TheorySeries 66
Practice Test
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30 free Series 66 questions
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Economic Factors
Which economic theory holds that business cycles are caused primarily by changes in the money supply and credit conditions rather than real sector shocks?
Correct — B. Austrian Business Cycle theory attributes booms and busts to credit expansion by central banks that distort interest rates and lead to malinvestment. Real Business Cycle theory attributes cycles to technology shocks. -
Economic Factors
Which type of security is specifically designed to protect investors against inflation risk?
Correct — D. TIPS have their principal adjusted by changes in the CPI. As inflation rises, the principal increases, so interest payments (a fixed percentage of adjusted principal) also rise, protecting purchasing power. -
Economic Factors
When the Federal Reserve raises the discount rate, the most direct immediate effect is:
Correct — A. The discount rate is what the Fed charges banks for short-term loans at the discount window. Raising it makes emergency borrowing from the Fed more costly, encouraging banks to seek funds elsewhere and generally tightening credit. -
Economic Factors
Which of the following relationships between interest rates and bond prices is correct?
Correct — D. Bond prices and interest rates have an inverse relationship. When market rates rise, existing bonds paying lower coupons become less attractive, so their prices fall. Long-term bonds are MORE sensitive (higher duration) to rate changes, not less. -
Economic Factors
The yield curve normally slopes upward because:
Correct — C. A normal (upward-sloping) yield curve reflects liquidity preference: investors demand a risk premium for tying up capital longer. Greater price volatility, reinvestment risk, and uncertainty over time justify higher long-term yields. -
Economic Factors
The Federal Reserve's 'dual mandate' refers to its goals of:
Correct — D. The Fed's dual mandate from Congress is to promote maximum employment and stable prices (price stability/low inflation). A third implicit goal is moderate long-term interest rates, sometimes called a triple mandate. -
Economic Factors
Quantitative easing (QE) is a monetary policy tool that involves:
Correct — A. QE is used when conventional monetary policy is constrained by the zero lower bound on interest rates. By buying long-term Treasuries and mortgage-backed securities, the Fed expands its balance sheet and pushes down long-term yields. -
Economic Factors
If the Federal Reserve wishes to slow an overheating economy, which of the following would be a contractionary monetary policy action?
Correct — B. Selling Treasuries in the open market removes reserves from the banking system (contractionary). Lowering rates, reducing requirements, and cutting the discount rate are all expansionary policies. -
Economic Factors
Fiscal policy refers to the use of which government tools to influence the economy?
Correct — A. Fiscal policy is conducted by the legislative and executive branches through decisions about government spending levels and tax rates. Monetary policy, by contrast, involves control of the money supply and interest rates by the central bank. -
Economic Factors
Which of the following is an example of an automatic fiscal stabilizer?
Correct — C. Automatic stabilizers work without new legislative action. Unemployment insurance payments rise automatically in recessions (injecting income), and tax revenues fall automatically, both cushioning the economic decline. -
Economic Factors
The 'crowding out' effect in economics refers to:
Correct — B. When the government borrows heavily to finance deficit spending, it competes with private borrowers for funds, pushing up interest rates. Higher rates then reduce private business investment — the 'crowding out' of private capital. -
Economic Factors
Which of the following best describes expansionary fiscal policy?
Correct — D. Expansionary (stimulative) fiscal policy increases aggregate demand by boosting government spending and/or reducing taxes, leaving consumers and businesses with more money to spend. It typically widens the budget deficit. -
Economic Factors
Gross Domestic Product (GDP) measures:
Correct — B. GDP measures the value of all final goods and services produced within a country's geographic borders, regardless of who produces them. GNP, by contrast, measures output by a country's citizens/nationals wherever they are located. -
Economic Factors
Real GDP differs from nominal GDP in that real GDP:
Correct — A. Real GDP removes the effect of price changes by using a base-year price level. This allows meaningful comparisons of economic output across years — nominal GDP can rise simply because prices rose, even with no real change in output. -
Economic Factors
In the expenditure approach to calculating GDP, which of the following components is typically the LARGEST share of U.S. GDP?
Correct — D. Personal consumption (C) typically accounts for approximately 68-70% of U.S. GDP. This reflects the dominance of consumer spending in the American economy. Government spending is roughly 17-18%, investment about 18%, and net exports are typically negative. -
Economic Factors
Which of the following is NOT included in the calculation of GDP?
Correct — C. GDP counts only NEW production of final goods and services. The resale of an existing home represents the transfer of an already-counted asset, not new production. Only the value of any real estate agent fees or improvements would be included. -
Economic Factors
Total Factor Productivity (TFP) growth in an economy is best described as:
Correct — A. TFP (also called the Solow residual) captures the portion of output growth that cannot be explained by increases in labor and capital inputs alone. It reflects efficiency gains, innovation, better management, and technological progress. -
Economic Factors
A trade deficit means that a country:
Correct — B. A trade deficit (negative trade balance) occurs when imports exceed exports. This means more money flows out to pay for foreign goods and services than flows in from export sales. -
Economic Factors
The principle of comparative advantage suggests that countries should:
Correct — D. Comparative advantage means producing where your relative opportunity cost is lowest, even if another country is absolutely more efficient at everything. Specialization and trade allow both parties to consume beyond their production possibilities. -
Economic Factors
When a country's currency appreciates against other currencies, the effect on its international trade is generally:
Correct — A. A stronger domestic currency makes exports pricier for foreign buyers (reducing export volumes) while making imports cheaper for domestic buyers (increasing import volumes). Both effects typically worsen the trade balance. -
Economic Factors
A tariff is best defined as:
Correct — C. A tariff is a tax levied on imported goods. It raises the cost of imports, protecting domestic producers from foreign competition and generating government revenue. A quota restricts quantity rather than adding a tax. -
Economic Factors
The J-curve effect in international trade describes:
Correct — B. After depreciation, import prices rise immediately (worsening the trade balance) while trade volumes adjust slowly (contracts are pre-set, behavioral changes take time). Eventually export volume rises and import volume falls, improving the balance — forming a J-shaped path. -
Economic Factors
If the U.S. dollar strengthens against the euro, a U.S. investor holding European stocks would likely see:
Correct — C. When the dollar strengthens (euro weakens), Euro-denominated returns convert into fewer dollars. A European stock returning 10% in euros produces a smaller dollar return for a U.S. investor — currency risk works against the investor when the foreign currency weakens. -
Economic Factors
Purchasing Power Parity (PPP) theory suggests that in the long run, exchange rates adjust so that:
Correct — A. PPP holds that exchange rates should equilibrate to make identical goods cost the same across countries. If a burger costs more in Country A than B in a common currency, the theory predicts A's currency will depreciate until prices equalize. -
Economic Factors
Interest Rate Parity theory predicts that differences in interest rates between two countries should be offset by:
Correct — D. Interest Rate Parity ensures no arbitrage: if Country A has a higher interest rate than Country B, investors expect Country A's currency to depreciate by the interest rate differential, leaving total returns equal across both countries. -
Economic Factors
A U.S. company expecting to receive €5 million in 90 days enters a forward contract to sell euros at the current forward rate. This transaction is best described as:
Correct — B. By locking in the forward rate today, the company eliminates uncertainty about how many dollars it will receive for its euro proceeds. This is a textbook currency hedge — it transfers exchange rate risk to the counterparty. -
Economic Factors
According to the law of demand, when the price of a good rises (all else equal), the quantity demanded will:
Correct — A. The law of demand states an inverse relationship between price and quantity demanded: higher prices lead consumers to buy less of a good, substituting alternatives or simply purchasing fewer units. -
Economic Factors
A rightward shift in the supply curve (increase in supply) would, all else equal, result in:
Correct — D. When supply increases (curve shifts right), more is available at every price. With unchanged demand, price must fall to induce buyers to absorb the larger quantity, leading to lower price and higher quantity traded. -
Economic Factors
Price elasticity of demand is defined as:
Correct — C. Price elasticity of demand = (%ΔQd) / (%ΔP). An elasticity greater than 1 (elastic) means consumers are very responsive to price changes; less than 1 (inelastic) means they are not. This measure is always negative due to the law of demand but often stated as an absolute value. -
Economic Factors
Which of the following would cause a rightward shift in the demand curve for a normal good?
Correct — B. For a normal good, demand increases (shifts right) when consumer incomes rise. A price decrease moves you along the existing demand curve (not a shift). Production costs affect supply, not demand.
Series 66 sample questions
Tap any question below to reveal the answer and a plain-English explanation.
Economic Factors If demand for a product is highly inelastic and supply decreases, what happens to total producer revenue?
A. Total revenue increases because the price rise more than offsets the lower volume sold ✓
B. Total revenue decreases because consumers buy fewer units
C. Total revenue remains approximately unchanged
D. Total revenue first rises then falls depending on the supply shift magnitude
Correct — A. With inelastic demand, a price increase causes a proportionally smaller quantity decrease. Total revenue (P × Q) rises because the price increase dominates. This is why taxes on inelastic goods (cigarettes, gasoline) generate substantial revenue.
Ethical Practices Under the Uniform Securities Act, an investment adviser representative owes which primary duty to clients?
A. Fiduciary duty to act in the client's best interest ✓
B. Suitability duty to recommend reasonable products
C. Duty to maximize commissions within legal limits
D. Duty to follow broker-dealer instructions above client interests
Correct — A. Investment adviser representatives are fiduciaries and must place client interests ahead of their own. This is a higher standard than the suitability standard that applies to broker-dealers.
Fiduciary Duty Under the Investment Advisers Act of 1940, investment advisers owe clients a fiduciary duty. Which of the following BEST describes what that duty requires?
A. Recommending only securities that generate the highest commission for the adviser
B. Recommending securities suitable for the client's general risk tolerance only
C. Acting in the client's best interest and placing the client's interests ahead of the adviser's own ✓
D. Disclosing all compensation after a transaction has been completed
Correct — C. The fiduciary standard requires an adviser to act in the client's best interest and prioritize the client's interests over the adviser's own. This is a higher standard than mere suitability and requires ongoing loyalty and care.
Investment Vehicles Which type of stock gives its holders priority over common stockholders when dividends are declared?
A. Preferred stock ✓
B. Growth stock
C. Value stock
D. Blue-chip stock
Correct — A. Preferred stockholders receive dividends before common stockholders and have a senior claim on assets in liquidation. Growth, value, and blue-chip are categories of common stock.
Laws & Regulations Under the Uniform Securities Act, which of the following persons is defined as an 'investment adviser'?
A. A person who provides advice about securities for compensation ✓
B. A broker-dealer who executes securities transactions for clients
C. A person who only publishes general market newsletters without giving individualized advice
D. A trust company that manages assets under a court order
Correct — A. The USA defines an investment adviser as any person who, for compensation, engages in the business of advising others on securities. Broker-dealers, publishers of general newsletters, and trust companies acting under court orders are excluded from this definition.
Portfolio Management Modern Portfolio Theory (MPT) was developed primarily to show that:
A. Individual stock selection determines nearly all portfolio returns
B. Diversification eliminates both systematic and unsystematic risk
C. Combining assets with low correlations can reduce portfolio risk without sacrificing expected return ✓
D. The optimal portfolio always holds the market portfolio alone
Correct — C. MPT, introduced by Markowitz, demonstrates that combining assets whose returns are not perfectly correlated lowers portfolio variance without necessarily reducing expected return. It does not eliminate systematic risk, only unsystematic risk.
Client Recommendations Which of the following is the PRIMARY factor an investment adviser must consider when making a recommendation to a client?
A. The client's specific investment objectives and financial situation ✓
B. The commission the adviser will earn on the transaction
C. The historical performance of the recommended security
D. The current market trend for the asset class
Correct — A. Suitability and, under Reg BI, best interest standards require that recommendations be based primarily on the client's own investment objectives, risk tolerance, time horizon, and financial situation—not the adviser's compensation or market trends.
Investment Strategies An investor allocates 60% of a portfolio to equities and 40% to bonds. This division between asset classes is best described as:
A. Asset allocation ✓
B. Security selection
C. Market timing
D. Tactical rebalancing
Correct — A. Asset allocation is the strategic decision of how to divide a portfolio among broad asset classes such as equities, bonds, and cash. Security selection refers to picking individual securities within an asset class.
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