CFA Economics Level 1

A devaluation of a country's currency to improve its trade deficit would most likely benefit a producer of _________ goods

Highly elastic; (goods with many substititutes, luxury goods, etc.).

Firms in a perfectly competitive industry will increase their output until which of the following conditions is met? A)Marginal cost equals price. B)Marginal revenue equals average total cost. C)Total revenue equals price.

A) Marginal cost equals price. When a firm operates under conditions of perfect competition, marginal revenue always equals price. Under perfect competition, price is constant (a horizontal line) so marginal revenue is constant. Therefore a firm will increase output until marginal cost equals price.

If the economy is in short-run disequilibrium below full employment, the most likely explanation is that: A)aggregate demand has decreased. B)money wage rates have decreased. C)long-run aggregate supply has decreased.

A) aggregate demand has decreased. A decrease in aggregate demand can reduce output below its full-employment level. A decline in long-run aggregate supply would mean the full-employment output level itself has decreased. Wage rates are assumed to be fixed in the short run, but the long-run effect of decreases in wage rates would be to increase (shift) short-run aggregate supply, leading to an increase in output.

Which of the following statements about the demand and supply of money is most accurate? People who are: A)holding money when interest rates are higher will try to reduce their money balances and, as a result, the demand for money decreases. B)buying bonds to reduce their money balances will increase the demand for bonds with an associated increase in interest rates. C)holding money when interest rates are lower will try to increase their money balances and, as a result, the supply of money increases.

A) holding money when interest rates are higher will try to reduce their money balances and, as a result, the demand for money decreases. Buying bonds would drive bond prices up and interest rates down. Selling bonds would have the opposite effect; driving bond prices down and interest rates up. When interest rates are lower, there is an excess demand for money. The supply of money is determined by the monetary authorities.

The inventory-to-sales ratio for manufacturing and trade is classified as a: A)lagging indicator. B)coincident indicator. C)leading indicator.

A) lagging indicator. The inventory-to-sales ratio for manufacturing and trade is considered a lagging indicator because it peaks after the economy does, even though it is sometimes used in forecasting economic activity.

A country that wishes to narrow its trade deficit devalues its currency. If domestic demand for imports is perfectly price-inelastic, whether devaluing the currency will result in a narrower trade deficit is least likely to depend on: A)the size of the currency devaluation. B)the country's ratio of imports to exports. C)price elasticity of demand for the country's exports.

A) the size of the currency devaluation. With perfectly inelastic demand for imports, currency devaluation of any size will increase total expenditures on imports (same quantity at higher prices in the home currency). The trade deficit will narrow only if the increase in export revenues is larger than the increase in import spending. To satisfy the Marshall-Lerner condition when import demand elasticity is zero, export demand elasticity must be larger than the ratio of imports to exports in the country's international trade. (LOS 18.j)

Promoting economic growth and price stability are the goals of: A)both fiscal and monetary policy. B)monetary policy, but not fiscal policy. C)fiscal policy, but not monetary policy.

A)both fiscal and monetary policy. Both fiscal and monetary policies are used to maintain stable prices and produce economic growth. Fiscal policy does so by mechanisms that involve spending and taxation, and monetary policy uses central bank tools to modify the availability of money and credit.

The form of regional trading agreement (RTA) least likely to have the unintended negative effect of reducing a member country's low-cost imports from a non-member country is a:

A)customs union. B)common market. C)free trade area. A free trade area removes barriers to trade among its members but does not require any of its members to change their trade policies with non-members. A common market and a customs union both impose uniformity on trade rules with non-member nations, which could restrict a member's low-cost imports from a nation that is not a member.

A country's labor force is projected to decrease by 2% while its labor productivity is projected to increase by 3% per year. Based on these projections, the country's sustainable annual economic growth rate: A)is positive. B)is negative. C)depends on the proportions of labor and capital in production.

A)is positive. Growth in potential GDP = growth in labor force + growth in labor productivity. In this example, -2% + 3% = 1% growth in potential GDP.

The GDP deflator is calculated as 100 times the ratio of: A)nominal GDP to real GDP. B)base year prices to current year prices. C)current year nominal GDP to base year nominal GDP.

A)nominal GDP to real GDP. The GDP deflator is the ratio of nominal GDP to real GDP, or equivalently the ratio of current year prices to base year prices. (LOS 14.c)

A central bank that wants to increase short-term interest rates is most likely to: A)sell government securities. B)decrease bank reserve requirements. C)issue long-term bonds.

A)sell government securities. Open market operations to sell securities will decrease the outstanding supply of cash balances and increase short-term interest rates. The central bank does not issue long-term bonds but may buy and sell bonds issued by the government. Decreasing reserve requirements or purchasing government securities would tend to decrease short-term interest rates.

What form of regulation is used to improve resource allocation by changing price to where P=ATC (normal profit)? Meanwhile, the form of efficient regulation forces monopolists to reduce price to the point where MC=MD and often requires a subsidy in order to provide the firm with a normal profit to prevent it from leaving the market entirely is know as?

Average cost pricing; Marginal cost pricing

In which market structure(s) can a firm's supply function be described as its marginal cost curve above its average variable cost curve? A)Oligopoly or monopoly. B)Perfect competition only. C)Perfect competition or monopolistic competition.

B) Perfect competition only. The supply function is not well-defined in markets other than those that can be characterized as perfect competition.

Which of the following factors is most likely to increase long-run aggregate supply? A)Aggregate demand decreases. B)The average rate of labor productivity increases. C)Wage rates increase.

B)The average rate of labor productivity increases. Factors that shift the long-run aggregate supply curve (LAS) to the right include improvements in technology and productivity, increases in the supply of resources, and institutional changes that increase the efficiency of resource use. An increase in the productivity of the average worker is likely to shift the LAS curve to the right. Wage rate changes shift the short-run aggregate supply curve (SAS) but not the LAS curve. A decline in consumer demand would represent a move down the LAS curve but not a shift in LAS.

Long-term sustainable growth of an economy is least likely to result from growth in: A)the supply of labor. B)capital per unit of labor. C)output per unit of labor.

B)capital per unit of labor. The sustainable rate of economic growth is a measurement of the rate of increase in the economy's productive capacity. An economy's sustainable rate of growth depends on the growth rate of the labor supply and the growth rate of labor productivity.

A firm that is experiencing diseconomies of scale should: A)decrease output in the short run. B)decrease its plant size. C)shut down in the long run.

B)decrease its plant size. If a firm is experiencing diseconomies of scale, it should decrease its plant size to the efficient scale, which is the size that minimizes long-run average total cost. Plant size can be adjusted in the long run but not in the short run. (Study Session 4, Module 12.2, LOS 12.e)

If a firm's long-run average total cost increases by 6% when output is increased by 6%, the firm is experiencing: A)economies of scale. B)diseconomies of scale. C)constant returns to scale.

B)diseconomies of scale. Explanation: Not C, because REMEBER THE Economies of Scale LRATC Curve! If output increases and LRATC increases we are in diseconomies of scale territory. Constant returns to scale is when LRATC is at the minimum trough point (minimum efficient scale).

Suppose an economy has a real trend rate of 2%. The central bank has set an inflation target of 4.5%. To achieve the target, the central bank has set the policy rate at 6%. Monetary policy is most likely: A)balanced. B)expansionary. C)contractionary.

B)expansionary. REMEMBER: 6% < 6.5%. A lower rate would mean more spending which means it is an expansionary policy. neutral rate = trend rate + inflation target = 2% + 4.5% = 6.5%

In order for effective price discrimination to occur the seller must: A)maximize revenue by selling at the highest price possible. B)face a demand curve with a negative slope. C)have more than one identifiable group of customers with the same price elasticities of demand for the product.

B)face a demand curve with a negative slope. The seller must also have at least two identifiable groups of customers with different price elasticities of demand for the product, and the seller must be able to prevent customers from reselling the product.

Policies that can be used as tools for redistribution of wealth and income include: A)monetary policy only. B)fiscal policy only. C)both fiscal policy and monetary policy.

B)fiscal policy only.

Sources of long-run economic growth most likely include increases in: A)government spending, labor supply, and physical capital. B)human capital, money supply, and natural resources. C)labor supply, physical capital, and technology.

B)human capital, money supply, and natural resources. Sources of sustainable long-run economic growth (increases in long-run aggregate supply) include increases in the labor force, human capital (the education and skill level of the labor force), the stock of physical capital, the supply of natural resources, and the level of technology. Increases in the money supply or government spending increase aggregate demand but do not increase long-run aggregate supply.

A good for which consumers exhibit a negative income effect that is smaller than the substitution effect is most accurately described as a(n): A)Giffen good. B)inferior good. C)Veblen good.

B)inferior good. Explanation: For an inferior good the income effect is negative. A Giffen good is an inferior good for which the negative income effect is larger than the positive substitution effect, resulting in a decrease in consumption in response to a decrease in price. A Veblen good is not an inferior good, but rather a good that provides more utility to a consumer at a higher price than it provides at a lower price because the status benefits of ownership are greater at higher prices.

In a production function model of economic output, total factor productivity represents the output growth that can be accounted for by: A)capital growth but not labor growth. B)neither labor growth nor capital growth. C)the combined effects of labor growth and capital growth.

B)neither labor growth nor capital growth. Remember: Production function represents the relationship of output to the size of the labor force, capital stock, and productivity. Meanwhile, the multiplier A, called total factor productivity quantifies the amount of output growth that is not explained by increases in the size of labor force and capital.

Which of the following statements about the relationship between interest rates and the demand for and supply of money is most accurate? Interest rates affect: A)the supply of money only. B)the demand for money only. C)both the demand for and supply of money.

B)the demand for money only. Interest rates only affect the demand for money. With higher interest rates, the opportunity cost of holding money increases, and people hold less money and more interest-earning assets. Monetary authorities determine the supply of money. Therefore, the supply of money is independent of the interest rate. (Study Session 5, Module 16.1, LOS 16.d)

A government enacts a program to subsidize farmers with an expansive spending program of $10 billion. At the same time, the government enacts a $10 billion tax increase over the same period. Which of the following statements best describes the impact on aggregate demand? A)Lower growth because the tax increase will have a greater effect. B)No effect because the tax and spending effects just offset each other. C)Higher growth because the spending increase will have a greater effect

C) Higher growth because the spending increase will have a greater effect. The amount of the spending program exactly offsets the amount of the tax increase, leaving the budget unaffected. The multiplier for government spending is greater than the multiplier for a tax increase. Therefore, the balanced budget multiplier is positive. All of the government spending enters the economy as increased expenditure, whereas spending is reduced by only a portion of the tax increase. (LOS 16.p)

Which of the following policy tools is the least likely to be available to the U.S. Federal Reserve Board? A)Buying and selling Treasury securities in the open market. B)Setting the discount rate at which banks can borrow from the Federal Reserve. C)Requiring the banking system to tighten or loosen its credit policies.

C) Requiring the banking system to tighten or loosen its credit policies. The U.S. Federal Reserve can encourage or persuade banks as a whole to tighten or loosen their credit policies, but it cannot compel them to do so.

The money supply curve is perfectly inelastic because the money: A)supply is independent of interest rates. B)demand schedule is downward-sloping. C)supply is dependent upon interest rates.

C) supply is dependent upon interest rates. The money supply schedule is vertical because the money supply is independent of interest rates. Central banks control the money supply.

When the price of a good decreases, and an individual's consumption of that good also decreases, it is most likely that: A)the income effect and substitution effect are both negative. B)the substitution effect is negative and the income effect is positive. C)the income effect is negative and the substitution effect is positive.

C) the income effect is negative and the substitution effect is positive. Explanation: This is because if income effect is negative, that means consumption decreases as price decreases, so the consumption of the other good must be positive--meaning that the substitution effect is positive. NOTE that the income effect must be larger than the substitution effect and this is a GIFFEN GOOD.

Purchases of securities in the open market by the monetary authorities are least likely to increase: A) excess reserves. B) cash in investor accounts. C) the interbank lending rate.

C) the interbank lending rate. REMEMBER: Excess reserves are the amount that banks hold, and increase when fed buys securities (banks hold more cash) Open market purchases by monetary authorities decrease the interbank lending rate by increasing excess reserves that banks can lend to one another and therefore increasing their willingness to lend.

The monetary authority of The Stoddard Islands will exchange its currency for U.S. dollars at a one-for-one ratio. As a result, the exchange rate of the Stoddard Islands currency with the U.S. dollar is 1.00, and many businesses in the Islands will accept U.S. dollars in transactions. This exchange rate regime is best described as: A)a fixed peg. B)dollarization. C)a currency board.

C)a currency board. This exchange rate regime is a currency board arrangement. The country has not formally dollarized because it continues to issue a domestic currency. A conventional fixed peg allows for a small degree of fluctuation around the target exchange rate. (LOS 18.i)

If a country's inflation rate is below the central bank's target rate, the central bank is most likely to: A)sell government securities. B)increase the reserve requirement. C)decrease the overnight lending rate.

C)decrease the overnight lending rate. Decreasing the overnight lending rate would add reserves to the banking system, which would encourage bank lending, expand the money supply, reduce interest rates, and allow GDP growth and the rate of inflation to increase. Selling government securities or increasing the reserve requirement would have the opposite effect, reducing the money supply and decreasing the inflation rate. (LOS 16.k)

When the economy enters an expansion phase, the most likely effect on external trade is a(n): A)increase in exports. B)decrease in exports. C)increase in imports.

C)increase in imports. When the domestic economy is expanding, demand for imports is likely to increase as domestic incomes increase. Exports tend to be independent of domestic economic growth and are more closely related to trading partners' economic growth.

Participants in foreign exchange markets that can be characterized as "real money accounts" most likely include: A)hedge funds. B)central banks. C)insurance companies.

C)insurance companies. Real money accounts are foreign exchange buy-side investors that do not use derivatives. Many mutual funds, pension funds, and insurance companies can be classified as real money accounts. Hedge funds typically use derivatives. Central banks usually do not act as investors in foreign exchange markets but may intervene in foreign exchange markets to achieve monetary policy objectives.

The three reasons for holding money are most accurately described as: A)broad money demand, narrow money demand, and transaction demand. B)narrow money demand, precautionary demand, and speculative demand. C)transaction demand, precautionary demand, and speculative demand.

C)transaction demand, precautionary demand, and speculative demand. The three reasons for holding money are: transaction demand, for buying goods and services; precautionary demand, to meet unforeseen future needs; and speculative demand, to take advantage of investment opportunities. Narrow money and broad money refer to measures of money in circulation.

Fiscal Plans: ______ policy is a macroeconomic policy based on the judgment of policymakers in the moment as opposed to policy set by predetermined rules. Examples may include passing a new spending bill that promotes a certain cause, such as green technology, or the creation of a federal jobs program. _______ stabilizers refers the increase (decrease) in transfer payments such as unemployment compensation and the decrease (increase) in tax revenue that result from a decrease (increase) in the level of economic activity. These effects tend to move the fiscal budget toward a deficit when economic activity decreases and toward surplus when economic activity increases, and tend to dampen economic cycles. (WITHOUT NEW LEGISLATION)

Discretionary; Automatic

________ school believes that that shifts in aggregate demand due to changes in expectations were the primary cause of business cycles and that fluctuations are primarily due to swings in the level of optimism of those who run businesses. They overinvest and overproduce when they are too optimistic about future growth in potential GDP, and they underinvest and underproduce when they are too pessimistic or fearful about the future growth in potential GDP. They argue that wages are "downward sticky", reducing the ability to decrease in money wages to increase short-run aggregate supply and move the economy from recession (or depression) back toward full employment. The policy prescription is to increase aggregate demand directly, through monetary policy (increasing the money supply) or through fiscal policy (increasing government spending, decreasing taxes, or both). ________ school believes shifts in both AD and AS are primary driven by changes in technology over time. They also believe that the economy has a strong tendency toward full-employment equilibrium, as recession puts downward pressure on the money wage rate, or as over-full employment puts upward pressure on the money wage rate. They conclude that business cycles result from temporary deviations from long-run equilibrium. _______ school believe the variations in aggregate demand that cause business cycles are due to variations in the rate of growth of the money supply, likely from inappropriate decisions by the monetary authorities. This school believes that recessions can be caused by external shocks or by inappropriate decreases in the money supply. They suggest that to keep aggregate demand stable and growing, the central bank should follow a policy of steady and predictable increases in the money supply. _______ school believe business cycles are caused by government intervention in the economy. When policymakers force interest rates down to artificially low levels, firms invest too much capital in long-term and speculative lines of production, compared to actual consumer demand. When these investments turn out poorly, firms must decrease output in those lines, which causes a contraction. ______ school introduced real business cycle theory (RBC). RBC emphasizes the effect of real economic variables such as changes in technology and external shocks, as opposed to monetary variables, as the cause of business cycles. RBC applies utility theory, which we described in the Study Session on microeconomic analysis, to macroeconomics. Based on a model in which individuals and firms maximize expected utility, this school argues that policymakers should not try to counteract business cycles because expansions and contractions are efficient market responses to real external shocks.

Keynesian; Neoclassical; Monetarist; Austrian; New Classical School;

Because HHI concentration measure for market share power takes the square, it is (more or less) sensitive to merger

More. Think about it, if we take the square of an entity that has merged and represents a large percent of the industry, say 40% this will produce a larger square than two separate firms 20%^2 and 20%^2.

Consider an economy in which labor's relative share of national income is 60%. For which of the following sources of economic growth will a 1% increase result in the largest increase in potential GDP?

The contributions of technology, labor, and capital to potential GDP can be modeled as follows: Growth in potential GDP = growth in technology + WL(growth in labor) + WC(growth in capital), where WL is labor's relative share of national income, WC is capital's relative share of national income, and WL + WC = 1.

(T/F) Regardless of whether a firm is a price taker, price searcher, monopoly, or oligopoly, all firms will seek to maximize profits and want to produce the output where marginal revenue equals marginal cost.

True

A decrease in the target U.S. federal funds rate is least likely to result in: A)a proportionate decrease in long-term interest rates. B)an increase in consumer spending on durable goods. C)depreciation of the U.S. dollar on the foreign exchange market.

a proportionate decrease in long-term interest rates Changes in the U.S. federal funds rate and changes in long-term interest rates are unlikely to be proportionate. Long-term rates are the sum of short-term rates and a premium for the expected rate of inflation. If a decrease (increase) in the target federal funds rate by the Fed causes economic agents to increase (decrease) their inflation expectations, the change in long-term rates will be less than the change in the federal funds rate. Increases in spending on consumer durables and a decrease in the foreign exchange value of the U.S. dollar are among the expected results of a decrease in the target U.S. federal funds rate. (Study Session 5, Module 16.2, LOS 16.k)

A stronger domestic currency relative to foreign currencies is most likely to result in: A)a shift in the aggregate supply curve toward lower supply. B)a shift in the aggregate demand curve toward lower demand. C)a movement along the aggregate demand curve towards higher prices.

a shift in the aggregate demand curve toward lower demand. Strengthening of the domestic currency should cause exports to decrease and imports to increase, causing the AD curve to shift to the left (lower demand). At the same time, the cost of raw material inputs should decrease in domestic currency terms, causing the SRAS curve to shift to the right (greater supply). Changes in the price level cause movement along the AD and AS curves; in this case, any shifts along these curves will be towards lower prices. (LOS 14.h)

Price elasticity along a linear demand curve is ______ when above unitary elasticity (-1.0), and is _____ when below unitary elasticity.

elastic; inelastic. Remember high elasticity is at higher prices on linear demand curve because %change in Qd is greater than the %change in price.

The short-run supply curve for a ______ is its marginal cost curve above the average variable cost curve. The short-run supply curve of the _______ is the sum of the supply curves for all firms in the industry.

firm; market