Series 66 Exam Questions & Answers 2026 (21–30)

Question 1

A tariff is best defined as:

TheoryPractice · Accepted Answer

A tax imposed on imported goods. 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.

Question 2

The J-curve effect in international trade describes:

TheoryPractice · Accepted Answer

The initial worsening of the trade balance after currency depreciation before it eventually improves. 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.

Question 3

If the U.S. dollar strengthens against the euro, a U.S. investor holding European stocks would likely see:

TheoryPractice · Accepted Answer

Lower returns when converted back to dollars. 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.

Question 4

Purchasing Power Parity (PPP) theory suggests that in the long run, exchange rates adjust so that:

TheoryPractice · Accepted Answer

A basket of identical goods costs the same in different countries when measured in a common currency. 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.

Question 5

Interest Rate Parity theory predicts that differences in interest rates between two countries should be offset by:

TheoryPractice · Accepted Answer

Expected changes in the exchange rate between their currencies. 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.

Question 6

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:

TheoryPractice · Accepted Answer

A currency hedge to lock in the dollar value of future euro receipts. 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.

Question 7

According to the law of demand, when the price of a good rises (all else equal), the quantity demanded will:

TheoryPractice · Accepted Answer

Decrease. 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.

Question 8

A rightward shift in the supply curve (increase in supply) would, all else equal, result in:

TheoryPractice · Accepted Answer

Lower equilibrium price and higher equilibrium quantity. 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.

Question 9

Price elasticity of demand is defined as:

TheoryPractice · Accepted Answer

The percentage change in quantity demanded divided by the percentage change in price. 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.

Question 10

Which of the following would cause a rightward shift in the demand curve for a normal good?

TheoryPractice · Accepted Answer

An increase in consumer incomes. 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 Exam Questions & Answers 2026 (21–30)

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