Economics

CFA® Level II, published weight 5–10%. Two dense modules: currency equilibrium value and economic growth.

What the outline covers

Currency Exchange Rates: Understanding Equilibrium Value
Economic Growth

Sample questions

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Question 1

An investor borrows in a low-interest-rate currency and invests in a high-interest-rate currency. This carry trade is profitable only if:

A. Uncovered interest rate parity holds
B. Uncovered interest rate parity fails
C. Covered interest rate parity fails
D. Purchasing power parity holds in the short run

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B. If uncovered parity held, the high-rate currency would depreciate by exactly the interest differential and the trade would earn nothing. Its empirical failure is the source of carry returns.

Reading: Economics — Currency Exchange Rates, LOS 1.d

Question 2

Under the neoclassical growth model, a permanent increase in the savings rate will:

A. Raise the long-run growth rate of output per capita
B. Raise the level of output per capita but not its long-run growth rate
C. Have no effect on either the level or the growth rate
D. Lower the steady-state capital-to-labour ratio

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B. Diminishing returns to capital mean higher saving raises the steady-state level of output per worker but leaves the long-run growth rate set by technology.

Reading: Economics — Economic Growth, LOS 2.d

Question 3

Relative purchasing power parity predicts that a country with persistently higher inflation than its trading partners will experience:

A. Currency appreciation
B. Currency depreciation
C. No change in the nominal exchange rate
D. A widening real interest differential only

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B. Higher relative inflation erodes purchasing power, so relative PPP predicts nominal depreciation roughly equal to the inflation differential.

Reading: Economics — Currency Exchange Rates, LOS 1.b

Question 4

A country converges toward the steady state of countries with similar institutions and savings rates, but not toward all countries. This is best described as:

A. Absolute convergence
B. Conditional convergence
C. Club convergence
D. Divergence

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C. Club convergence describes convergence only within groups sharing institutional characteristics — the word “institutions” is the tell.

Reading: Economics — Economic Growth, LOS 2.f

Question 5

Under the FX portfolio balance approach, a country running persistent fiscal deficits will most likely see its currency:

A. Appreciate indefinitely as capital flows in
B. Appreciate in the short run and depreciate in the long run
C. Depreciate immediately and permanently
D. Remain unchanged in both horizons

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B. Higher rates attract capital and support the currency initially, but investors eventually demand compensation for the growing debt burden, causing depreciation.

Reading: Economics — Currency Exchange Rates, LOS 1.g

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