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Series 65 study materials
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Series 65 practice questions

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Question 1Economic Analysis and Business Information

A sustained period of falling real GDP, rising unemployment, and weakening consumer spending is best described as

  1. A recovery
  2. A recession Correct answer.
  3. A peak
  4. An expansion

Explanation

The business cycle alternates between expansions and contractions, and a contraction lasting more than a few months, marked by falling output and rising joblessness, is called a recession. Peaks and troughs are turning points rather than periods, and a recovery is the early stage of the following expansion.

Question 2Economic Analysis and Business Information

Which of the following is classified as a leading economic indicator?

  1. The average duration of unemployment
  2. Industrial production
  3. The average prime rate charged by banks
  4. Building permits for new housing Correct answer.

Explanation

Leading indicators change direction before the overall economy does, and building permits reflect planned construction activity that shows up in output later. Industrial production moves with the economy (coincident), while the prime rate and unemployment duration change only after the cycle has turned (lagging).

Question 3Economic Analysis and Business Information

Unanticipated inflation is most likely to benefit which of the following?

  1. A retiree living on a fixed pension
  2. An investor holding long-term bonds
  3. A bank holding fixed-rate mortgages
  4. A borrower repaying a fixed-rate mortgage Correct answer.

Explanation

Unexpected inflation reduces the real value of fixed-dollar obligations, so a debtor repays in dollars that purchase less than when the loan was made. Creditors and recipients of fixed payments absorb the corresponding loss of purchasing power.

Question 4Economic Analysis and Business Information

Which of the following transactions is included in the current year's U.S. gross domestic product?

  1. The purchase of shares of stock in a new issue
  2. A five-year-old car sold by a dealer
  3. A newly built house bought from its builder Correct answer.
  4. A Social Security payment to a retiree

Explanation

GDP counts only the market value of goods and services produced during the period, so a newly constructed home is included in the year it is built. Resales, financial transactions, and transfer payments do not represent current production.

Question 5Economic Analysis and Business Information

Which tool does the Federal Reserve use most frequently to adjust the money supply?

  1. Changing the reserve requirement
  2. Changing margin requirements on stock purchases
  3. Buying and selling U.S. Treasury securities Correct answer.
  4. Issuing new U.S. Treasury bonds

Explanation

Open market operations, the Fed's purchases and sales of Treasury securities, are used continuously because they are flexible and easily reversed. The reserve requirement is changed only rarely, and margin rules are a credit-control tool rather than a routine money-supply lever.

Question 6Economic Analysis and Business Information

The term "fiscal policy" refers to the use of which of the following to influence the economy?

  1. Margin requirements and consumer credit controls
  2. Government spending and taxation Correct answer.
  3. Open market operations and reserve requirements
  4. The money supply and short-term interest rates

Explanation

Fiscal policy is conducted by the legislative and executive branches through decisions on taxing and spending, which affect aggregate demand directly. The other choices describe monetary and credit policy tools controlled by the Federal Reserve.

Question 7Economic Analysis and Business Information

The Consumer Price Index is best described as

  1. An index of the prices of a fixed market basket bought by urban consumers Correct answer.
  2. An index that tracks the wages and benefits paid to unionized manufacturing workers
  3. A measure of the price change for all goods and services produced in the domestic economy
  4. A measure of the prices of raw materials and intermediate goods purchased by manufacturers

Explanation

The CPI tracks the cost of a fixed market basket of goods and services purchased by urban households, including imported items. Because the basket is fixed, the index measures pure price change over time.

Question 8Economic Analysis and Business Information

All else equal, a technological advance that lowers the cost of producing a good will most likely

  1. Increase demand, raising price and quantity
  2. Decrease demand, lowering price and quantity
  3. Increase supply, lowering price and raising quantity Correct answer.
  4. Decrease supply, raising price and lowering quantity

Explanation

A cost-reducing advance shifts the supply curve to the right, which lowers the equilibrium price and increases the equilibrium quantity sold. Demand is unaffected because consumer preferences and incomes have not changed.

Question 9Economic Analysis and Business Information

A company raises the price of its product by 10% and finds that its total revenue falls. The demand for this product is

  1. Inelastic
  2. Unitary elastic
  3. Perfectly inelastic
  4. Elastic Correct answer.

Explanation

When demand is elastic, the percentage drop in quantity demanded exceeds the percentage rise in price, so total revenue declines. Total revenue stays unchanged only when demand is unitary elastic.

Question 10Economic Analysis and Business Information

If the Federal Reserve buys U.S. Treasury securities in the open market, the most likely immediate result is

  1. A decrease in the money supply
  2. A decrease in bank reserves and higher short-term rates
  3. An increase in bank reserves and lower short-term rates Correct answer.
  4. An increase in the Treasury's borrowing costs

Explanation

When the Fed buys securities it pays for them by crediting reserves to the banking system, expanding the supply of money and reserves. The added liquidity pushes short-term interest rates, such as the federal funds rate, downward.

Question 11Economic Analysis and Business Information

The short-run Phillips curve suggests that

  1. Inflation and unemployment are unrelated in the short run
  2. Higher unemployment is always accompanied by higher rates of inflation
  3. Inflation can be reduced only if unemployment falls to zero
  4. Lower unemployment tends to be associated with higher inflation Correct answer.

Explanation

The short-run Phillips curve describes an inverse trade-off: policies that push unemployment below its natural rate tend to generate accelerating inflation. The relationship is a short-run one and can shift with changes in expectations.

Question 12Economic Analysis and Business Information

If the real rate of interest is 2% and expected inflation is 3%, the nominal interest rate should be approximately

  1. 2%
  2. 5% Correct answer.
  3. 1%
  4. 3%

Explanation

The Fisher relationship holds that the nominal rate approximately equals the real rate plus expected inflation. Lenders demand compensation for both the real return they require and the erosion of purchasing power they anticipate.

Question 13Economic Analysis and Business Information

Which of the following is recorded in the current account of the U.S. balance of payments?

  1. A U.S. bank's loan to a Brazilian manufacturing firm
  2. The purchase of a U.S. Treasury bond by a Japanese investor
  3. A dividend paid by a U.S. company to a German shareholder Correct answer.
  4. Direct investment by a U.S. firm in a Mexican factory

Explanation

The current account covers trade in goods and services plus income flows such as dividends and interest, and unilateral transfers. Purchases of securities, bank lending, and direct investment are recorded in the financial account.

Question 14Economic Analysis and Business Information

If the U.S. dollar appreciates substantially against the euro, the most likely effect is that

  1. U.S. goods become cheaper to Europeans and U.S. exports rise
  2. U.S. export sales increase sharply
  3. European goods become more expensive for U.S. buyers
  4. U.S. goods become costlier to Europeans and U.S. imports rise Correct answer.

Explanation

A stronger dollar means each euro buys fewer dollars, so European buyers must pay more for U.S. goods and U.S. exports tend to fall. At the same time, European goods cost fewer dollars, so U.S. imports tend to rise.

Question 15Economic Analysis and Business Information

Which of the following is a coincident economic indicator?

  1. Stock prices
  2. Industrial production Correct answer.
  3. Average duration of unemployment
  4. Building permits

Explanation

Coincident indicators move roughly in step with the economy and include industrial production, nonfarm payrolls, personal income less transfers, and manufacturing and trade sales. They describe current conditions rather than forecasting or confirming after the fact.

Question 16Economic Analysis and Business Information

Expansionary fiscal policy financed by large-scale Treasury borrowing can produce "crowding out," which means that

  1. Higher government spending reduces private consumption dollar for dollar
  2. Government borrowing raises interest rates and reduces private investment Correct answer.
  3. Government borrowing lowers interest rates and stimulates private investment
  4. Federal deficits automatically shrink the money supply

Explanation

Heavy Treasury borrowing increases the demand for loanable funds, pushing interest rates higher and leaving less credit available for private borrowers. The result is that some private investment is displaced by government borrowing.

Question 17Economic Analysis and Business Information

Over long periods, the main source of rising real living standards in an economy is

  1. Growth in productivity, or output per worker Correct answer.
  2. Persistent trade surpluses with major trading partners
  3. Sustained growth in the money supply
  4. Rising government budget deficits

Explanation

Real income per person can rise durably only if each worker produces more, which comes from capital investment, technology, and improved human capital. Money growth and trade balances affect prices and composition of output but do not by themselves raise long-run output per worker.

Question 18Economic Analysis and Business Information

An industry characterized by a small number of large firms, significant barriers to entry, and strategic interdependence among competitors is best described as

  1. An oligopoly Correct answer.
  2. Monopolistic competition
  3. A monopoly
  4. Perfect competition

Explanation

An oligopoly has few enough sellers that each firm must consider rivals' reactions when setting price or output, and entry barriers sustain the concentration. Perfect competition and monopolistic competition involve many sellers, while a monopoly has a single seller.

Question 19Economic Analysis and Business Information

Responsibility for setting the target for the federal funds rate rests with

  1. The Federal Open Market Committee Correct answer.
  2. The 12 district bank presidents voting individually
  3. The President's Council of Economic Advisers
  4. The U.S. Treasury Secretary

Explanation

The FOMC, composed of the Board of Governors and rotating district bank presidents, votes on the federal funds target and directs open market operations. District presidents act through the committee rather than individually, and the Treasury and Council of Economic Advisers have no vote.

Question 20Economic Analysis and Business Information

A worker who loses her job as a machine operator because her plant automates the task and her skills are no longer in demand is experiencing

  1. Cyclical unemployment
  2. Seasonal unemployment
  3. Structural unemployment Correct answer.
  4. Frictional unemployment

Explanation

Structural unemployment arises from a lasting mismatch between the skills or location of workers and the requirements of available jobs, such as displacement by technology. It persists even when the overall economy is healthy.

Question 21Economic Analysis and Business Information

If nominal GDP grows 6% in a year while the GDP deflator rises 4%, then real GDP grew approximately

  1. 4%
  2. 2% Correct answer.
  3. 6%
  4. 10%

Explanation

Real growth is approximated by subtracting the price change from nominal growth, because nominal growth combines changes in output and in prices. A deflator rising 4% means four percentage points of the 6% nominal gain reflect inflation.

Question 22Economic Analysis and Business Information

Assume banks hold no excess reserves and the public holds no currency. If the reserve requirement is 10% and the Fed buys $1 billion of securities from the public, the maximum potential increase in the money supply is

  1. $1 billion
  2. $9 billion
  3. $10 billion Correct answer.
  4. $100 million

Explanation

The simple deposit multiplier is the reciprocal of the reserve requirement, or 1 divided by 0.10, which equals 10. Multiplying the $1 billion of new reserves by 10 gives a potential money supply increase of $10 billion.

Question 23Economic Analysis and Business Information

If inflation in the United States runs consistently higher than in Japan, purchasing power parity theory predicts that, over time, the dollar will

  1. Be fixed by the Federal Reserve at its current level
  2. Depreciate relative to the yen Correct answer.
  3. Appreciate relative to the yen
  4. Remain unchanged relative to the yen

Explanation

Purchasing power parity holds that exchange rates adjust so that identical goods cost the same across countries. When one country's price level rises faster, its currency must depreciate to restore relative purchasing power.

Question 24Economic Analysis and Business Information

If the velocity of money is stable and real output grows 3% per year while the money supply grows 7%, the quantity theory of money predicts inflation of approximately

  1. 10%
  2. 3%
  3. 7%
  4. 4% Correct answer.

Explanation

In the equation of exchange with stable velocity, money growth in excess of real output growth shows up as inflation. Here 7% money growth minus 3% real growth leaves about 4% inflation.

Question 25Economic Analysis and Business Information

An inverted yield curve, in which short-term interest rates exceed long-term rates, has historically been interpreted as

  1. A signal of accelerating economic growth
  2. A signal of an impending economic slowdown or recession Correct answer.
  3. A neutral technical factor with no forecasting value
  4. A signal that inflation has been brought under control

Explanation

An inversion typically occurs when the central bank has tightened sharply at the short end while long-term yields reflect expectations of weaker future growth and lower inflation. Historically, sustained inversions have preceded many recessions, though with variable lead times.

Question 26Economic Analysis and Business Information

In the U.S. expenditure approach to gross domestic product, which category typically accounts for the largest share?

  1. Gross private domestic investment
  2. Government consumption and investment
  3. Net exports
  4. Personal consumption expenditures Correct answer.

Explanation

GDP under the expenditure approach is the sum of consumption, investment, government purchases, and net exports. Household consumption is normally the largest component in the U.S. economy.

Question 27Economic Analysis and Business Information

Which term describes a sustained decrease in the general price level of goods and services?

  1. Disinflation
  2. Deflation Correct answer.
  3. Stagflation
  4. Hyperinflation

Explanation

Deflation is a sustained decline in the general price level. Disinflation refers to a slowdown in the inflation rate, not a fall in prices.

Question 28Economic Analysis and Business Information

A graphic designer who voluntarily leaves a job to move to another city and is currently searching for a new position is classified as

  1. Seasonally unemployed
  2. Frictionally unemployed Correct answer.
  3. Cyclically unemployed
  4. Structurally unemployed

Explanation

Frictional unemployment arises from the normal search time between jobs. It can occur even when workers are moving voluntarily and jobs are available.

Question 29Economic Analysis and Business Information

The phase of the business cycle at which economic activity stops contracting and begins to expand is called the

  1. Contraction
  2. Expansion
  3. Peak
  4. Trough Correct answer.

Explanation

The business cycle has expansion and contraction phases, with peaks and troughs as turning points. A trough is the low point where contraction ends and expansion begins.

Question 30Economic Analysis and Business Information

If a price index rises from 200 to 210 over one year, the annual inflation rate is approximately

  1. 0.5%
  2. 5.0% Correct answer.
  3. 10.0%
  4. 2.5%

Explanation

The inflation rate is the percentage change in the price index from the start of the period to the end. Here it is (210 - 200) / 200 = 0.05, or 5%.

Question 31Economic Analysis and Business Information

To compare a country's total output across years while removing the effect of price changes, economists use

  1. Real GDP Correct answer.
  2. Gross national product
  3. The unemployment rate
  4. Nominal GDP

Explanation

Real GDP adjusts nominal output for changes in the price level by using constant base-year prices. This makes comparisons of output across years more meaningful.

Question 32Economic Analysis and Business Information

When money is used to buy groceries, it is performing which function?

  1. Unit of account
  2. Medium of exchange Correct answer.
  3. Store of value
  4. Standard of deferred payment

Explanation

As a medium of exchange, money is accepted as an intermediary in buying and selling goods and services. Using money for groceries is a direct exchange for goods.

Question 33Economic Analysis and Business Information

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

  1. A one-time tax rebate passed by Congress
  2. A change in the discount rate
  3. Unemployment insurance payments Correct answer.
  4. A new public works appropriation

Explanation

Automatic stabilizers are fiscal mechanisms that change without new legislation as economic conditions change. Unemployment insurance payments rise automatically during a recession and fall during an expansion.

Question 34Economic Analysis and Business Information

If the Federal Reserve raises the discount rate, the most direct initial effect is

  1. A lower federal funds target
  2. A larger money supply
  3. A lower reserve requirement
  4. Higher reserve borrowing costs Correct answer.

Explanation

The discount rate is the interest rate the Fed charges depository institutions that borrow reserves directly from it. Raising it increases those borrowing costs and tends to discourage such borrowing.

Question 35Economic Analysis and Business Information

The long-run Phillips curve is best described as

  1. Downward sloping, showing a permanent trade-off between inflation and unemployment
  2. Horizontal at the current inflation rate
  3. Vertical at the natural rate of unemployment Correct answer.
  4. Upward sloping, showing that higher unemployment causes higher inflation

Explanation

In the long run, inflation expectations adjust and the economy tends toward the natural rate of unemployment. Thus the long-run Phillips curve is vertical rather than downward sloping.

Question 36Economic Analysis and Business Information

A foreign central bank purchases U.S. Treasury securities. In the U.S. balance of payments, this transaction is recorded primarily in the

  1. Financial account Correct answer.
  2. Trade balance
  3. Unilateral transfers account
  4. Current account

Explanation

Purchases and sales of financial assets between countries are recorded in the financial account. A foreign central bank's purchase of U.S. Treasury securities is an inflow of foreign capital into U.S. assets.

Question 37Economic Analysis and Business Information

If one euro is worth $1.10 and one British pound is worth $1.30, the exchange rate of euros per pound is approximately

  1. 0.85
  2. 1.30
  3. 1.18 Correct answer.
  4. 1.10

Explanation

To convert dollars per pound into euros per pound, divide the dollar value of a pound by the dollar value of a euro. Thus $1.30 / $1.10 ≈ 1.18 euros per pound.

Question 38Economic Analysis and Business Information

Country A can produce 10 units of cloth or 5 units of wine with one unit of resources. Country B can produce 8 units of cloth or 4 units of wine with one unit of resources. Which statement is correct?

  1. Country A has the comparative advantage in wine
  2. No comparative advantage exists for either country Correct answer.
  3. Country A has the comparative advantage in cloth
  4. Country B has the comparative advantage in wine

Explanation

The opportunity cost of one unit of cloth is 0.5 unit of wine in both countries, and the opportunity cost of one unit of wine is 2 units of cloth in both. Because these opportunity costs are equal, neither country has a comparative advantage.

Question 39Economic Analysis and Business Information

A binding price ceiling set below the equilibrium price will most likely produce

  1. A rightward shift of the supply curve
  2. A surplus of the good
  3. An increase in the equilibrium price
  4. A shortage of the good Correct answer.

Explanation

A price ceiling below equilibrium is binding because the legal price is lower than the market-clearing price. Quantity demanded then exceeds quantity supplied, creating a shortage.

Question 40Economic Analysis and Business Information

If a consumer's income rises and, as a result, she buys less of a particular good, that good is

  1. A luxury good
  2. A normal good
  3. An inferior good Correct answer.
  4. A Giffen good

Explanation

An inferior good has a negative income elasticity of demand, meaning demand falls when income rises. That is the pattern described.

Question 41Economic Analysis and Business Information

A profit-maximizing monopolist will choose the output level at which

  1. Price equals average total cost
  2. Price equals marginal cost
  3. Marginal revenue equals average total cost
  4. Marginal revenue equals marginal cost Correct answer.

Explanation

A monopolist maximizes profit by producing where marginal revenue equals marginal cost and then charging the highest price consumers will pay for that quantity from the demand curve.

Question 42Economic Analysis and Business Information

If nominal GDP is $12 trillion and real GDP is $10 trillion, the GDP deflator is

  1. 120 Correct answer.
  2. 20
  3. 1.2
  4. 83.3

Explanation

The GDP deflator is nominal GDP divided by real GDP, multiplied by 100. Here $12 trillion / $10 trillion × 100 = 120.

Question 43Economic Analysis and Business Information

If the nominal interest rate is 7% and inflation is 3%, the approximate real interest rate is

  1. 10%
  2. 2.3%
  3. 3%
  4. 4% Correct answer.

Explanation

The approximate Fisher relationship says the real rate is about the nominal rate minus expected inflation. Thus 7% - 3% = 4%.

Question 44Economic Analysis and Business Information

Which of the following is classified as a lagging economic indicator?

  1. Stock prices of major companies
  2. Building permits for new private housing
  3. Average duration of unemployment Correct answer.
  4. The index of consumer expectations

Explanation

Average duration of unemployment tends to change after the overall economy has already turned, so it is a lagging indicator. Leading indicators, such as building permits and consumer expectations, tend to turn before the economy.

Question 45Economic Analysis and Business Information

A sharp increase in oil prices that raises production costs and pushes up the general price level is an example of

  1. Cost-push inflation Correct answer.
  2. Demand-pull inflation
  3. Hyperinflation
  4. Disinflation

Explanation

Cost-push inflation results from rising costs of production, such as a sharp oil price increase, that reduce aggregate supply and raise prices. It is distinct from inflation caused by rising aggregate demand.

Question 46Economic Analysis and Business Information

Assume the reserve requirement is 10%, banks choose to hold excess reserves equal to 5% of deposits, and the public holds no currency. If the Federal Reserve purchases $60 million of securities, the maximum potential increase in the money supply is closest to

  1. $400 million Correct answer.
  2. $600 million
  3. $1.2 billion
  4. $300 million

Explanation

With no currency leakage, the money multiplier is the reciprocal of the total reserve ratio, including required and excess reserves. Total reserves are 10% + 5% = 15%, so the multiplier is 1/0.15 ≈ 6.67; $60 million × 6.67 ≈ $400 million.

Question 47Economic Analysis and Business Information

Suppose the U.S. inflation rate is 4% and the euro area inflation rate is 1%. According to purchasing power parity, the euro should ______ against the dollar by approximately ______.

  1. depreciate; 3%
  2. appreciate; 5%
  3. remain unchanged; 0%
  4. appreciate; 3% Correct answer.

Explanation

Purchasing power parity predicts that a country with higher inflation will see its currency depreciate relative to a lower-inflation country. The euro area's inflation is 3 percentage points below the U.S. rate, so the euro should appreciate about 3% against the dollar.

Question 48Economic Analysis and Business Information

If the Federal Reserve is targeting a federal funds rate and demand for reserves unexpectedly rises, to keep the rate from rising above target the Fed would most likely

  1. Raise the reserve requirement
  2. Sell securities in the open market
  3. Buy securities in the open market Correct answer.
  4. Increase the discount rate

Explanation

To keep the federal funds rate at its target when reserve demand rises, the Fed must increase the supply of reserves. Buying securities in the open market adds reserves and prevents the rate from being bid above target.

Question 49Economic Analysis and Business Information

In the neoclassical growth model, a permanent increase in a country's saving rate will most likely

  1. Raise the long-run growth rate indefinitely
  2. Raise steady-state output per worker Correct answer.
  3. Reduce steady-state capital per worker
  4. Leave steady-state output per worker unchanged

Explanation

In the neoclassical growth model, a higher saving rate increases capital per worker and raises the steady-state level of output per worker. It does not permanently raise the long-run growth rate, which depends on technological progress.

Question 50Economic Analysis and Business Information

If nominal GDP grows 7%, the GDP deflator rises 3%, and population grows 2%, real GDP per capita grows approximately

  1. 4%
  2. 5%
  3. 7%
  4. 2% Correct answer.

Explanation

Real GDP growth is approximately nominal GDP growth minus inflation: 7% - 3% = 4%. Real GDP per capita growth then subtracts population growth: 4% - 2% = 2%.