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SIE economic factors practice questions

Free SIE exam questions on economic factors: the Federal Reserve's tools, interest rates and the yield curve, the business cycle, economic indicators and exchange rates, with rationales.

Tap an answer to check it, or open "Show the answer and rationale" under each question. Customers in the questions are fictional. Exam practice only, not investment advice.

Question 1 of 20

How many voting members sit on the Federal Open Market Committee?

  1. 7
  2. 9
  3. 15
  4. 12
Show the answer and rationale

Answer: D

The FOMC has 12 voting members: the 7 Board governors, the New York Fed president and 4 of the other 11 Reserve Bank presidents on a rotating basis. Seven is just the Board of Governors.

📚 Learn it: The Fed's Toolkit: Tightening and Easing

Question 2 of 20

Upward-sloping yield curves are commonly explained by investors requiring:

  1. Lower yields for longer commitments
  2. Higher yields for longer commitments
  3. Tax breaks on short-term bonds
  4. Equal yields regardless of term
Show the answer and rationale

Answer: B

Tying up money longer carries more interest-rate and inflation risk, so investors normally demand more yield, producing an upward slope. Lower or equal yields for longer terms describe inverted or flat curves.

📚 Learn it: Rates, Bond Prices and the Yield Curve

Question 3 of 20

A common rule of thumb, though not the official test, says a recession is:

  1. One month of falling retail sales
  2. Inflation above 5% for a year
  3. An inverted yield curve for one week
  4. Two consecutive quarters of declining real GDP
Show the answer and rationale

Answer: D

The popular shorthand is two straight quarters of falling real GDP. The NBER, which officially dates U.S. cycles, does not rely on it. The other choices are not recession definitions.

📚 Learn it: Boom, Bust and Who Survives

Question 4 of 20

Inflation is generally most harmful to the purchasing power of:

  1. Owners of real estate
  2. Holders of inflation-indexed bonds
  3. Owners of commodities
  4. Holders of fixed-rate long-term bonds
Show the answer and rationale

Answer: D

Fixed payments buy less as prices rise, so long-term fixed-rate bonds suffer most. Real assets like real estate and commodities often keep pace with inflation, and inflation-indexed bonds adjust for it.

📚 Learn it: Leading, Coincident, Lagging

Question 5 of 20

Which financial statement shows revenue, expenses and net income over a period?

  1. Balance sheet
  2. Income statement
  3. Statement of financial position
  4. Official statement
Show the answer and rationale

Answer: B

The income statement reports results over a period. The balance sheet, also called the statement of financial position, is a snapshot on one date, and an official statement is a municipal offering document.

📚 Learn it: The Dollar Abroad and Reading the Books

Question 6 of 20

The federal funds rate is the rate that:

  1. Banks charge each other for overnight loans of reserves
  2. The Fed charges banks at the discount window
  3. Commercial banks charge their most creditworthy corporate customers
  4. The Treasury pays on 30-year bonds
Show the answer and rationale

Answer: A

Fed funds is the overnight interbank rate on reserve balances, targeted by the FOMC. The discount rate is the Fed's own lending rate, the prime rate is for top business borrowers and Treasury bond yields are set at auction and in the market.

📚 Learn it: The Fed's Toolkit: Tightening and Easing

Question 7 of 20

A yield curve is constructed by plotting bond yields against:

  1. Credit ratings
  2. Coupon rates
  3. Time to maturity
  4. Trading volume
Show the answer and rationale

Answer: C

The x-axis of a yield curve is maturity; the bonds compared are of similar credit quality, usually Treasuries. Ratings, coupons and volume are not the plotted variable.

📚 Learn it: Rates, Bond Prices and the Yield Curve

Question 8 of 20

Which group of stocks has historically tended to hold up best during recessions?

  1. Homebuilders
  2. Airlines
  3. Consumer staples companies
  4. Luxury handbag and jewelry makers
Show the answer and rationale

Answer: C

Staples (food, beverages, household goods) are defensive and tend to keep earning in downturns. Luxury goods, homebuilders and airlines depend on discretionary spending and are cyclical.

📚 Learn it: Boom, Bust and Who Survives

Question 9 of 20

A general decline in the price level across the economy is called:

  1. Disinflation
  2. Stagflation
  3. Deflation
  4. Devaluation
Show the answer and rationale

Answer: C

Deflation is falling prices. Disinflation is a slower rate of rising prices, stagflation pairs inflation with stagnant growth, and devaluation is a cut in a currency's official value.

📚 Learn it: Leading, Coincident, Lagging

Question 10 of 20

A company earned $12 million, paid $2 million in preferred dividends and has 5 million common shares outstanding. EPS is:

  1. $2.00
  2. $6.00
  3. $2.40
  4. $2.80
Show the answer and rationale

Answer: A

EPS = (net income − preferred dividends) ÷ common shares = ($12M − $2M) ÷ 5M = $2.00. $2.40 ignores preferred dividends, $2.80 adds them, and $6.00 divides by the wrong figure.

📚 Learn it: The Dollar Abroad and Reading the Books

Practice 10 more economic factors questions free →

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Question 11 of 20

If the Federal Reserve raises the interest rate it pays on reserve balances, the most likely effect is:

  1. Short-term market rates tend to rise
  2. The money supply expands quickly
  3. Reserve requirements fall to zero
  4. Bond prices tend to rise sharply
Show the answer and rationale

Answer: A

Banks will not lend reserves for less than they can earn at the Fed, so a higher IORB rate pulls short-term rates up. That is tightening, so bond prices tend to fall and money growth slows; reserve requirements are a separate tool.

📚 Learn it: The Fed's Toolkit: Tightening and Easing

Question 12 of 20

During a period of tight Fed policy, which yield curve shape is most likely?

  1. Inverted
  2. Steep and upward sloping
  3. Normal with wide spreads
  4. Perfectly vertical
Show the answer and rationale

Answer: A

Tight policy lifts short-term rates, and if markets expect slowing growth, long yields may stay lower, inverting the curve. Steep upward curves are typical of easy policy early in a recovery.

📚 Learn it: Rates, Bond Prices and the Yield Curve

Question 13 of 20

Which is the correct order of the business cycle phases starting from expansion?

  1. Expansion, peak, contraction, trough
  2. Expansion, trough, contraction, peak
  3. Expansion, contraction, peak, trough
  4. Expansion, peak, trough, contraction
Show the answer and rationale

Answer: A

Activity grows (expansion), tops out (peak), declines (contraction) and bottoms (trough) before a new expansion. The other sequences put the phases in an impossible order.

📚 Learn it: Boom, Bust and Who Survives

Question 14 of 20

The Consumer Price Index is published by the:

  1. Federal Reserve
  2. Bureau of Economic Analysis
  3. Bureau of Labor Statistics
  4. Department of the Treasury
Show the answer and rationale

Answer: C

The BLS publishes the CPI, which tracks the change in prices paid by urban consumers for a basket of goods and services. The BEA publishes GDP; the Fed and Treasury do not publish the CPI.

📚 Learn it: Leading, Coincident, Lagging

Question 15 of 20

Net income on the income statement is calculated as:

  1. Current assets minus current liabilities
  2. Sales plus interest received minus dividends
  3. Revenue minus all expenses, including taxes
  4. Total assets minus total liabilities
Show the answer and rationale

Answer: C

Net income is what remains after all expenses, interest and taxes are subtracted from revenue. Assets minus liabilities is equity, and current assets minus current liabilities is working capital.

📚 Learn it: The Dollar Abroad and Reading the Books

Question 16 of 20

When the Fed sells government securities to banks, bank reserves:

  1. Increase, and rates tend to rise
  2. Increase, and rates tend to fall
  3. Are unchanged by the sale
  4. Decrease, and rates tend to rise
Show the answer and rationale

Answer: D

Banks pay for the securities with reserves, so reserves shrink and money gets scarcer, nudging rates up. An increase in reserves comes from Fed purchases, not sales.

📚 Learn it: The Fed's Toolkit: Tightening and Easing

Question 17 of 20

An inverted yield curve has often been viewed by market participants as a signal of:

  1. A possible economic slowdown
  2. A weakening U.S. dollar
  3. Accelerating economic growth
  4. Falling short-term rates today
Show the answer and rationale

Answer: A

Inversion typically appears when the Fed is tight and investors expect slower growth and lower future rates, so it is watched as a warning of a slowdown. It does not signal accelerating growth or a weak dollar.

📚 Learn it: Rates, Bond Prices and the Yield Curve

Question 18 of 20

Which sector is generally the most defensive in an economic downturn?

  1. Healthcare providers
  2. Construction materials
  3. Hotels and casinos
  4. Auto manufacturers
Show the answer and rationale

Answer: A

People still need medical care during recessions, so healthcare is defensive. Travel, autos and construction depend on spending that is easy to postpone.

📚 Learn it: Boom, Bust and Who Survives

Question 19 of 20

Which pair contains only leading indicators?

  1. Personal income and retail sales
  2. Industrial production and payrolls
  3. Building permits and stock prices
  4. Prime rate and inventories
Show the answer and rationale

Answer: C

Building permits and stock prices both turn before the economy. Industrial production, payrolls and personal income are coincident, and the prime rate and inventory ratio are lagging.

📚 Learn it: Leading, Coincident, Lagging

Question 20 of 20

An American investor owns shares of a European company priced in euros. If the euro strengthens against the dollar, the investment's value in dollars will:

  1. Be frozen by regulators
  2. Fall, all else equal
  3. Not change at all
  4. Rise, all else equal
Show the answer and rationale

Answer: D

Each euro now converts into more dollars, so the dollar value rises even if the share price in euros is unchanged. This is currency risk working in the investor's favor.

📚 Learn it: The Dollar Abroad and Reading the Books

Practice 10 more economic factors questions free →

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