CFA Level I Economics practice questions
25 exam-style questions from across Economics, which is 6–9% of the Level I exam (roughly 11–16 of the 180 questions). Pick an answer to see whether you were right, why each option is right or wrong, and the lesson to go back to.
Module 1 The Firm and Market Structures
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1A price-taking firm can sell at EUR 9 a unit. At its current output, average variable cost is EUR 7 and average total cost is EUR 11. In the short run it should most likely:
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The answer is B.
A. Shutting down would lose all the fixed cost. Price covers variable cost, so producing loses less. The trap
B. Price 9 > AVC 7, so each unit adds EUR 2 towards fixed costs that are owed anyway. The loss is smaller than the fixed cost.
C. A price taker cannot choose its price; the market sets it.
From the lesson Breakeven and shutdown points
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2Dozens of independent bakeries in a city each sell their own distinctive breads under their own names, and a new bakery can open for modest cost. This market is best described as:
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The answer is B.
A. Many sellers, but the products are differentiated, which gives each bakery some pricing power. The trap
B. Many sellers, differentiated products and low barriers to entry.
C. Oligopoly needs few sellers and high barriers to entry.
From the lesson The four market structures compared
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3Alto (rows) and Brio (columns) each choose Premium or Discount pricing. Payoffs (Alto, Brio): Premium/Premium 90, 60; Premium/Discount 40, 80; Discount/Premium 70, 30; Discount/Discount 50, 45. The Nash equilibrium is most likely:
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The answer is C.
A. Brio's best response to Alto Premium is Discount, but Alto would then switch to Discount (50 > 40), so this is not stable.
B. The joint-profit maximum (150), but Brio gains by switching to Discount (80 > 60). Not stable. The trap
C. Brio prefers Discount whatever Alto does (80 > 60; 45 > 30). Given that, Alto prefers Discount (50 > 40).
From the lesson Oligopoly pricing: kinked demand, Cournot, Nash and Stackelberg
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4Five firms have market shares of 40%, 25%, 15%, 10% and 10%. The three-firm HHI is closest to:
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The answer is A.
A. 0.40² + 0.25² + 0.15² = 0.16 + 0.0625 + 0.0225 = 0.245.
B. Includes all five firms (adds 0.01 + 0.01) when the question asks for three.
C. The three-firm concentration ratio, 40 + 25 + 15 = 80%. It does not square the shares. The trap
On your calculator- 0.4x²+0.25x²+0.15x²= 0.245
x² square
- 0.4ENTER×0.25ENTER×+0.15ENTER×+ 0.245
ENTER enter (on the HP, puts the number on the stack)
From the lesson Concentration ratio and Herfindahl-Hirschman index
Module 2 Understanding Business Cycles
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5An economist claims business cycles follow a fixed five-year timetable. The best correction is that they are:
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The answer is B.
A. This repeats the economist's mistake. Cycles do not keep a fixed timetable or equal lengths. The trap
B. Expansions and contractions recur, but their lengths vary from a little over a year to about a decade.
C. The phases do follow a recognizable sequence, so cycles are not random.
From the lesson The business cycle and its four phases
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6A retailer's sales growth begins to slow while its suppliers keep delivering at the earlier pace. Its inventory–sales ratio will most likely:
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The answer is A.
A. Stock keeps arriving while sales slow, so inventory grows relative to sales. This is the late-expansion warning sign.
B. A falling ratio fits early recovery, when sales outpace production. The trap
C. A stable ratio fits the middle of an expansion, when production keeps pace with sales.
From the lesson Employment, capital spending, inventories, housing and trade over the cycle
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7Which of the following is a lagging economic indicator?
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The answer is B.
A. Permits are needed before building starts, so they lead. The trap
B. People stay unemployed longer even after hiring restarts, so the average duration turns after the economy does.
C. Firms change overtime before headcount, so weekly hours lead.
From the lesson Leading, coincident and lagging economic indicators
Module 3 Fiscal Policy
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8Which of the following is a typical objective of fiscal policy?
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The answer is B.
A. Setting the policy rate is the central bank's job, so it is a monetary tool.
B. Progressive taxes and transfers move income between groups. Redistribution is one of the three fiscal roles.
C. Stable purchasing power is a monetary objective. The trap
From the lesson Fiscal vs monetary policy and what fiscal policy is for
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9The marginal propensity to consume is 0.75 and the net tax rate is 30%. A GBP 10 billion increase in government spending will raise output by closest to:
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The answer is B.
A. Ignores the multiplier altogether.
B. 1 ÷ (1 − 0.75 × 0.70) = 1 ÷ 0.475 = 2.105; × 10 = 21.05.
C. Ignores the tax leak: 1 ÷ (1 − 0.75) = 4, and 4 × 10 = 40. The trap
On your calculator- 1−0.3=×0.75=+|-+1=1/x×10= 21.05
+|- change sign · 1/x reciprocal
- 1ENTER0.3−0.75×CHS1+1/x10× 21.05
ENTER enter (on the HP, puts the number on the stack) · CHS change sign · 1/x reciprocal
From the lesson Fiscal policy tools and the fiscal multiplier
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10A government cuts spending by 1% of GDP and cuts taxes by 2% of GDP. Its fiscal policy has become:
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The answer is C.
A. Reads only the spending cut. The tax cut is larger. The trap
B. Policy would be neutral only if the two changes offset each other.
C. The deficit widens by 2 − 1 = 1% of GDP, so policy is expansionary.
From the lesson Fiscal stance, structural deficits and policy lags
Module 4 Monetary Policy
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11To reduce bank reserves through open market operations, a central bank would:
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The answer is B.
A. Buying bonds pays banks with new reserves, which adds to them. The trap
B. Banks pay for the bonds out of their reserves, so reserves and lending capacity fall.
C. A lower requirement lets banks lend more against the same deposits.
From the lesson Monetary policy tools and the transmission mechanism
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12A government sets a 2% inflation target and a five-year horizon for its central bank, which then decides interest rates freely to meet it. The bank is best described as:
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The answer is C.
A. Target independence would mean the bank also set the target and horizon itself. The trap
B. The bank does choose rates, so it has operational independence too.
C. It chooses the instrument but not the goal.
From the lesson Inflation targeting vs exchange rate targeting
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13Trend real growth is 1.5% and the inflation target is 2.0%. The central bank's policy rate is 3.0%. Policy is best described as:
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The answer is A.
A. Neutral = 1.5 + 2.0 = 3.5%. The policy rate of 3.0% is below it.
B. Policy would be neutral only if the rate equaled 3.5%.
C. Compares 3.0% with the 2.0% inflation target alone, leaving out trend growth. The trap
On your calculator- 1.5+2= 3.5, above the 3.0 policy rate
- 1.5ENTER2+ 3.5, above the 3.0 policy rate
ENTER enter (on the HP, puts the number on the stack)
From the lesson The neutral rate and the limits of monetary policy
Module 5 Introduction to Geopolitics
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14A country faces a sudden shortage of foreign currency and cannot pay for imports. Which body is most likely to provide temporary, conditional loans?
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The answer is A.
A. Lending foreign currency to countries with balance of payments problems, on conditions and for a limited time, is the IMF's role.
B. The WTO sets trade rules. It does not lend.
C. The development association gives interest-free loans and grants for development, not emergency balance of payments support. The trap
From the lesson The IMF, the World Bank and the WTO
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15A country that cooperates with partners one agreement at a time but limits global economic integration is best described as following:
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The answer is A.
A. Cooperation on a one-partner-at-a-time basis with limited global integration is bilateralism: cooperative and nationalist.
B. A hegemon is non-cooperative and global.
C. Multilateralism is cooperative and global, with many partners. The trap
From the lesson Geopolitical risk and the four country archetypes
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16A general election scheduled for next March is best described as:
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The answer is A.
A. An election has a set date, so it is known in advance. That is event risk.
B. Exogenous risk is sudden and unanticipated, such as a disaster. The trap
C. Thematic risk is a known trend that evolves, such as climate change.
From the lesson How geopolitical risk affects investments
Module 6 International Trade
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17A report says free trade benefits a country as a whole. The most accurate reading is that:
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The answer is B.
A. Some workers, especially in import-competing industries, can be worse off for good. The trap
B. Gains from trade are net: the winners could pay the losers and still be ahead. It does not say they do.
C. Trade balance is a separate question. Gains from trade do not require balanced trade.
From the lesson Benefits and costs of international trade
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18A small country imposes a tariff of USD 5 per unit on a good with a world price of USD 20. Domestic output rises from 200 to 240 units and domestic demand falls from 500 to 450 units. The deadweight loss is closest to:
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The answer is A.
A. ½ × 5 × 40 + ½ × 5 × 50 = 100 + 125 = 225.
B. This is the tariff revenue, 5 × (450 − 240) = 5 × 210 = 1,050. Revenue is a transfer, not the loss. The trap
C. This adds the revenue to the deadweight loss (1,050 + 225), which is the national loss under a quota whose rent goes abroad.
On your calculator- 40+50=×5÷2= 225
- 40ENTER50+5×2÷ 225
ENTER enter (on the HP, puts the number on the stack)
From the lesson Tariffs, quotas, export subsidies and their welfare effects
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19Two neighbors scrap all tariffs and quotas on each other's goods, but each keeps its own tariffs on imports from everyone else, and workers cannot move freely between them. They have formed a:
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The answer is A.
A. Free trade among members only. Each keeps its own external tariffs, so there is no common external trade policy.
B. A customs union would need a common external tariff. The trap
C. A common market would need free movement of labor and capital as well.
From the lesson Trading blocs: free trade areas, customs unions, common markets and economic unions
Module 7 Capital Flows and the FX Market
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20The CHF/EUR exchange rate falls from 0.9600 to 0.9300. The Swiss franc has changed against the euro by closest to:
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The answer is C.
A. This is the euro's change (0.9300 ÷ 0.9600 − 1), not the franc's.
B. Assumes the franc's gain mirrors the euro's loss. The two percentages are not equal. The trap
C. The franc is the price currency: 0.9600 ÷ 0.9300 − 1 = +3.23%.
On your calculator- 0.96÷0.93−1= 0.0323
- 0.96ENTER0.93÷1− 0.0323
ENTER enter (on the HP, puts the number on the stack)
From the lesson Exchange rate quotes and percentage change in a currency
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21For a euro-area resident, the EUR/GBP exchange rate rises 2%, UK prices rise 4% and euro-area prices rise 1.5%. The change in the real EUR/GBP exchange rate is closest to:
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The answer is C.
A. Swaps the two inflation rates: 1.02 × 1.015 ÷ 1.04 − 1. The trap
B. Uses only the nominal change and ignores prices.
C. 1.02 × 1.04 ÷ 1.015 − 1 = 4.51%, close to the approximation 2 + 4 − 1.5 = 4.5%.
On your calculator- 1.02×1.04÷1.015−1= 0.0451
- 1.02ENTER1.04×1.015÷1− 0.0451
ENTER enter (on the HP, puts the number on the stack)
From the lesson Nominal vs real exchange rates
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22A small economy's law requires its central bank to issue local currency only against an equal value of euros held in reserve, at a fixed rate. This regime is:
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The answer is B.
A. A managed float has no fixed rate and no legal backing requirement.
B. A legal commitment to a fixed rate with the monetary base fully backed by the anchor currency defines a currency board.
C. A crawling peg adjusts its rate in small steps and has no such legal backing. The trap
From the lesson Exchange rate regimes and their effects on trade and capital flows
Module 8 Exchange Rate Calculations
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23USD/AUD is 0.6600 and CHF/USD is 0.8800. The CHF/AUD cross-rate is closest to:
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The answer is A.
A. The USD cancels: CHF/AUD = (CHF/USD) × (USD/AUD) = 0.8800 × 0.6600 = 0.5808.
B. Divides 0.6600 by 0.8800. The units do not cancel. The trap
C. Divides 0.8800 by 0.6600. The units do not cancel.
On your calculator- 0.88×0.66= 0.5808
- 0.88ENTER0.66× 0.5808
ENTER enter (on the HP, puts the number on the stack)
From the lesson Currency cross-rates and triangular arbitrage
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24CAD/USD spot is 1.3600 and the 1-year forward points are +72.4. The 1-year forward rate is closest to:
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The answer is C.
A. Subtracts the points. Positive points are added. The trap
B. Divides the points by 100,000, so the adjustment is ten times too small.
C. 1.3600 + 72.4 ÷ 10,000 = 1.3600 + 0.00724 = 1.36724.
On your calculator- 72.4÷10000+1.36= 1.36724
- 72.4ENTER10000÷1.36+ 1.36724
ENTER enter (on the HP, puts the number on the stack)
From the lesson Forward points, forward premiums and discounts
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25GBP/EUR spot is 0.8550. The GBP rate is 5.00% and the EUR rate is 3.00% (both annual, actual/360). The 180-day forward GBP/EUR rate is closest to:
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The answer is B.
A. Swaps the rates (the EUR rate on top). The price currency's rate, GBP, goes on top.
B. τ = 180 ÷ 360 = 0.5. F = 0.8550 × (1 + 0.05 × 0.5) ÷ (1 + 0.03 × 0.5) = 0.8550 × 1.025 ÷ 1.015 = 0.86342.
C. Uses the full annual rates (0.8550 × 1.05 ÷ 1.03) for a half-year forward. The trap
On your calculator- 0.855×(0.05×180÷360+1)÷(0.03×180÷360+1)= 0.86342
- 0.855ENTER0.05ENTER180×360÷1+×0.03ENTER180×360÷1+÷ 0.86342
ENTER enter (on the HP, puts the number on the stack)
From the lesson Covered interest rate parity: forward rates from interest rates
Keep going
Study the topic module by module in the Economics lessons, look up a word in the Level I glossary, or run a timed practice set that tracks your score by topic.