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Series 66 study materials
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Series 66 practice questions

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Question 1Economic Factors and Business Information

Which of the following transactions is counted in the current year's gross domestic product?

  1. A state agency's purchase of new snowplows from a manufacturer Correct answer.
  2. A household's purchase of a five-year-old automobile
  3. A brokerage's purchase of shares of stock for its own account
  4. A firm's purchase of steel that will be resold in finished goods

Explanation

GDP measures the market value of final goods and services produced within a country during the period. Government purchases of newly produced capital goods such as snowplows are a component of GDP. Used goods, financial transactions, and intermediate goods bought by businesses are excluded.

Question 2Economic Factors and Business Information

The official unemployment rate is calculated by dividing the number of unemployed persons by the:

  1. total population including armed forces
  2. total civilian population aged 16 and over
  3. number of employed persons
  4. civilian labor force Correct answer.

Explanation

The unemployment rate equals the number of unemployed divided by the civilian labor force, which contains both employed people and unemployed people actively looking for work. People without jobs who are not seeking work are outside the labor force and are not counted as unemployed.

Question 3Economic Factors and Business Information

An investor holds a bond yielding 5% while inflation is running at 3%. The investor's real return is approximately:

  1. 2% Correct answer.
  2. 1.67%
  3. 5%
  4. 8%

Explanation

Real return is approximately the nominal return minus the inflation rate, or 5% minus 3% equals 2%. Inflation erodes the purchasing power of the bond's cash flows, so a 5% nominal yield produces only about 2% of real gain.

Question 4Economic Factors and Business Information

Fiscal policy refers to the government's use of:

  1. reserve requirements and discount rates to manage credit
  2. taxation and spending to influence the economy Correct answer.
  3. open market purchases to influence interest rates
  4. margin requirements to control securities credit

Explanation

Fiscal policy is the use of government taxation and spending to influence aggregate demand, employment, and prices. It is carried out by the legislative and executive branches rather than by the central bank.

Question 5Economic Factors and Business Information

When the Federal Reserve buys U.S. Treasury securities in the open market, the usual effect is to:

  1. increase bank reserves and push short-term rates higher
  2. decrease bank reserves and push short-term rates lower
  3. decrease bank reserves and push short-term rates higher
  4. increase bank reserves and push short-term rates lower Correct answer.

Explanation

An open market purchase adds reserves to the banking system, supporting more lending and putting downward pressure on short-term rates such as the federal funds rate. The Fed buys securities when it wants to ease credit conditions.

Question 6Economic Factors and Business Information

On a corporate balance sheet, total assets equal:

  1. total liabilities plus shareholders' equity Correct answer.
  2. gross revenue minus operating expenses
  3. current assets plus net income
  4. retained earnings plus working capital and long-term debt

Explanation

The balance sheet identity is assets equal liabilities plus shareholders' equity. Assets are what the firm owns, while liabilities and equity represent the claims against those assets.

Question 7Economic Factors and Business Information

A company has current assets of $600,000 and current liabilities of $300,000. Its current ratio is:

  1. 1.5 to 1
  2. 3.0 to 1
  3. 0.5 to 1
  4. 2.0 to 1 Correct answer.

Explanation

The current ratio divides current assets by current liabilities: $600,000 divided by $300,000 equals 2.0 to 1. It measures the firm's ability to cover short-term obligations with short-term assets.

Question 8Economic Factors and Business Information

The risk that rising prices will erode the real value of an investment's returns is known as:

  1. interest rate risk
  2. inflation risk Correct answer.
  3. credit risk
  4. liquidity risk

Explanation

Inflation risk, also called purchasing power risk, is the chance that a rising price level reduces what an investment's future cash flows will actually buy. It falls most heavily on long-term fixed-income investments.

Question 9Economic Factors and Business Information

During which phase of the business cycle do unemployment and unused capacity typically rise while production and spending fall?

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

Explanation

In a contraction, output, employment, and spending decline as demand weakens. Unemployment rises and productive capacity sits idle until the trough is reached.

Question 10Economic Factors and Business Information

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

  1. Index of stock prices Correct answer.
  2. Consumer installment credit to income
  3. The prime rate charged by banks
  4. Average duration of unemployment

Explanation

Stock prices are one of the ten components of the Conference Board's leading economic index because investors anticipate future activity. Average duration of unemployment, the bank prime rate, and the installment credit-to-income ratio are lagging indicators.

Question 11Economic Factors and Business Information

The Federal Reserve sells $1 million of Treasury bills to a primary dealer. This action will most likely:

  1. lower the discount rate
  2. reduce bank reserves and raise the federal funds rate Correct answer.
  3. reduce the national debt held by the public
  4. increase the money supply and lower the federal funds rate

Explanation

When the Fed sells securities, the buyer pays with funds drawn from a bank, which drains reserves from the banking system. Fewer reserves mean less lending capacity, and the federal funds rate tends to rise.

Question 12Economic Factors and Business Information

An inverted yield curve most typically signals:

  1. an expectation that near-term inflation will accelerate
  2. heavy foreign demand for long-term Treasury bonds
  3. weaker growth ahead and lower future short-term rates Correct answer.
  4. rising long-term inflation expectations

Explanation

An inverted curve, with short-term yields above long-term yields, has historically preceded economic slowdowns. Investors expect the central bank to cut short-term rates as growth weakens, which pulls long-term yields below short-term yields.

Question 13Economic Factors and Business Information

A country has a large trade deficit. In the balance of payments, this deficit is recorded primarily in the:

  1. financial account as a net outflow of portfolio investment
  2. capital account as an inflow
  3. current account Correct answer.
  4. official reserve account

Explanation

A trade deficit is a current account deficit: imports of goods and services exceed exports. It must be financed by offsetting net inflows recorded in the financial and capital accounts.

Question 14Economic Factors and Business Information

If the U.S. dollar appreciates substantially against the euro, which group is most likely to be hurt?

  1. European firms selling goods in the United States
  2. U.S. exporters selling goods in Europe Correct answer.
  3. European consumers purchasing U.S.-made goods
  4. U.S. importers buying European goods

Explanation

A stronger dollar makes U.S. goods more expensive when priced in foreign currency, so U.S. exporters lose competitiveness and see sales and profits fall. Importers and U.S. travelers abroad benefit from the stronger dollar.

Question 15Economic Factors and Business Information

A company reports sales of $500,000 and cost of goods sold of $300,000. Its gross profit margin is:

  1. 150%
  2. 20%
  3. 60%
  4. 40% Correct answer.

Explanation

Gross profit is sales minus cost of goods sold: $500,000 minus $300,000 equals $200,000. Dividing gross profit by sales gives a gross margin of 40%.

Question 16Economic Factors and Business Information

A company has net income of $2 million and 1 million shares outstanding, and its stock trades at $40 per share. Its price-to-earnings ratio is:

  1. 80
  2. 10
  3. 20 Correct answer.
  4. 40

Explanation

Earnings per share is $2 million divided by 1 million shares, or $2.00. The P/E ratio is price divided by earnings per share: $40 divided by $2 equals 20.

Question 17Economic Factors and Business Information

In preparing the statement of cash flows under the indirect method, depreciation expense is:

  1. reported as an investing cash inflow in the period
  2. subtracted from net income because it reduces reported earnings
  3. added back to net income because it is a noncash charge Correct answer.
  4. ignored because depreciation does not affect cash

Explanation

Depreciation lowers reported net income without using any cash, so the indirect method adds it back when reconciling net income to operating cash flow. The cash actually spent on the asset appears as an investing outflow when it is purchased.

Question 18Economic Factors and Business Information

A firm has total liabilities of $4 million and total equity of $2 million. Its debt-to-equity ratio is:

  1. 3.0 to 1
  2. 0.5 to 1
  3. 2.0 to 1 Correct answer.
  4. 6.0 to 1

Explanation

Debt-to-equity divides total liabilities by total equity: $4 million divided by $2 million equals 2.0 to 1. It shows how much debt the firm carries for each dollar of equity capital.

Question 19Economic Factors and Business Information

An investor wants $10,000 in three years and can earn 5% annually. To find the amount that must be invested today, the investor should:

  1. multiply $10,000 by (1.05)^3
  2. multiply $10,000 by 0.05 and add it to $10,000
  3. divide $10,000 by (1.05)^3 Correct answer.
  4. divide $10,000 by 1.05

Explanation

Present value discounts a future amount by dividing it by (1 + r) raised to the number of periods. Here $10,000 divided by (1.05)^3 gives the sum needed today.

Question 20Economic Factors and Business Information

Deflation is most dangerous to an economy primarily because it:

  1. raises the real burden of debt and delays spending Correct answer.
  2. increases the velocity of money and accelerates spending
  3. reduces the real burden of outstanding debt for borrowers
  4. pushes nominal interest rates well below zero in most cases

Explanation

Deflation increases the real value of debt, forcing borrowers to repay with money worth more than what they borrowed. Consumers expecting still-lower prices postpone purchases, which weakens demand and can deepen the downturn.

Question 21Economic Factors and Business Information

A stock has a beta of 1.4, the risk-free rate is 3%, and the expected return on the market is 8%. Using the capital asset pricing model, the required return on the stock is:

  1. 11.2%
  2. 8.0%
  3. 10.0% Correct answer.
  4. 14.2%

Explanation

The CAPM required return equals the risk-free rate plus beta times the market risk premium: 3% plus 1.4 times (8% minus 3%), which is 3% plus 7%, or 10.0%.

Question 22Economic Factors and Business Information

A company uses LIFO inventory accounting and the prices of its inventory items are rising. Compared with FIFO, LIFO will report:

  1. lower net income and higher ending inventory
  2. lower net income and lower ending inventory Correct answer.
  3. higher net income and higher ending inventory
  4. higher net income and lower ending inventory

Explanation

Under LIFO in a period of rising prices, the newest and most expensive units are charged to cost of goods sold. That raises cost of goods sold, lowers net income, and leaves the older, cheaper units in ending inventory.

Question 23Economic Factors and Business Information

The reserve requirement is 10% and banks hold no excess reserves. A $5 million open market purchase of securities by the Federal Reserve can ultimately expand the money supply by a maximum of:

  1. $50 million Correct answer.
  2. $5 million
  3. $500 million
  4. $10 million

Explanation

The simple deposit multiplier equals 1 divided by the reserve requirement, or 10 in this case. A $5 million injection of reserves can therefore support up to $50 million of new money, assuming banks lend all excess reserves and the public holds no extra currency.

Question 24Economic Factors and Business Information

Compared with the consumer price index, the GDP price deflator:

  1. relies on a fixed market basket that is rarely revised
  2. covers all goods and services counted in GDP Correct answer.
  3. tracks only prices paid by urban wage earners
  4. measures only the prices of internationally traded goods

Explanation

The GDP deflator is an implicit price index for everything counted in GDP, including capital goods and government purchases. The CPI tracks a fixed market basket of consumer goods and services only.

Question 25Economic Factors and Business Information

A stock has just paid an annual dividend of $2.00. Dividends are expected to grow 4% per year indefinitely and investors require a 12% return. Using the constant-growth dividend discount model, the stock's value is:

  1. $26.00 Correct answer.
  2. $17.33
  3. $16.67
  4. $25.00

Explanation

The constant-growth model values a share at next year's dividend divided by the required return minus the growth rate. Next year's dividend is $2.00 times 1.04, or $2.08, and $2.08 divided by 0.08 equals $26.00.

Question 26Economic Factors and Business Information

In the expenditure approach to GDP, a manufacturer's purchase of new production machinery is classified as:

  1. government spending
  2. net exports
  3. consumption
  4. investment Correct answer.

Explanation

The expenditure approach divides GDP into consumption, investment, government purchases, and net exports. Business purchases of new capital goods such as machinery are counted as investment.

Question 27Economic Factors and Business Information

Which measure tracks price changes at the wholesale or producer level before they reach consumers?

  1. Employment cost index
  2. GDP deflator
  3. Consumer Price Index
  4. Producer Price Index Correct answer.

Explanation

The Producer Price Index measures average changes in selling prices received by domestic producers. The CPI measures consumer prices, while the GDP deflator covers all domestic output.

Question 28Economic Factors and Business Information

The interest rate charged by a Federal Reserve Bank to depository institutions for short-term loans is called the:

  1. repurchase rate
  2. prime rate
  3. discount rate Correct answer.
  4. federal funds rate

Explanation

The discount rate is the interest rate the Fed charges banks that borrow reserves at the discount window. The federal funds rate applies to overnight lending between banks.

Question 29Economic Factors and Business Information

Which financial statement reports a company's financial position at a specific point in time?

  1. statement of cash flows
  2. statement of retained earnings
  3. balance sheet Correct answer.
  4. income statement

Explanation

The balance sheet is a snapshot showing assets, liabilities, and equity at a specific date. The income statement and cash flow statement report activity over a period.

Question 30Economic Factors and Business Information

Real GDP is preferred to nominal GDP for comparing output across years because real GDP:

  1. includes only goods produced for export
  2. excludes government spending
  3. uses current market prices for all goods
  4. adjusts for changes in the price level Correct answer.

Explanation

Real GDP holds prices constant, removing the effect of inflation so changes reflect actual output. Nominal GDP uses current prices and can rise merely because prices rose.

Question 31Economic Factors and Business Information

A series of equal cash payments made at regular intervals for a specified period is known as a(n):

  1. lump sum
  2. perpetuity
  3. annuity Correct answer.
  4. amortized loan

Explanation

An annuity is a stream of equal payments made at regular intervals for a defined period. A perpetuity continues forever, while a lump sum is a single payment.

Question 32Economic Factors and Business Information

A public company's annual report filed with the SEC, containing audited financial statements and management discussion, is filed on:

  1. Form 8-K
  2. Form 10-Q
  3. Form 10-K Correct answer.
  4. Form S-1

Explanation

Form 10-K is the annual report filed with the SEC. Form 10-Q is quarterly, Form 8-K reports current events, and Form S-1 is a securities registration statement.

Question 33Economic Factors and Business Information

The portion of a security's risk that cannot be eliminated through diversification is called:

  1. unsystematic risk
  2. systematic risk Correct answer.
  3. credit risk
  4. liquidity risk

Explanation

Systematic risk, also called market risk, affects broad markets and cannot be diversified away. Unsystematic risk is specific to a company or industry and can be reduced by diversification.

Question 34Economic Factors and Business Information

A construction worker loses her job because a recession reduces demand for new homes. This worker is best classified as:

  1. structurally unemployed
  2. seasonally unemployed
  3. cyclically unemployed Correct answer.
  4. frictionally unemployed

Explanation

Cyclical unemployment results from a downturn in the business cycle and weak aggregate demand. The job loss is tied to the recession rather than to job search, skills mismatch, or seasonal patterns.

Question 35Economic Factors and Business Information

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

  1. A new public works spending program
  2. An open market sale of Treasury securities
  3. A change in the federal funds rate
  4. Unemployment insurance payments Correct answer.

Explanation

Automatic stabilizers change with economic conditions without new legislation. Unemployment insurance payments rise during recessions and fall during expansions.

Question 36Economic Factors and Business Information

At the peak phase of a business cycle, an economy is most likely experiencing:

  1. falling employment and slowing production
  2. excess capacity and declining prices
  3. rising unemployment and substantially weaker consumer spending
  4. high employment and rising inflationary pressure Correct answer.

Explanation

A business-cycle peak is the high point of economic activity, typically marked by high employment and rising demand pressures. Unemployment and excess capacity generally increase during a contraction.

Question 37Economic Factors and Business Information

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

  1. Growth in the money supply
  2. Average duration of unemployment Correct answer.
  3. The number of new building permits issued
  4. Performance of the stock market

Explanation

The average duration of unemployment tends to change after the economy has already begun to shift, making it a lagging indicator. Stock prices, building permits, and money supply growth are generally leading indicators.

Question 38Economic Factors and Business Information

A normal upward-sloping Treasury yield curve most likely reflects:

  1. an immediate recession signal
  2. expectations of lower future short-term rates
  3. greater credit risk on long-term Treasuries
  4. a term premium for longer maturities Correct answer.

Explanation

A normal curve slopes upward because longer maturities usually carry a term premium and may reflect expectations of higher future short-term rates. Treasury securities have minimal credit risk, and an inverted curve is the recession signal.

Question 39Economic Factors and Business Information

In the balance of payments, foreign aid and other unilateral transfers are recorded in the:

  1. current account Correct answer.
  2. official reserves account
  3. financial account
  4. capital account

Explanation

The current account includes trade in goods and services, income flows, and unilateral transfers such as foreign aid. Investment flows are recorded in the financial account.

Question 40Economic Factors and Business Information

If a country's currency depreciates against its trading partners' currencies, the country's exports generally become:

  1. more expensive and less competitive abroad
  2. cheaper and more competitive abroad Correct answer.
  3. subject to higher domestic tariffs
  4. unaffected because export prices are fixed

Explanation

Currency depreciation lowers the foreign-currency price of the country's exports, making them cheaper for foreign buyers. Imports, by contrast, become more expensive in the domestic currency.

Question 41Economic Factors and Business Information

Inventory is excluded from the quick ratio primarily because inventory:

  1. may take time to convert into cash Correct answer.
  2. is always financed with debt
  3. is not reported on the balance sheet
  4. is included in current liabilities

Explanation

The quick ratio focuses on the most liquid current assets. Inventory is excluded because it may take time to sell and convert into cash, making it less reliable for meeting immediate obligations.

Question 42Economic Factors and Business Information

A company issues long-term debt and uses the proceeds to repurchase common stock. Its debt-to-equity ratio will most likely:

  1. decrease
  2. become negative
  3. increase Correct answer.
  4. remain unchanged

Explanation

Issuing debt increases liabilities, and using the proceeds to repurchase stock reduces equity. Both changes raise the debt-to-equity ratio and increase financial leverage.

Question 43Economic Factors and Business Information

Return on equity measures a company's:

  1. market value relative to book value
  2. the amount of sales generated by each dollar of total assets
  3. the ability to pay short-term obligations as they come due
  4. net income per dollar of shareholders' equity Correct answer.

Explanation

Return on equity is calculated as net income divided by shareholders' equity. It measures how effectively the company generates profits from the capital shareholders have invested.

Question 44Economic Factors and Business Information

Cash received from customers for goods sold is reported in the statement of cash flows as a(n):

  1. noncash activity
  2. financing activity
  3. investing activity
  4. operating activity Correct answer.

Explanation

Operating activities include cash receipts from customers and cash payments to suppliers and employees. Investing activities involve long-term assets, while financing activities involve debt and equity.

Question 45Economic Factors and Business Information

According to the Fisher effect, if expected inflation rises by 2% and the real interest rate is unchanged, nominal interest rates will:

  1. remain unchanged
  2. rise by more than 4%
  3. rise by about 2% Correct answer.
  4. fall by about 2%

Explanation

The Fisher effect states that nominal interest rates adjust to expected inflation so that the real rate remains relatively stable. If expected inflation rises by 2% and the real rate is unchanged, nominal rates should rise by about 2%.

Question 46Economic Factors and Business Information

An economy experiences rising prices caused mainly by sharp increases in wages and raw material costs. This is best described as:

  1. deflation
  2. hyperinflation
  3. cost-push inflation Correct answer.
  4. demand-pull inflation

Explanation

Cost-push inflation occurs when higher input costs, such as wages or raw materials, are passed through to consumer prices. Demand-pull inflation instead results from excessive aggregate demand.

Question 47Economic Factors and Business Information

If the Federal Reserve increases the reserve requirement for banks, the money supply will most likely:

  1. decrease as banks have fewer reserves to lend Correct answer.
  2. increase only if the discount rate falls
  3. increase as banks lend more
  4. remain unchanged because reserves earn interest

Explanation

A higher reserve requirement forces banks to hold more reserves against deposits, reducing excess reserves and lending capacity. The result is a contraction in the money supply.

Question 48Economic Factors and Business Information

The inventory turnover ratio measures how many times inventory is:

  1. written down due to obsolescence
  2. converted into accounts receivable
  3. paid for with short-term debt
  4. sold and replaced during a period Correct answer.

Explanation

Inventory turnover measures how often inventory is sold and replenished during a period. It is calculated by dividing cost of goods sold by average inventory.

Question 49Economic Factors and Business Information

Government borrowing to finance a large budget deficit can crowd out private investment primarily by:

  1. lowering the federal funds rate
  2. reducing the supply of Treasury securities
  3. increasing tax revenue
  4. raising interest rates Correct answer.

Explanation

Deficit financing increases government demand for loanable funds, which tends to push interest rates higher. Higher rates can reduce private borrowing and investment, a phenomenon called crowding out.

Question 50Economic Factors and Business Information

If the United States has consistently higher inflation than Japan, purchasing power parity suggests that over time the U.S. dollar should:

  1. remain fixed against the Japanese yen
  2. depreciate against the Japanese yen Correct answer.
  3. appreciate against the Japanese yen
  4. be replaced by the yen in trade

Explanation

Purchasing power parity holds that exchange rates adjust so similar goods cost the same across countries. Higher U.S. inflation erodes the dollar's purchasing power, implying the dollar should depreciate against the lower-inflation country's currency.