Cornerstone

Economics

CFA® Level I, published weight 6–9%. Market structures, business cycles, policy, trade and exchange rates.

What the outline covers

Sample questions

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Question 1

A firm faces a downward-sloping demand curve and sells a differentiated product with many close substitutes and low barriers to entry. This market is best characterised as:

A. Perfect competition
B. Monopolistic competition
C. Oligopoly
D. Monopoly

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B. Product differentiation with many sellers and easy entry defines monopolistic competition. Long-run economic profit is competed away to zero.

Reading: Economics — The Firm and Market Structures, LOS 1.b

Question 2

The inventory–sales ratio rises sharply. This most likely indicates the economy is:

A. Entering an expansion
B. Entering a contraction
C. At a cyclical trough
D. Unaffected — the ratio is not cyclical

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B. Sales fall before firms cut production, so unsold inventory builds up. A rising inventory–sales ratio is a classic early-contraction signal.

Reading: Economics — Understanding Business Cycles, LOS 2.b

Question 3

The spot USD/EUR rate is 1.1000. The one-year US interest rate is 5% and the euro rate is 3%. The one-year forward USD/EUR rate implied by covered interest rate parity is closest to:

S = 1.1000 · i_USD = 5% · i_EUR = 3%

A. 1.0787
B. 1.1000
C. 1.1214
D. 1.1550

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C. F = S × (1 + i_USD)/(1 + i_EUR) = 1.1000 × 1.05/1.03 = 1.1214. The higher-rate currency trades at a forward discount.

Reading: Economics — Capital Flows and the FX Market, LOS 7.c

Question 4

Which of the following is most accurately described as a lagging economic indicator?

A. The slope of the yield curve
B. New orders for capital goods
C. The average duration of unemployment
D. Building permits issued

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C. The average duration of unemployment continues rising after a recovery begins, making it a lagging indicator. The other three are leading.

Reading: Economics — Understanding Business Cycles, LOS 2.d

Question 5

A central bank raises its policy rate to combat inflation. Compared with fiscal policy, monetary policy most likely has:

A. A longer enactment lag but a shorter impact lag
B. A shorter enactment lag but a longer impact lag
C. Shorter lags on both dimensions
D. Longer lags on both dimensions

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B. Monetary policy can be enacted quickly by committee decision, but works indirectly through rates, credit and expectations, so its impact lag is long and variable.

Reading: Economics — Monetary Policy, LOS 4.f

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