CMA Economic & Financial Analysis 3 — Questions and Answers
Question 1: Which of the following best describes the concept of 'purchasing power parity' (PPP)?
- Interest rates equalize across countries over time
- Exchange rates adjust so identical goods cost the same across countries (Correct answer)
- Trade balances converge toward zero in the long run
- Central banks coordinate monetary policy to stabilize currencies
Correct answer: Exchange rates adjust so identical goods cost the same across countries
PPP holds that exchange rates should adjust until the same basket of goods costs the same amount in different countries when priced in a common currency.
Question 2: An analyst calculates a company's EV/EBITDA multiple as significantly lower than its industry peers. All else equal, this suggests the company may be:
- Overvalued relative to peers
- Undervalued relative to peers (Correct answer)
- More leveraged than peers
- Growing faster than peers
Correct answer: Undervalued relative to peers
A lower EV/EBITDA multiple than peers suggests the market is paying less per dollar of operating earnings, indicating potential undervaluation.
Question 3: Which type of unemployment is MOST associated with structural changes in the economy, such as automation replacing workers?
- Frictional unemployment
- Cyclical unemployment
- Structural unemployment (Correct answer)
- Seasonal unemployment
Correct answer: Structural unemployment
Structural unemployment results from a mismatch between workers' skills and the needs of the economy, often driven by technological change or industry shifts.
Question 4: A bond with a 5% coupon is trading at a premium. What can be inferred about the relationship between the coupon rate and the yield to maturity?
- Coupon rate equals YTM
- Coupon rate is less than YTM
- Coupon rate is greater than YTM (Correct answer)
- YTM cannot be determined from price alone
Correct answer: Coupon rate is greater than YTM
When a bond trades at a premium (above par), its coupon rate exceeds the YTM because investors are willing to pay more than face value for above-market income.
Question 5: The Gini coefficient is used to measure:
- A country's economic growth rate
- Income inequality within a population (Correct answer)
- The efficiency of tax collection
- Consumer price inflation
Correct answer: Income inequality within a population
The Gini coefficient ranges from 0 (perfect equality) to 1 (perfect inequality), serving as a standard measure of income or wealth distribution.
Question 6: In a DuPont analysis, which three components combine to determine return on equity?
- Gross margin, asset turnover, leverage ratio
- Net profit margin, asset turnover, equity multiplier (Correct answer)
- Operating margin, current ratio, debt-to-equity
- Revenue growth, EPS, price-to-earnings ratio
Correct answer: Net profit margin, asset turnover, equity multiplier
The DuPont formula decomposes ROE into net profit margin × asset turnover × equity multiplier, revealing drivers of profitability, efficiency, and leverage.
Question 7: When the Federal Reserve engages in quantitative easing (QE), what is the PRIMARY mechanism intended to stimulate economic activity?
- Directly depositing funds into consumer bank accounts
- Lowering reserve requirements for commercial banks
- Purchasing assets to inject liquidity and lower long-term interest rates (Correct answer)
- Raising the federal funds rate to encourage saving
Correct answer: Purchasing assets to inject liquidity and lower long-term interest rates
QE involves the Fed buying securities (typically Treasuries and MBS) to increase bank reserves, push down long-term yields, and encourage borrowing and investment.
CMA Economic & Financial Analysis 3
Which of the following best describes the concept of 'purchasing power parity' (PPP)?