CFA Economics for Investment Analysis 2

Question 1

The J-curve effect describes how a country's trade balance initially worsens after a currency depreciation because:

Accepted Answer

Import and export volumes adjust slowly while prices change immediately, causing the trade deficit to temporarily widen

Answer

Imports become cheaper immediately, increasing import volumes

Answer

Trading partners retaliate with tariffs, reducing exports further

Answer

Domestic inflation immediately erodes the competitive advantage

Question 2

In the context of CFA economics, an expansionary fiscal policy is MOST likely to lead to which of the following in the short run?

Accepted Answer

Higher government spending or lower taxes leading to increased aggregate demand and GDP

Answer

Reduced money supply causing deflation

Answer

Appreciation of the domestic currency due to higher interest rates

Answer

Decreased consumer spending due to Ricardian equivalence in all cases

Question 3

The concept of 'crowding out' in economics refers to:

Accepted Answer

Government deficits reducing private investment by driving up interest rates

Answer

Central bank bond purchases eliminating private sector bond markets

Answer

High corporate taxes reducing business formation

Answer

Excessive imports crowding out domestically produced goods

Question 4

Which of the following central bank tools directly controls the money supply by influencing bank reserves?

Accepted Answer

Both B and C

Answer

Discount rate changes

Answer

Open market operations (buying/selling government securities)

Answer

Reserve requirement changes

Question 5

Covered interest rate parity (CIP) states that the forward exchange rate between two currencies is determined by:

Accepted Answer

The differential in interest rates between the two countries

Answer

Relative inflation rates between the two countries

Answer

Relative purchasing power in each country

Answer

Central bank intervention in the foreign exchange market

Question 6

Which economic concept explains why some countries specialize in producing certain goods even if they are absolutely less efficient than their trading partners?

Accepted Answer

Comparative advantage

Answer

Absolute advantage

Answer

Economies of scale

Answer

Factor endowment theory