Economics for Investment Analysis Flashcards
6 cards from real CFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Economics for Investment Analysis flashcards as text
The J-curve effect describes how a country's trade balance initially worsens after a currency depreciation because:
Answer: Import and export volumes adjust slowly while prices change immediately, causing the trade deficit to temporarily widen
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.
In the context of CFA economics, an expansionary fiscal policy is MOST likely to lead to which of the following in the short run?
Answer: Higher government spending or lower taxes leading to increased aggregate demand and GDP
Expansionary fiscal policy (increased spending or tax cuts) directly boosts aggregate demand, leading to higher short-run GDP and potentially higher employment.
The concept of 'crowding out' in economics refers to:
Answer: Government deficits reducing private investment by driving up interest rates
Crowding out occurs when government borrowing increases interest rates, raising the cost of capital and reducing private sector investment spending.
Which of the following central bank tools directly controls the money supply by influencing bank reserves?
Answer: Both B and C
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.
Covered interest rate parity (CIP) states that the forward exchange rate between two currencies is determined by:
Answer: The differential in interest rates between the two countries
CIP requires the forward exchange rate to reflect the interest rate differential between two countries; otherwise, risk-free arbitrage profits would be available.
Which economic concept explains why some countries specialize in producing certain goods even if they are absolutely less efficient than their trading partners?
Answer: Comparative advantage
Comparative advantage shows that countries benefit from specializing in goods where they have the lowest opportunity cost, even if a trading partner is better at producing everything.