The federal government funds a large spending increase by selling substantial new Treasury debt to the public, and the Federal Reserve does not accommodate the borrowing. Which result do economists call crowding out?

Higher Treasury yields raise borrowing costs for businesses, which lowers private investment spending.

Which of the following is included in the M2 money supply measure but NOT in the narrower M1 measure?

Savings deposits and retail money market mutual funds

Which formula correctly represents the standard expenditure approach to calculating Gross Domestic Product (GDP)?

GDP = Consumption + Investment + Government Spending + (Exports − Imports)

An inverted yield curve, in which short-term interest rates are higher than long-term interest rates, is generally interpreted by market participants as a signal of:

An expected economic slowdown or recession

Which of the following correctly lists the phases of the business cycle in proper chronological order?

Expansion, peak, contraction, trough

Series 7 Economic Factors Practice Questions

Official outline: FINRA Series 7 Content Outline
Questions on this page: 8
Updated: Nov 3, 2026

Question 1, medium
The federal government funds a large spending increase by selling substantial new Treasury debt to the public, and the Federal Reserve does not accommodate the borrowing. Which result do economists call crowding out?
- A.Higher Treasury yields raise borrowing costs for businesses, which lowers private investment spending.
- B.A weaker dollar raises import prices, which lowers domestic purchases of foreign goods.
- C.Lower bank reserves force banks to call loans, which reduces the money multiplier.
- D.Higher tax receipts reduce household disposable income, which lowers consumer spending.
Show answer and explanationHide answer
Correct answer: A. Higher Treasury yields raise borrowing costs for businesses, which lowers private investment spending.
Crowding out occurs when heavy government borrowing competes for loanable funds and pushes interest rates up. The higher rates make private borrowing and investment less attractive, offsetting part of the fiscal stimulus.
- A. Correct. Deficit financing raises yields and reduces private investment.
- B. Exchange-rate and import effects are separate channels and are not what crowding out means.
- C. Reserve requirements and the money multiplier are monetary policy mechanics, not the result of Treasury borrowing.
- D. This describes a tax effect on consumption, not the effect of government borrowing on interest rates.
- Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026
Question 2, medium
Which of the following is included in the M2 money supply measure but NOT in the narrower M1 measure?
- A.Physical currency in circulation
- B.Demand deposits (checking accounts)
- C.Savings deposits and retail money market mutual funds
- D.Traveler's checks
Show answer and explanationHide answer
Correct answer: C. Savings deposits and retail money market mutual funds
M1 consists of the most liquid forms of money. Currency in circulation, demand deposits, and other checkable deposits. M2 is broader, adding savings deposits, small-denomination time deposits, and retail money market mutual funds on top of everything in M1.
- A. Physical currency in circulation is already part of the narrower M1 measure.
- B. Demand deposits (checking accounts) are also already included in M1.
- C. Correct. Savings deposits and retail money market mutual funds are added to M1 to form M2. They are not part of the narrower M1 measure.
- D. Traveler's checks are counted within M1, not added uniquely at the M2 level.
- Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026
Question 3, easy
Which formula correctly represents the standard expenditure approach to calculating Gross Domestic Product (GDP)?
- A.GDP = Consumption + Investment + Government Spending + (Exports − Imports)
- B.GDP = Consumption + Savings − Taxes
- C.GDP = Money Supply × Velocity of Money
- D.GDP = Corporate Profits + Wages + Interest + Rent
Show answer and explanationHide answer
Correct answer: A. GDP = Consumption + Investment + Government Spending + (Exports − Imports)
The expenditure approach to GDP sums consumption spending, business investment, government spending, and net exports (exports minus imports): GDP = C + I + G + (X − M). The other formulas describe unrelated or partial economic relationships (the equation of exchange, national income components, etc.).
- A. The expenditure approach sums consumption, investment, government spending, and net exports (exports minus imports) to calculate GDP.
- B. This isn't a recognized GDP formula; it resembles a savings/consumption identity rather than the expenditure approach.
- C. Money supply times velocity is the equation of exchange used in monetary theory, not the expenditure approach to GDP.
- D. Summing corporate profits, wages, interest, and rent describes the income approach to GDP, not the expenditure approach.
- Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026
Question 4, medium
When the Federal Reserve wants to decrease the money supply and slow economic growth, it would most likely:
- A.Lower the discount rate
- B.Buy government securities in the open market
- C.Raise the reserve requirement
- D.Lower the reserve requirement
Show answer and explanationHide answer
Correct answer: C. Raise the reserve requirement
Raising the reserve requirement forces banks to hold more of their deposits in reserve and lend out less, contracting the money supply and slowing economic activity. A tightening (contractionary) monetary policy tool. Lowering the discount rate, buying securities in the open market, and lowering the reserve requirement are all expansionary (easing) actions that increase the money supply.
- A. Lowering the discount rate makes borrowing cheaper for banks, which is expansionary. The opposite of the stated goal.
- B. Open market purchases inject reserves into the banking system, which is expansionary. The opposite of the stated goal.
- C. Correct. Raising the reserve requirement contracts the money supply, consistent with slowing economic growth.
- D. Lowering the reserve requirement frees up more money for lending, which is expansionary. The opposite of the stated goal.
- Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026
Question 5, medium
An inverted yield curve, in which short-term interest rates are higher than long-term interest rates, is generally interpreted by market participants as a signal of:
- A.Strong expected economic growth ahead
- B.An increase in long-term bond issuance by the Treasury
- C.Permanently stable interest rates going forward
- D.An expected economic slowdown or recession
Show answer and explanationHide answer
Correct answer: D. An expected economic slowdown or recession
A normal, upward-sloping yield curve reflects expectations of economic growth and higher future rates. An inverted curve, where short-term rates exceed long-term rates, has historically been interpreted as a signal that investors expect an economic slowdown or recession, often reflecting expectations of future rate cuts.
- A. This describes the interpretation of a normal, upward-sloping curve, not an inverted one.
- B. Yield curve shape reflects rate expectations across maturities, not directly a signal about issuance volume.
- C. The yield curve's shape reflects changing rate expectations, not a signal of permanent stability.
- D. Correct. Inversion is widely viewed as a recession-warning signal.
- Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026
Question 6, hard
An investor earns a 9% nominal annual return on a bond portfolio during a year in which inflation runs at 4%. Using the standard approximation tested on the exam, what is the investor's approximate real rate of return?
- A.13%
- B.9%
- C.5%
- D.2.25%
Show answer and explanationHide answer
Correct answer: C. 5%
The standard approximation for real rate of return is nominal return minus the inflation rate: 9% − 4% = 5%. This approximation is what's tested on the exam, even though a more precise Fisher-equation calculation would yield a slightly different figure.
- A. Adding nominal return and inflation (9%+4%) is the wrong operation for approximating real return; the two should be subtracted.
- B. 9% is the nominal return before adjusting for inflation. It ignores the erosion of purchasing power the question is asking about.
- C. Correct. The standard approximation is nominal return minus inflation rate: 9% − 4% = 5% real return.
- D. 2.25% doesn't correspond to the simple approximation method tested here (nominal minus inflation); it results from an unrelated calculation.
- Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026
Question 7, medium
Which of the following correctly lists the phases of the business cycle in proper chronological order?
- A.Peak, expansion, trough, contraction
- B.Expansion, peak, contraction, trough
- C.Contraction, trough, peak, expansion
- D.Trough, contraction, expansion, peak
Show answer and explanationHide answer
Correct answer: B. Expansion, peak, contraction, trough
The standard business cycle sequence is expansion (growth), peak (the high point before decline), contraction/recession (decline), and trough (the low point before growth resumes), after which a new expansion begins. The choice listing 'Expansion, peak, contraction, trough' reflects this correct sequential order; the other choices scramble the sequence, placing a peak or trough out of its proper position relative to expansion and contraction.
- A. This puts expansion right after the peak and then jumps from expansion straight to the trough. After a peak the economy contracts, and a trough is reached only at the end of a contraction. Even read as a circular cycle, these transitions are out of order.
- B. The cycle correctly runs expansion (growth) to peak (high point) to contraction (decline) to trough (low point), then repeats.
- C. Contraction followed by trough is a correct pairing, but the list then jumps from the trough directly to the peak, skipping expansion. It also moves from the peak back to expansion, which reverses the real order. After a trough comes expansion, and only then a peak.
- D. Listing contraction immediately after trough is backwards; expansion follows the trough, and contraction follows the peak.
- Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026
Question 8, hard
The Federal Reserve lowers the reserve requirement from 10% to 5%. If a bank receives a new deposit of $10,000, what is the maximum potential increase in the money supply resulting from this deposit under the new reserve requirement?
- A.$50,000
- B.$100,000
- C.$200,000
- D.$20,000
Show answer and explanationHide answer
Correct answer: C. $200,000
The money multiplier equals 1 divided by the reserve requirement. At the new 5% requirement, the multiplier is 1/0.05 = 20. Applying this to the $10,000 deposit gives a maximum potential money supply increase of $10,000 x 20 = $200,000. Choice A results from mistakenly using the old 10% requirement (multiplier of 10), and choices B and D do not correctly apply the multiplier formula.
- A. This understates the money multiplier; at a 5% reserve requirement the multiplier is 1/0.05 = 20, giving $200,000, not $50,000.
- B. This is half the correct figure; the money multiplier at a 5% reserve requirement is 20x, not 10x.
- C. Lowering the reserve requirement to 5% creates a money multiplier of 1/0.05 = 20, so a new $10,000 deposit can theoretically expand the money supply by up to $10,000 x 20 = $200,000.
- D. This is far too low; it doesn't reflect the 20x multiplier produced by a 5% reserve requirement.
- Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026

Questions are drafted with help from AI and published only after a person reviews and approves them. How these questions are made

Series 7 Economic Factors Practice Questions

More Economic Factors questions

Keep going

The same subject on other exams

More Series 7 topics