Series 65 – Uniform Investment Adviser Law Exam Economic Factors and Business Information 1 — Questions and Answers
Question 1: Which economic indicator is considered a leading indicator of future economic activity?
- Unemployment rate
- Building permits (Correct answer)
- GDP
- Consumer price index
Correct answer: Building permits
Building permits are a leading indicator because they signal future construction and economic expansion before it occurs.
Question 2: When the Federal Reserve raises the federal funds rate, what is the typical effect on bond prices?
- Bond prices rise
- Bond prices fall (Correct answer)
- Bond prices are unaffected
- Bond prices become more volatile
Correct answer: Bond prices fall
When interest rates rise, existing bond prices fall because new bonds offer higher yields, making older bonds less attractive.
Question 3: Which phase of the business cycle is characterized by rising GDP, falling unemployment, and increasing consumer spending?
- Contraction
- Trough
- Expansion (Correct answer)
- Peak
Correct answer: Expansion
The expansion phase features rising economic output, decreasing unemployment, and increased consumer and business spending.
Question 4: What does a yield curve inversion typically signal?
- Strong economic growth ahead
- A potential recession (Correct answer)
- Rising inflation
- Federal Reserve rate cuts
Correct answer: A potential recession
An inverted yield curve, where short-term rates exceed long-term rates, has historically been a reliable predictor of recession.
Question 5: Which of the following best describes the Consumer Price Index (CPI)?
- A measure of stock market performance
- A measure of changes in the price of a basket of consumer goods and services (Correct answer)
- A measure of corporate earnings growth
- A measure of unemployment trends
Correct answer: A measure of changes in the price of a basket of consumer goods and services
The CPI tracks the average change over time in the prices paid by urban consumers for a representative basket of goods and services.
Question 6: What is the formula for calculating a company's price-to-earnings (P/E) ratio?
- Earnings per share divided by market price
- Market price per share divided by earnings per share (Correct answer)
- Net income divided by total assets
- Total revenue divided by net income
Correct answer: Market price per share divided by earnings per share
The P/E ratio is calculated by dividing the market price per share by the earnings per share, reflecting how much investors pay per dollar of earnings.
