Reserve wanted to implement an expansionary monetary policy, which one of the following actions would the Federal Reserve take?
A. Raisethereserverequirementandthediscountrate.
B. PurchaseadditionalU.S.governmentsecuritiesandlowerthediscountrate. C. Raise the discount rate and sell U.S. government securities.
D. Lower the discount rate and raise the reserve requirement.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Fed purchases of government securities increase the money supply (putting money into circulation), and lowering the discount rate encourages borrowing by member banks and increases the money supply. Hence, these measures would help implement an expansionary monetary policy. Choice "a" is incorrect. Raising the reserve requirement and the discount rate would have the opposite effect of decreasing the money supply.
Choice "c" is incorrect. Raising the discount rate and selling government securities would reduce the money supply.
Choice "d" is incorrect. Raising the reserve requirement would decrease the money supply, but lowering the discount rate would increase the money supply.
QUESTION 135
To decrease the money supply, the Fed might:
A. Sellgovernmentsecuritiesontheopenmarket. B. Buygovernmentsecuritiesontheopenmarket. C. Decrease the required reserve ratio.
D. Lower the discount rate.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. To decrease the money supply, the Fed can: (1) sell government securities in the open market, (2) increase the discount rate, and (3) increase the required reserve ratio. Choice "b" is incorrect. The Fed should sell (not buy) securities on the open market. Choice "c" is incorrect. The Fed should increase (not decrease) the required reserve ratio. Choice "d" is incorrect. The Fed should increase (not decrease) the discount rate.
QUESTION 136
Which of the following correctly lists the three ways to increase the money supply?
A. Raisetherequiredreserveratio,increasethediscountrate,sellbondsintheopenmarket. B. Raisetherequiredreserveratio,increasethediscountrate,buybondsintheopenmarket. C. Lower the required reserve ratio, increase the discount rate, buy bonds in the open market. D. Lower the required reserve ratio, decrease the discount rate, buy bonds in the open market.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The three ways the Fed can increase the money supply are: (1) buy (purchase) government securities in the open market, (2) lower the discount rate, and (3) lower the required reserve ratio.
Choice "a" is incorrect, per above Explanation: .
Choice "b" is incorrect, per above Explanation: .
Choice "c" is incorrect, per above Explanation: .
QUESTION 137
An increase in the money supply leads to:
A. Adeclineininterestrates,anincreaseininvestmentandanincreaseinaggregatedemand. B. Adeclineininterestrates,adecreaseininvestmentandanincreaseinaggregatedemand. C. An increase in interest rates, a decrease in investment and a decrease in aggregate demand. D. Anincreaseinthemoneysupplyhasnoeffectoninterestratesorinvestment.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Expansionary monetary policy results when the Fed increases the money supply. Expansionary monetary policy affects the economy through the following chain of events: (1) an increase in the money supply causes interest rates to fall, (2) falling interest rates stimulate the desired levels of firm investment and household consumption, (3) increases in desired investment and consumption cause an increase in aggregate demand, and (4) aggregate demand shifts to the right causing real GDP and the price level to rise.
Choice "b" is incorrect. An increase in the money supply causes investment to increase, not decrease. Choice "c" is incorrect. An increase in the money supply causes interest rates to decrease, not increase, investment to increase, not decrease and aggregate demand to increase, not decrease.
Choice "d" is incorrect per above Explanation: .
QUESTION 138
Which of the following is most likely to cause an increase in the amount of frictional unemployment in an economy?
A. Aninventionthatrendersanindustryobsolete.
B. Adownturninaggregatebusinessactivity.
C. An increase in the average age of the work force. D. A reduction in the average age of the work force.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Younger workers tend to move between jobs more frequently. Choice "a" is incorrect. This would lead to structural unemployment. Choice "b"
is incorrect. This would lead to cyclical unemployment. Choice "c" is incorrect. Older workers tend to be voluntarily between jobs less frequently than younger workers.