Series 65 Economics: what to know

Short answer: “Economic Factors and Business Information” is 20 of the 130 scored Series 65 questions (about 15%) under NASAA's June 2023 outline. This content area covers economic indicators, monetary and fiscal policy, and financial statement analysis used in investment decisions.

Independent practice questions. Not affiliated with or endorsed by NASAA or FINRA.

Core concepts

Business cycles and economic indicators

Know the phases of the business cycle (expansion, peak, contraction, trough) and distinguish leading, lagging and coincident indicators. Building permits and initial unemployment claims are leading indicators; output is coincident, while unemployment duration is lagging. An inverted yield curve means short-term yields exceed long-term yields and can signal a slowdown, but does not guarantee a recession.

Monetary vs. fiscal policy

The Federal Reserve conducts monetary policy; taxation and government spending are fiscal policy set by Congress and the President. In the traditional framework, open-market purchases add reserves and sales drain reserves. Reserve requirements are a textbook tool, not a claim about their current level; modern implementation also uses administered rates. Know who controls each policy and its intended direction, rather than memorizing current rates.

Inflation, deflation, and interest rates

CPI is the standard inflation measure. Fixed-income investors lose purchasing power in inflation; bonds with fixed coupons fall in price when rates rise. Understand the time value of money: present value, future value, and why a dollar today beats a dollar tomorrow.

Financial statement fundamentals

Read a balance sheet (assets = liabilities + shareholders' equity) and an income statement. Know working capital (current assets minus current liabilities), the current ratio, quick ratio, debt-to-equity, earnings per share, and the price-to-earnings ratio. These ratios show up as applied questions: given two companies, which is more liquid or more leveraged?

Quantitative measures

Expect a handful of calculation-style items: dividend yield, current yield on a bond, total return, and basic statistical measures like standard deviation as a proxy for risk, alpha and beta, and the Sharpe ratio. You rarely need heavy math — you need to know what each measure tells an adviser.

Subtopics we cover

Business cycles & indicators
Monetary & fiscal policy
Financial statements & ratios
Time value of money
Risk measures
Statistics & analytical methods

8 free economics practice questions

Each includes the answer and an explanation of why it is right and why the tempting alternative is wrong. Prefer to answer interactively? Take the free sets.

1.An investor earns a 7% nominal return during a year in which inflation is 3%. Using the approximate method, the real return is:
- A. 10%
- B. 7%
- C. 4%
- D. 2.33%
Show answer and explanation
Answer: 4%
The approximate Fisher equation is real return ≈ nominal return minus inflation, so 7% − 3% = 4%. Adding the two rates gives the tempting 10% choice but measures neither real purchasing-power return nor the requested approximation.
2.Real GDP has declined for two consecutive quarters, unemployment is rising, and inventories are building. The economy is MOST likely in which phase of the business cycle?
- A. Expansion
- B. Peak
- C. Contraction
- D. Trough
Show answer and explanation
Answer: Contraction
The business-cycle contraction phase features declining output and rising unemployment. A trough is the low turning point, not the entire declining phase; two negative real-GDP quarters are a rule of thumb rather than the official U.S. recession definition.
3.A stock with a beta of 1.5 would be expected to:
- A. Move inversely to the overall market
- B. Have 1.5 times the market-related return sensitivity of a beta-1 stock
- C. Have no correlation with market movements
- D. Have less market-related return sensitivity than a beta-1 stock
Show answer and explanation
Answer: Have 1.5 times the market-related return sensitivity of a beta-1 stock
Beta = covariance(stock return, market return) / variance(market return), so beta 1.5 indicates 1.5 times the market-related return sensitivity. It does not establish 50% greater total volatility, and a positive beta does not imply inverse market movement.
4.An analyst notes that the yield curve has become inverted. Which of the following is the MOST accurate interpretation?
- A. Short-term yields exceed long-term yields, historically a signal of an expected economic slowdown
- B. Long-term yields exceed short-term yields, signaling expected expansion
- C. All maturities yield approximately the same, signaling a transition period
- D. Municipal yields exceed Treasury yields on an after-tax basis
Show answer and explanation
Answer: Short-term yields exceed long-term yields, historically a signal of an expected economic slowdown
The yield-curve inversion rule means short-term yields exceed long-term yields and can signal a future slowdown. Long-term yields above short-term yields describe a normal curve, not an inversion.
5.Which financial statement shows a company's assets, liabilities, and shareholders' equity at a single point in time?
- A. Income statement
- B. Statement of cash flows
- C. Balance sheet
- D. Statement of retained earnings
Show answer and explanation
Answer: Balance sheet
The balance-sheet identity is assets = liabilities + shareholders' equity at a particular date. The income statement reports performance over a period, so it is not the requested financial-position snapshot.
6.Which of the following actions by the Federal Reserve Board would be considered the MOST expansionary?
- A. Raising the discount rate
- B. Increasing reserve requirements
- C. Purchasing Treasury securities in the open market
- D. Raising margin requirements under Regulation T
Show answer and explanation
Answer: Purchasing Treasury securities in the open market
Under the traditional reserve-channel model, open-market purchases add bank reserves and can ease financial conditions. Raising the discount rate instead makes central-bank borrowing more expensive; reserve additions do not mechanically guarantee proportional loan or money growth.
7.A U.S. investor holds bonds denominated in euros. If the U.S. dollar strengthens against the euro, the effect on the investor's dollar-denominated return is:
- A. Positive, because foreign bonds become cheaper
- B. Negative, because euro cash flows convert into fewer dollars
- C. Neutral, because bond coupons are fixed
- D. Positive, because interest rate parity guarantees a hedge
Show answer and explanation
Answer: Negative, because euro cash flows convert into fewer dollars
The currency-translation rule converts each euro cash flow at the prevailing dollar-per-euro exchange rate. A stronger dollar buys more euros, so the same euro coupon yields fewer dollars; a fixed foreign-currency coupon does not make the dollar return neutral.
8.The theory that securities prices reflect all publicly available information, so that fundamental analysis of public data cannot produce excess returns, is the:
- A. Weak form of the efficient market hypothesis
- B. Semi-strong form of the efficient market hypothesis
- C. Strong form of the efficient market hypothesis
- D. Random walk exception
Show answer and explanation
Answer: Semi-strong form of the efficient market hypothesis
The semi-strong efficient-market hypothesis says prices reflect all public information, precluding consistent public-information abnormal profits after risk and costs. Strong-form efficiency additionally includes private information, whereas weak form concerns historical market data.