CFA Economics for Investment Analysis 1

Question 1

In the CFA curriculum, which phase of the business cycle is characterized by rising GDP, declining unemployment, and increasing inflation?

Accepted Answer

Expansion

Answer

During an expansion, economic output (GDP) rises, unemployment falls, and inflation tends to increase as demand outpaces supply.

Question 2

The Fisher Effect describes the relationship between nominal interest rates, real interest rates, and inflation as:

Accepted Answer

Nominal rate = Real rate + Expected inflation

Answer

The Fisher Effect: nominal interest rate ≈ real interest rate + expected inflation rate; lenders demand compensation for both the time value of money and expected purchasing power erosion.

Question 3

Monetary policy transmission to the real economy occurs PRIMARILY through which channel?

Accepted Answer

Changes in short-term interest rates that affect borrowing costs, asset prices, and exchange rates

Answer

Central banks adjust short-term interest rates, which then transmit to borrowing costs, investment decisions, asset prices, currency values, and ultimately aggregate demand and inflation.

Question 4

Which of the following BEST describes stagflation?

Accepted Answer

High unemployment combined with high inflation and stagnant growth

Answer

Stagflation is the combination of high inflation, high unemployment, and weak economic growth — a situation that is difficult to address because standard policy tools involve trade-offs.

Question 5

Purchasing Power Parity (PPP) theory suggests that, in the long run, exchange rates will adjust so that:

Accepted Answer

The price of a basket of goods is the same in all countries when expressed in a common currency

Answer

PPP holds that exchange rates should equalize the purchasing power of currencies by adjusting to offset inflation differentials between countries.

CFA Practice Test

CFA Practice Test

CFA Economics for Investment Analysis 1