CFA Level I Economics

A product's price rises 10% and the quantity demanded falls 20%. Demand is:

Elasticity = %ΔQ / %ΔP = −20% / 10%.

For a normal good, the income elasticity of demand is:

Negative income elasticity means an inferior good.

In long-run equilibrium under perfect competition, firms earn:

Entry and exit remove economic profits.

A profit-maximising monopolist produces where:

The gap between price and marginal cost creates deadweight loss.

Four firms each have a 25% market share. What is the Herfindahl-Hirschman Index?

4 × 25² = 2,500, a concentrated market.

Under the expenditure approach, GDP equals:

Consumption, investment, government spending and net exports.

Which is expansionary fiscal policy?

Interest rates and open market operations are monetary policy tools.

A central bank raises its policy rate. What is the usual effect?

Higher rates attract capital and cool demand.

The real interest rate is 2% and expected inflation is 3%. What is the nominal rate, approximately?

Fisher effect: nominal ≈ real + expected inflation.

Which is usually a lagging economic indicator?

Stock prices and building permits tend to lead the cycle.

According to the quantity theory of money:

With velocity and real output stable, more money means higher prices.

EUR/USD is quoted at 1.10. What does it mean?

The first currency is the base: its price is given in the second.

The spot rate is 1.10 USD per EUR. One-year rates are 4% in USD and 2% in EUR. What is the one-year forward rate?

F = S × (1 + r_USD) / (1 + r_EUR) = 1.10 × 1.04 / 1.02. The higher-rate currency trades at a forward discount.

Over the long run, a country with higher inflation than its trading partners tends to see its currency:

Purchasing power parity.

A country has a comparative advantage in a good when:

Producing more of it than anyone is absolute advantage.

A country runs a current account deficit. Its capital and financial accounts together show:

The balance of payments must balance: foreigners finance the deficit.

A country puts a tariff on imported steel. Which is most likely?

Domestic producers and the government gain, but less than consumers lose.