CFA Level 1, Volume 2, Study Session 4, Reading 16 – Aggregate Output, Prices, and Economic Growth, LOS 16h: Explain causes of movements along and shifts in aggregate demand and supply c
Trang 1CFA LEVEL 1 – ECONOMICS
By AnalystPrep.com
By AnalystPrep.com
Trang 21 The Canadian dollar and the Euro share a common feature with most other major currencies
in that:
A They can be exchanged for a fixed quantity of gold
B Their values relative to the UK pound and the US dollar float within tightly controlled bounds
C These currencies have value only because of our shared willingness to accept them
The correct answer is C
Modern currencies are almost all fiat currencies with values relative to other currencies determined by demand and supply There are some exceptions, especially in the case of small economies, where the local currency has a fixed exchange rate with, for example, the US dollar
At various points, major currencies were tied to precious metals such as gold, which has the benefit of limiting the central bank’s ability to create inflation by the expansion of the money supply
CFA Level 1, Volume 2, Study Session 5, Reading 18 – Monetary and Fiscal Policy, LOS 18b: Describe functions and definitions of money
2 All else being equal, estimate the change in price levels if the money supply increases by 11%
A Price levels will decrease by 11%
B Price levels will increase by 11%
C Price levels will increase at a faster pace (more than 11%)
The correct answer is B
Quantity Equation of Exchange is:
Money supply × Velocity = Price level × Real output (MV=PY)
The Equationof Exchange addresses the relationship between money and price level, and between money and nominal GDP
If all other variables are constant, then an 11% increase in money supply will increase price levels by 11%
Trang 3CFA Level 1, Volume 2, Study Session 5, Reading 18 – Monetary and Fiscal Policy, LOS 18d: describe theories of the demand for and supply of money
3 Suppose that the exchange rate between the Canadian dollar and the Brazilian real is BRL/CAD = 3.27 If the interest rate in Canada is 2.5 percent and the interest rate in Brazil is 8.0
percent, the exchange rate you should expect one year from today is closest to:
A BRL/CAD 3.45
B BRL/CAD 3.10
C BRL/CAD 3.53
The correct answer is A
To understand the Fisher relationship that links interest rates and forward exchange rates, recognize that an investment in the Canadian dollar should convert to the same number of Brazilian reais (the plural of real), as one would obtain by converting the dollar to reaisand investing it in Brazil That is 1 × 1.025 F = 3.27 × 1.08, where F is the future exchange rate between the Canadian dollar and the real
Solving for the future rate, F = 3.27 × (1.08/1.025) = BRL 3.45/CAD
CFA Level 1, Volume 2, Study Session 5, Reading 20 – Currency Exchange Rates, LOS 20f: Explain the arbitrage relationship between spot rates, forward rates, and interest rates
4 The effect of imposing additional emissions control requirements on electricity producers can
be best characterized as a:
A Leftward shift in the electricity supply curve
B Leftward movement along the electricity supply curve
C Rightward shift of the electricity demand curve
The correct answer is A
This is most easily understood by recognizing that for any given quantity of electricity production, producers must now receive sufficient extra income to recover the additional cost
of the emission control equipment Therefore, this is a leftward movement of the supply curve
Trang 4CFA Level 1, Volume 2, Study Session 4, Reading 16 – Aggregate Output, Prices, and Economic Growth, LOS 16h: Explain causes of movements along and shifts in aggregate demand and supply curves
5 Calculate the growth in potential GDP if the growth in technology, labor and capital is 2%, 3%, and 4% respectively Assume that national income allocated to labor compensation is 55%
A 5.55%
B 5.45%
C 5.85%
The correct answer is B
The growth rate of an economy depends on the rate at which technological advances, labor forces, physical and human capital, and natural resources grow Therefore, these forces can be summarized to the GDP equation as follows:
Growth in potential GDP = Growth in technology + WL(growth in labor) + WC(growth in capital),
where WL and WC are the relative shares of capital and labor in national income
Growth in potential GDP= 2% + (0.55 × 3%) + (0.45 × 4%) = 5.45%
CFA Level 1, Volume 2, Study Session 4, Reading 16 – Aggregate Output, Prices, and Economic Growth, LOS 16m:Describe sources, measurement, and sustainability of economic growth
6 For an inferior good, if the price of the good falls in comparison to a normal good, the:
A Income effect will reinforce the substitution effect leading to a larger increase in demand
B Income effect will offset the substitution effect leading to a smaller increase in demand
C Income effect will reinforce the substitution effect leading to a larger decrease in demand
Trang 5The correct answer is B
The income effect will be negative, and it will be in the opposite direction to the substitution effect Therefore, a reduction in price will, as in the case of a normal good, cause substitution towards the now cheaper good but this effect will be weakened by the income effect, which in the case of an inferior good, is negative
CFA Level 1, Volume 2, Study Session 4, Reading 14 – Topics in Demand and Supply Analysis, LOS 14b: Compare substitution and income effects
7 Suppose that for a manufacturer their total costsare currently greater than their total revenue
In the short run, the manufacturer should:
A Shut down
B Shut down if fixed cost is greater than marginal revenue
C Shut down if marginal cost is greater than marginal revenue
The correct answer is C
In the short run, if marginal revenue is greater than marginal cost, any revenue that is left over after paying the variable costs can be used to pay for some portion of the fixed costs This is a better outcome than shutting down and not recovering any of the fixed costs
CFA Level 1, Volume 2, Study Session 4, Reading 14 – Topics in Demand and Supply Analysis, LOS 14e: Determine and describe breakeven and shutdown points of production
8 Calculate the 4-firm Herfindahl-Hirschman Index of Tech Inc., Sun Systems, LiteC.org, and Git firms with market shares of 32%, 20%, 31%, and 17% respectively
A 1.0000
B 0.2674
C 0.5171
Trang 6The correct answer is B
The Herfindahl-HirschmanIndex (HHI) is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them
10 An economy is operating at full employment when the government eliminates sales taxes
This will most likely result in:
A Cost-push inflation
B Supply-push inflation
C Demand-pull inflation
Trang 7The correct answer is C
Eliminating the sales tax, all else equal, will increase consumption spending This is a rightward shift in aggregate demand and if the economy is already at or near full employment, demand-
pull inflation is the most likely consequence
CFA Level 1, Volume 2, Study Session 4, Reading 17 – Understanding Business Cycles, LOS 17h: distinguish between cost-push and demand-pull inflation
11 If the economy is at or near full employment, a sudden and unanticipated reduction in the
availability of a key resource such as electricity is most likely to:
A Shift aggregate supply to the left resulting in higher GDP
B Shift aggregate supply to the left resulting in higher prices
C Shift aggregate demand to the left causing a higher price level
The correct answer is B
A sudden and unanticipated reduction in the availability of a key resource is most likely to shift
aggregate supply to the left resulting in higher prices The famous example of this was the oil price shock from actions by OPEC which resulted in stagflation Output shrank while the inflation rate rose
CFA Level 1, Volume 2, Study Session 4, Reading 16 – Aggregate Output, Prices, and Economic Growth, LOS 16j: Distinguish between the following types of macroeconomic equilibria: long- run full employment, short-run recessionary gap, short-run inflationary gap, and short-run stagflation
12 Weaknesses of the CPI as a tool to measure the rate of inflation include:
A Overrepresentation of the purchases made by farmers and other rural residents
B Failure to account for changes over time in the nature or quality of goods included
C Over sensitivity to changes in gasoline prices
Trang 8The correct answer is B
The CPI is a weighted basket of purchases by urban consumers, in which the weights represent budget shares If the items are weighted by budget share, then changes in the price of gasoline
or any other component will be reasonably represented in the index
CFA Level 1, Volume 2, Study Session 4, Reading 17 – Understanding Business Cycles, LOS 17i: Interpret a set of economic indicators and describe their uses and limitations
13 In November of 2008, Zimbabwe had an estimated monthly inflation rate of 79.6 billion percent If nominal annual GDP increased by 1,000 percent, then:
A Real GDP also increased
B Real GDP declined
C The change in real GDP cannot be estimated without knowing the change in wages
The correct answer is B
This was a hyperinflation during which workers were typically paid more frequently than once per day, and the value of the Zimbabwe dollar plummeted The change in nominal GDP would have to exceed the rate of inflation to represent an increase in real GDP
CFA Level 1, Volume 2, Study Session 4, Reading 17 – Understanding Business Cycles, LOS 17e: Explain inflation, disinflation, and deflation
14 Which of the following best describes a market structure with only one buyer?
A Monopoly
B Monopolistically competitive market
C Monopsony
Trang 9The correct answer is C
A monopsony has only one buyer whereas a monopoly has one seller but many buyers A monopolistically competitive market has many buyers and fairly many sellers
CFA Level 1, Volume 1, Study Session 3, Reading 16 – Aggregate Output, Prices, And Economic
Growth, LOS 16d: compare GDP, national income, personal income, and personal disposable income
15 For the years 1981, 1982 and 1983, the year to year changes in the Canadian CPI were 10.0, 12.5 and 10.9 percent, respectively For 1984 and 1985, although prices continued to rise, the year to year changes declined to 5.8 and 4.3 percent, respectively The 1984 and 1985 changes
most likely indicate a period of:
A Disinflation
B Deflation
C Stagflation
The correct answer is A
Disinflation is a reduction in the rate of inflation It occurs when the rate at which the prices are risingis diminishing
Deflation is a decrease in the price level
CFA Level 1, Volume 1, Study Session 3, Reading 17 – Understanding Business Cycles , LOS 17e: Explain inflation, hyperinflation, disinflation, and deflation
Trang 1016 A small island nation has the following economic characteristics:
The correct answer is A
GDP = C+I+G+(X-M) = [Consumption + Investment + Government expenditures + Net exports] =
350 + 10 + 100 + (6-10) = 456
CFA Level 1, Volume 2, Study Session 4, Reading 16 – Aggregate Output, Prices, and Economic Growth, LOS 16a: Calculate and explain gross domestic product (GDP) using expenditure and income approaches
17 Consider the following table for a country’s nominal GDP and corresponding GDP deflators
Trang 11For the year 2015, its real GDP (in constant 1995 dollars) is closest to:
A 270
B 521
C 318
The correct answer is A
To convert to constant 1995 dollars, real GDP = nominal GDP × (GDP deflator 1995 / GDP deflator 2015) = 375 × (85/118) = 270
CFA Level 1, Volume 2, Study Session 4, Reading 16 – Aggregate Output, Prices, and Economic Growth, LOS 16c: Compare nominal and real GDP and calculate and interpret the GDP deflator
18 If the central bank reduces the reserve requirements and increases net redemptions (purchases) of treasury securities, then:
A Banks would decrease acceptance of deposits, and the money supply would decrease
B Banks would increase lending activities, and the money supply would increase
C Interest rates would rise, and bank lending activities would decrease
The correct answer is B
Both of these actions by the central bank increase the money supply If banks are required to place less cash on deposit at the central bank, their capacity to lend is increased Reducing the net purchases of treasury securities means more cash is left in circulation, which increases the money supply
CFA Level 1, Volume 2, Study Session 5, Reading 18 – Monetary and Fiscal Policy, LOS 18h: Describe tools used to implement monetary policy
Trang 1219 A profit-maximizing monopolist should choose an output level and price such that:
A Marginal revenue equals marginal cost and price exceeds average total cost
B Marginal revenue is greater than marginal cost and price equals average total cost
C Marginal revenue is greater than marginal cost and price is less than average variable cost
The correct answer is A
For all industries, output is optimized when marginal revenue equals marginal cost However, the monopolist can then set the price above average total cost and will be able to capture economic rents
CFA Level 1, Volume 2, Study Session 4, Reading 15 – The Firm and Market Structures, LOS 15c: Describe a firm’s supply function under each market structure
20 An analyst gathered the following national data (in thousands of U.S dollars) for a country for the year 2017:
Investment income received from foreigners $980,000
Payments for purchased foreign financial assets $2,220,000
The country's account balance is closest to:
A $4,240,000
B $1,760,000
C $6,200,000
Trang 13The correct answer is B
The account balance is a double-entry system in which every transaction involves both a debit and credit Debit entries reflect purchases of imported goods and services, purchases of foreign financial assets, payments received for exports, and payments (interest and principal) received from debtors Credit entries reflect payments for imported goods and services, payments for purchased foreign financial assets, and payments to creditors
$6,500,000 + $980,000 - $3,500,000 - $2,220,000 = $1,760,000
CFA Level 1, Volume 1, Study Session 3, Reading 16 – Aggregate Output, Prices, And Economic
Growth , LOS 16e:Explain the fundamental relationship among saving, investment, the fiscal balance, and the trade balance.
21 For a manufacturer, if Total revenue is less than Total fixed cost plus Total variable cost (TR
< TFC + TVC), then the most accurate statement is:
A The firm must shut down in the long run
B The firm must shut down if marginal revenue is greater than marginal cost
C The firm should shut down immediately
The correct answer is A
If the firm is not recovering the full cost of production in the short run, it needs not to shut down unless the variable cost exceeds the marginal revenue However, in the long run, it must recover all components of the total costs
CFA Level 1, Volume 2, Study Session 4, Reading 14 – Topics in Demand and Supply Analysis, LOS 14e: Determine and describe breakeven and shutdown points of production
Trang 1422 Suppose the government is considering policies to address the prevalence of obesity through increasing gym memberships With respect to the market for gym memberships, if elasticity of demand is highly elastic, then it is probable that:
A Providing a small tax benefit to gym membership purchasers will have a large demand effect
B Providing a large cash subsidy to purchase gym memberships will have little demand effect
C Increasing business taxes on gym operators will have little impact
The correct answer is A
If demand is price elastic, then any small reduction in the out of pocket cost to purchase the good will have a larger effect on the quantity demanded, all else equal
CFA Level 1, Volume 2, Study Session 4, Reading 14 – Topics in Demand and Supply Analysis, LOS 14a: Calculate and interpret price, income, and cross-price elasticities of demand and describe factors that affect each measure
23 The aggregate supply curve represents the relationship between the supply of output and the price level The distinction between short run and long run aggregate supply is necessary to allow for differences in:
A Daily operations and the 5-year planning cycle
B Firm’s inability to adjust the capital stock in the short run versus long run
C Inflexibility of labor input in the short run
The correct answer is B
In the long run, all inputs including capital are variable In the short run, output varies as a result of adjusting worker hours
CFA Level 1, Volume 2, Study Session 4, Reading 16 – Aggregate Output, Prices, and Economic Growth,LOS 16g: explain the aggregate supply curve in the short-run and long-run
Trang 1524 If banking is a competitive industry in which all banks are operating in ranges where they
are facing substantial economies of scale, then we will most likely see:
A More competitive pricing from smaller banks
B Mergers and industry consolidation
C Increased marketing spending from smaller banks
The correct answer is B
If there are economies of scale, then larger banks have a cost advantage over smaller banks Therefore, smaller banks cannot successfully compete on price The cost advantages from
greater size will, all else equal, result in mergers and general industry consolidation
CFA Level 1, Volume 2, Study Session 4, Reading 14 – Topics in Demand and Supply Analysis, LOS 14f: describe how economies of scale and diseconomies of scale affect costs
25 A look at the financial statements of a business based in Qatar reveals that for the most recent reporting period, revenue stood at $2 million It had total cost amounting to $2.5 million, which was comprised of TFC of $1 million and TVC of $1.5 million The reported net loss on the income statement stood at $500,000, disregarding tax obligations In prior periods, the business had consistently reported profits on its operations
What decision should the management take regarding operations for the next few months?
A Shut down operations since the business is already making losses
B Minimize operations to cut TVC
C Continue operations but attempt to borrow funds for the short term
The correct answer is C
From the financials given, the firm is in a position to cover all the TVC, but can cover only about half of TFC ($1 million) If the business were to decide to shut down operations, its loss would
be equal to the amount of TFC ($1 million) However, if it chooses to continue operations, the net loss would be minimized at $500,000, and this is clearly the better option To navigate through the current profitability problems, the business should attempt to secure credit from financiers in the short term The fact that it has previously reported profits means chances of successfully negotiating such an agreement would be quite high
Trang 16CFA Level 1, Volume 2, Study Session 4, Reading 14 – Topics in Demand and Supply Analysis, LOS 14e: determine and describe breakeven and shutdown points of production
26 Which one of these is more likely to create a demand curve shift in product B?
A Unitary cost increases
B Government tax policies
C A change in consumers’ income
The correct answer is C
Government tax policies and unitary cost increases create a supply curve shift whereas a change
in consumers’ income will shift the demand curve
CFA Level 1, Volume 2, Study Session 4, Reading 14 – Topics in Demand and Supply Analysis, LOS 14a: Calculate and interpret price, income, and cross-price elasticities of demand and describe factors that affect each measure
27 The price of a good has gone up from $41 to $45.As a result, the demand for the same good has gone down from 15,000,000 units to 14,000,000 units How would you best describe elasticity in demand for this good?
A Elastic
B Inelastic
C The good has unitary elasticity
The correct answer is B
Elasticity measures the sensitivity or responsiveness of one variable to another Elasticity is measured in percentage changes in each of the variables
Elasticity =(QQ11+ Q− Q0) 20⁄ ÷
P1− P0(P1+ P0) 2⁄ =
14,000,000 − 15,000,000(14,000,000 + 15,000,000) 2⁄ ÷
45 − 41(45 + 41) 2⁄
=−0.0689660.093023 = −0.74
Trang 17Since -0.74 < 1, demand is inelastic
CFA Level 1, Volume 2, Study Session 4, Reading 14 – Topics in Demand and Supply Analysis, LOS 14a: Calculate and interpret price, income, and cross-price elasticities of demand and describe factors that affect each measure
28 Aggregate demand is:
A The potential output level of each labor force
B The total supply of goods all firms plan on selling during a period of time
C The demand for the gross domestic product of an economy
The correct answer is C
Aggregate demand is the demand for final goods and services in an economy during a given period of time It can also be described as the demand for an economy’s GDP Aggregate demand equals gross domestic product (GDP), at least in purely quantitative terms, because they share the same equation As a matter of accounting, it must always be the case the aggregate demand and GDP increase or decrease together
CFA Level 1, Volume 2, Study Session 4, Reading 16 – Aggregate Output, Prices, and Economic Growth, Reading 16 – Aggregate Output, Prices, and Economic Growth, LOS 16f: Explain the IS and LM curves and how they combine to generate the aggregate demand curve
29 An economy in disinflation is:
A An economy in hyperinflation
B An economy where inflation decreases over time
C An economy with a consistently negative inflation growth
The correct answer is B
Disinflation is a reduction in the rate of inflation It occurs when the rate at which the prices are raising is diminishing It is important to understand that it does not signal the slowing down of growth of the economy
Trang 18Note: An economy in deflation is an economy with a consistently negative inflation growth
CFA Level 1, Volume 2, Study Session 4, Reading 17 – Understanding Business Cycles, LOS 17e: explain inflation, hyperinflation, disinflation, and deflation
30 According to the Fisher effect, a decrease in expected inflation will most likely decrease:
A The real interest rate
B The nominal interest rate
C The real interest rate and the nominal interest rate
The correct answer is B
The Fisher effect states that the real interest rate equals to the nominal interest rate minus the expected inflation rate Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation
CFA Level 1, Volume 2, Study Session 4, Reading 18 – Monetary and Fiscal Policy, LOS 18e: describe the Fisher effect
31 A country has the following characteristics:
Exports of goods and services $14,000,000
Investment income received from foreigners $3,200,000
Imports of goods and services $11,430,000
Investment income payment made to foreigners $1,600,000
What is this country’s account balance?
A $4,170,000
B ($970,000)
C $970,000
Trang 19The correct answer is A
Current Account Balance + Current Account = (Exports - Imports) + Net Income from Abroad
$14,000,000 + $3,200,000 - $11,430,000 - $1,600,000
CFA Level 1, Volume 2, Study Session 5, Reading 19 – International Trade and Capital Flow, LOS 19h: Describe the balance of payments accounts including their components
32 All else being equal, if the Canadian dollar goes from USD 0.7 to USD 0.8, goods produced
in Canada and consumed in the United States will usually be:
A The same price as before for Americans
B More expensive for Americans
C Cheaper for Americans
The correct answer is B
Since the Canadian dollar is now more expensive in terms of US dollars, Americans will be paying more to get the same amount of Canadian dollars
CFA Level 1, Volume 2, Study Session 5, Reading 20 – Currency Exchange Rates, LOS 20a: Define an exchange rate and distinguish between nominal and real exchange rates and spot and forward exchange rates
33 A European company has recently received a payment of CAD 760,000 (Canadian dollars) The spot rate for CAD/USD is 0.8831 and the spot rate for EUR/USD is 1.2341 What is the amount the European company will receive in Euros?
A $697,370
B $828,724
C $1,062,100
Trang 20The correct answer is C
CFA Level 1, Volume 2, Study Session 5, Reading 20 – Currency Exchange Rates, LOS 20d:
Calculate and interpret currency cross- rates
34 The market demand function for item A is a function of its price, income and the price of
item B
Own-price elasticity of demand for item A -0.5
Income elasticity of demand for item A 0.4
Cross-price elasticity of demand for item A with respect
to the price of item B
0.8
Given this information, which of the following statements is most accurate?
A Demand for item A is elastic
B Item A is an inferior good
C Items A and B are substitutes
The correct answer is C
A positive coefficient of cross-price elasticity means that when the price of item B goes up, the
demand for item A also goes up This behavior is coherent with the fact that A and B are
substitutes
CFA Level 1, Volume 2, Study Session 4, Reading 14 – Topics in Demand and Supply Analysis,
LOS 14a: Calculate and interpret price, income, and cross-price elasticities of demand and
describe factors that affect each measure
Trang 2135 Company A has developed a new product and acquired a patent for the next 20 years It faces the following demand and cost schedules:
The correct answer is A
The optimal output is based on the output levels that maximize profits
Trang 2236 An analyst gathered the following information about a country:
The economist would estimate the unemployment rate to be closest to:
A 17.58%
B 6.10%
C 5.76%
The correct answer is B
Unemployment rate =UnemploymentLaborforce =870,000 = 0.06153,000
CFA Level 1, Volume 2, Study Session 4, Reading 17 – Understanding Business Cycles, LOS 17d: Describe types of unemployment and compare measures of unemployment
rate of return is closest to:
A 14.85%
B 15.30%
Trang 23The correct answer is C
Expected return = (0.75 × 0.18) + (0.25 × 0.09) = 0.1350 + 0.0225 = 0.1575 or 15.75%
Note: In this problem, we completely ignore the correlation between equities and bonds
CFA Level 1, Volume 1, Study Session 2, Reading 9 – Probability Concepts, LOS 9h: Calculate and interpret an unconditional probability using the total probability rule
38 The demand and supply curves for a bag of rice are:
D = 6 - 1P, S = 3 + 0.5P
Where P is the price of a bag of rice
The quantity of bags of rice bought and sold at equilibrium is closest to:
A 4
B 11
C 15
The correct answer is A
First, we'll set supply equal to demand:
Thus, the equilibrium price is 2, and the equilibrium quantity is 4
CFA Level 1, Volume 2, Study Session 4, Reading 14 – Topics in Demand and Supply Analysis, LOS 14a: Calculate and interpret price, income, and cross-price elasticities of demand and describe factors that affect each measure
Trang 2439 Corn supplies are sharply reduced because of an epidemic in a specific country, and consumers turn to wheat as a substitute for corn How would you best illustrate this change in the corn market in supply-and-demand terms?
A The supply curve for corn would shift to the left
B The demand curve for corn would shift to the left
C The demand curve for corn would shift to the right
The correct answer is A
The supply curve for corn would shift to the left This will cause the price of corn to rise, and the quantity consumed to decrease The demand curve would not move here
CFA Level 1, Volume 2, Study Session 4, Reading 16 – Aggregate Output, Prices, and Economic Growth, LOS 16h: Explain causes of movements along and shifts in aggregate demand and supply curves
40 The accompanying table shows the prices and yearly quantities sold of souvenir T-shirts in the town of Springfield
Price of T-shirt Quantity of T-shirts demanded
Trang 25The correct answer is B
41 The aggregate demand curve shows a:
A Positive relationship between the price level and aggregate output demanded
B Negative relationship between the price level and aggregate output supplied
C Negative relationship between the price level and aggregate output demanded
The correct answer is C
The aggregate demand curve shows a negative relationship between the price level and
aggregate output demanded
Trang 26CFA Level 1, Volume 2, Study Session 4, Reading 16 – Aggregate Output, Prices, and Economic Growth, LOS 16g: Explain the aggregate supply curve in the short-run and long-run
42 Which of these would least likely be an objective of monetary policy?
A Ensuring price stability
B Ensuring general trust in the currency
C Ensuring economic growth
The correct answer is C
Monetary policy is generally concerned with the management of interest rates and stability of a country’s currency, including the amount of money in circulation Fiscal policy, on the other hand, is primarily concerned with tax policies and spending habits of governments
Thus, ensuring economic growth would be an objective of fiscal policy Ensuring price stability and ensuring general trust in the currency are both objectives of monetary policy
CFA Level 1, Volume 2, Study Session 5, Reading 18 – Monetary and Fiscal Policy, LOS 18a: Compare monetary and fiscal policy
43 Which of the following statements is least likely accurate?
A The employment rate is the percentage of the labor force that is employed
B The labor force is comprised of all of the members of a particular population who are able to work
C If the labor force participation rate declines and the number of people employed remains unchanged, the unemployment rate will increase
The correct answer is C
Participation rate represents the active portion of an economy’s labor force I.e the number of people already employed and those actively looking for work
The unemployment rate will decrease if the labor force participation rate declines and the
number of people employed remains unchanged There would be less people willing to work,
Trang 27which would result to a decrease in unemployment, even if the decrease itself is not attributable
to an improved economy The participation rate usually declines when people get discouraged (and possibly frustrated) and stop seeking employment
CFA Level 1, Volume 2, Study Session 4, Reading 17 – Understanding Business Cycles, LOS 17d: Describe types of unemployment and compare measures of unemployment
44 A number of workers at an airplane manufacturing plant in Montreal, Canada, are laid off because of a financial crisis The manufacturer isn't sure when the plant will need to rehire What type of unemployment describes the workers' situation?
A Cyclical unemployment
B Structural unemployment
C Frictional unemployment
The correct answer is A
Economists describe cyclical unemployment as the result of businesses not having enough demand for labor to employ all those who are looking for work Therefore, the situation described is an example of cyclical unemployment
CFA Level 1, Volume 2, Study Session 4, Reading 17 – Understanding Business Cycles, LOS 17d: Describe types of unemployment and compare measures of unemployment
45 A country has a real GDP of $4.4 trillion and a nominal GDP of $4.84 trillion The
unemployment rate is 6.5% The GDP deflator is closest to:
A 90.1
B 104.4
C 110.0
Trang 28The correct answer is C
GDP deflator is also called implicit price deflator for GDP It is simply the ratio of Nominal GDP to Real GDP and is expressed as:
GDP deflator = Nominal GDP/Real GDP × 100 =4.844.4 × 100 = 110.0
CFA Level 1, Volume 2, Study Session 4, Reading 16 – Aggregate Output, Prices, and Economic Growth, LOS 16c: Compare nominal and real GDP and calculate and interpret the GDP deflator
46 You are given the following exchange rates:
The correct answer is A
USD/EUR × CHF/USD × JPY/CHF × CAD/JPY × GBP/CAD = GBP/EUR
USD/EUR = 1/0.6288 = 1.5903
CHF/USD = 0.8833
JPY/CHF = 120.3211
CAD/JPY = 1/99.0001 = 0.010101
Trang 29Equivalent number of firms = 1/HHI = 1/0.3306 = 3.0248
CFA Level 1, Volume 2, Study Session 4, Reading 15 – The Firm and Market Structures, LOS 15g: Describe the use and limitations of concentration measures in identifying market structure
48 If the USD/CAD spot rate is 1.5011 and the USD/CAD forward rate is 1.4413, then the
forward discount is closest to:
Trang 30CFA Level 1, Volume 2, Study Session 5, Reading 20 – Currency Exchange Rates, LOS20g: calculate and interpret a forward discount or premium
49 An analyst gathered the following information about Portugal:
CFA Level 1, Volume 2, Study Session 4, Reading 17 – Understanding Business Cycles, LOS 17d: Describe types of unemployment and compare measures of unemployment
50 The difference between partial and general equilibrium analyses is that at least one of the analyses:
A Ignores exogenous variables
B Ignores endogenous variables
C Does not take feedback effects from all markets into consideration