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

After depreciation, import prices rise and export prices fall immediately, but trade volumes adjust slowly; the short-term effect is a wider trade deficit before volumes respond to improve the balance.

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

Expansionary fiscal policy (increased spending or tax cuts) directly boosts aggregate demand, leading to higher short-run GDP and potentially higher employment.

Question 3

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

Accepted Answer

Government deficits reducing private investment by driving up interest rates

Answer

Crowding out occurs when government borrowing increases interest rates, raising the cost of capital and reducing private sector investment spending.

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

Open market operations directly affect bank reserves by injecting or withdrawing cash, while changing reserve requirements alters how much of those reserves banks must hold vs. lend out.

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

CIP requires the forward exchange rate to reflect the interest rate differential between two countries; otherwise, risk-free arbitrage profits would be available.

CFA Practice Test

CFA Practice Test

CFA Economics for Investment Analysis 2