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
In the CFA curriculum, which phase of the business cycle is characterized by rising GDP, declining unemployment, and increasing inflation?
Answer: Expansion
During an expansion, economic output (GDP) rises, unemployment falls, and inflation tends to increase as demand outpaces supply.
The Fisher Effect describes the relationship between nominal interest rates, real interest rates, and inflation as:
Answer: Nominal rate = Real rate + Expected inflation
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.
Monetary policy transmission to the real economy occurs PRIMARILY through which channel?
Answer: Changes in short-term interest rates that affect borrowing costs, asset prices, and exchange rates
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.
Which of the following BEST describes stagflation?
Answer: High unemployment combined with high inflation and stagnant growth
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.
Purchasing Power Parity (PPP) theory suggests that, in the long run, exchange rates will adjust so that:
Answer: The price of a basket of goods is the same in all countries when expressed in a common currency
PPP holds that exchange rates should equalize the purchasing power of currencies by adjusting to offset inflation differentials between countries.
Which of the following is considered a leading economic indicator?
Answer: Average weekly hours worked in manufacturing
Average weekly hours worked in manufacturing is a leading indicator because firms adjust hours before hiring or laying off workers, signaling future employment and output trends.