CFA Economic Analysis & Indicators 3

Question 1

Which of the following best describes 'stagflation' and which economic framework struggled most to explain it?

Accepted Answer

High inflation combined with high unemployment; traditional Keynesian demand-side models

Answer

Stagflation (1970s) combined rising prices with rising unemployment, contradicting the traditional Phillips Curve trade-off central to Keynesian economics.

Question 2

In national income accounting, Gross National Income (GNI) differs from GDP in that GNI:

Accepted Answer

Adds net income earned by residents abroad and subtracts income earned by foreigners domestically

Answer

GNI = GDP + income received by residents from abroad − income paid to foreign residents, capturing the nationality rather than geographic basis of income.

Question 3

The 'neutral rate of interest' (r*) is best defined as:

Accepted Answer

The real short-term interest rate consistent with full employment and stable inflation in the long run

Answer

The neutral rate is the theoretical equilibrium real rate where monetary policy is neither expansionary nor contractionary given an economy at potential.

Question 4

According to the expenditure approach to measuring GDP, which formula is correct?

Accepted Answer

GDP = C + I + G + (X - M)

Answer

The expenditure approach sums consumption (C), investment (I), government spending (G), and net exports (X−M) to arrive at GDP.

Question 5

A central bank adopting a Taylor Rule sets its policy rate based primarily on:

Accepted Answer

Deviations of inflation from target and deviations of output from potential

Answer

The Taylor Rule prescribes a policy rate as a function of the neutral rate plus adjustments for the inflation gap and the output (or unemployment) gap.

CFA Practice Test

CFA Practice Test

CFA Economic Analysis & Indicators 3