Economic Factors and Business Information — Series 66 practice questions

The Producer Price Index (PPI) differs from the Consumer Price Index (CPI) in that PPI measures:

1. Prices paid by producers for inputs and output before reaching consumers
2. Retail prices paid directly by urban consumers for a fixed goods basket
3. Wage growth for production and nonsupervisory employees industry-wide
4. The value of all finished goods and services produced domestically

Answer: A — Prices paid by producers for inputs and output before reaching consumers

A) Correct — PPI tracks wholesale/producer-level prices. B) That's CPI. C) That's average hourly earnings. D) That's GDP.

Which of the following actions represents an EXPANSIONARY monetary policy tool used by the Federal Reserve?

1. Raising the reserve requirement ratio applied to member bank deposits
2. Selling Treasury securities in the open market to drain bank reserves
3. Purchasing Treasury securities in the open market to add bank reserves
4. Raising the discount rate charged on loans to depository institutions

Answer: C — Purchasing Treasury securities in the open market to add bank reserves

A) Raising reserves is contractionary. B) Selling securities drains reserves — contractionary. C) Correct — buying securities injects reserves, expanding credit. D) Raising the discount rate is contractionary.

Which of the following is NOT one of the four components in the expenditure approach to calculating GDP?

1. Personal consumption expenditures by households on goods and services
2. Gross private domestic investment including business and residential spending
3. Corporate retained earnings held by publicly traded companies each year
4. Net exports, calculated as the value of exports minus imports

Answer: C — Corporate retained earnings held by publicly traded companies each year

A) Real component (C). B) Real component (I). C) Correct — retained earnings isn't a GDP expenditure component. D) Real component (NX); government spending (G) is the fourth.

A market structure with many sellers offering differentiated products with low entry barriers is called:

1. Pure monopoly with one seller and no close substitutes for the offered product
2. Oligopoly with a small number of large sellers whose pricing is interdependent
3. Monopolistic competition with product differentiation and easy market entry
4. Perfect competition with identical products and perfectly informed participants

Answer: C — Monopolistic competition with product differentiation and easy market entry

A) One seller = monopoly. B) Few sellers = oligopoly. C) Correct. D) Identical products, not differentiated.

The FOMC's principal open-market policy tool for adjusting short-term interest rates is:

1. Modifying the reserve ratio each bank must hold against demand deposits
2. Setting margin requirements for equity purchases on regulated exchanges
3. Adjusting the discount rate for direct loans from Fed to member banks
4. Buying or selling U.S. Treasury securities to change bank reserve levels

Answer: D — Buying or selling U.S. Treasury securities to change bank reserve levels

A) Reserve ratio changes are rare and not the day-to-day tool. B) Reg T is set by the Board, not an OMO tool. C) Discount rate is Board-set and separate from OMO. D) Correct — OMO changes reserves, which moves the fed funds rate.

The relationship between outstanding bond prices and prevailing market interest rates is best described as:

1. Direct — bond prices rise when interest rates rise across the yield curve
2. Fixed — bond prices remain at par throughout the life of the bond issue
3. Independent — bond prices move based on coupon changes rather than yields
4. Inverse — bond prices fall when interest rates rise across the yield curve

Answer: D — Inverse — bond prices fall when interest rates rise across the yield curve

A) Reversed relationship. B) Prices fluctuate with yield changes. C) Rates drive prices. D) Correct — the fundamental price/yield inverse.

The Fed's dual mandate under the Federal Reserve Act directs the central bank to pursue which of the following goals?

1. Balanced federal budget and stable exchange rate for the U.S. dollar globally
2. Full employment and elimination of business cycle downturns across all sectors
3. Maximum GDP growth and lowest possible interest rates for corporate borrowers
4. Maximum sustainable employment and stable prices in the domestic U.S. economy

Answer: D — Maximum sustainable employment and stable prices in the domestic U.S. economy

A) Not the Fed's mandate. B) The Fed cannot eliminate cycles. C) Growth is not a mandated target. D) Correct — the statutory dual mandate.

A flat yield curve, where short- and long-term yields converge, is BEST interpreted as signaling:

1. A rapid economic expansion with substantial near-term investor gains
2. A likely transition point where the economic outlook is uncertain
3. A confirmed recession that has already begun across all sectors
4. No relationship at all between economic activity and interest rates

Answer: B — A likely transition point where the economic outlook is uncertain

A) More consistent with a steep, normal curve. B) Correct — flat curves often mark a transition point. C) 'Confirmed' overstates the signal — it's not a confirmed recession. D) Yield curve shape does relate to growth expectations.

An expansionary fiscal policy is MOST likely to involve which combination of actions by Congress and the Treasury?

1. Increasing federal spending and/or cutting taxes to stimulate demand
2. Decreasing federal spending and raising taxes to reduce the deficit
3. Raising the federal funds target rate to slow consumer borrowing
4. Increasing bank reserve requirements to tighten credit availability

Answer: A — Increasing federal spending and/or cutting taxes to stimulate demand

A) Correct — textbook expansionary fiscal policy. B) That's contractionary fiscal policy. C) That's monetary policy, not fiscal. D) Also monetary policy, not fiscal.

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

1. Average duration of unemployment among unemployed workers
2. New building permits issued for private housing units
3. Average weekly hours worked in manufacturing industries
4. The spread between long-term and short-term Treasury yields

Answer: A — Average duration of unemployment among unemployed workers

A) Correct — average duration of unemployment lags the cycle. B) Leading indicator. C) Leading indicator. D) Leading indicator (yield spread).

What is the difference between real GDP and nominal GDP?

Nominal GDP is measured in current prices. Real GDP is adjusted for inflation using a base-year price level, isolating actual output growth from price changes.

What are the three types of unemployment?

Frictional (short-term, between jobs), structural (skills/geographic mismatch), and cyclical (tied to the business cycle downturns). Full employment reflects frictional + structural only.

What is the relationship between bond prices and interest rates?

Inverse — when rates rise, prices fall, and vice versa. Magnitude depends on duration.

What is the federal funds rate?

The interest rate banks charge each other for overnight lending of reserve balances. The Fed targets this rate via open-market operations.