Series 66 Exam Questions & Answers 2026 (1–10)

Question 1

Which economic theory holds that business cycles are caused primarily by changes in the money supply and credit conditions rather than real sector shocks?

TheoryPractice · Accepted Answer

Austrian Business Cycle theory. 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.

Question 2

Which type of security is specifically designed to protect investors against inflation risk?

TheoryPractice · Accepted Answer

Treasury Inflation-Protected Securities (TIPS). 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.

Question 3

When the Federal Reserve raises the discount rate, the most direct immediate effect is:

TheoryPractice · Accepted Answer

Borrowing from the Fed becomes more expensive for banks. 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.

Question 4

Which of the following relationships between interest rates and bond prices is correct?

TheoryPractice · Accepted Answer

When interest rates rise, existing bond prices fall. 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.

Question 5

The yield curve normally slopes upward because:

TheoryPractice · Accepted Answer

Investors require higher yields to compensate for greater uncertainty and lower liquidity of longer maturities. 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.

Question 6

The Federal Reserve's 'dual mandate' refers to its goals of:

TheoryPractice · Accepted Answer

Maximum employment and stable prices. 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.

Question 7

Quantitative easing (QE) is a monetary policy tool that involves:

TheoryPractice · Accepted Answer

Large-scale purchases of longer-term securities to inject liquidity when short-term rates are near zero. 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.

Question 8

If the Federal Reserve wishes to slow an overheating economy, which of the following would be a contractionary monetary policy action?

TheoryPractice · Accepted Answer

Sell U.S. Treasury securities in the open market. 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.

Question 9

Fiscal policy refers to the use of which government tools to influence the economy?

TheoryPractice · Accepted Answer

Government spending and taxation. 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.

Question 10

Which of the following is an example of an automatic fiscal stabilizer?

TheoryPractice · Accepted Answer

Unemployment insurance benefit payments that increase automatically during downturns. 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.

Series 66 Exam Questions & Answers 2026 (1–10)

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