Economics is a critical part of the CFA Level 1 exam, testing your understanding of microeconomic and macroeconomic principles, market forces, monetary policy, and international trade. Scoring well in this section can strengthen your overall performance because many of these concepts are directly linked to finance, investment analysis, and corporate decision-making.
This set of 50 CFA Level 1 Economics MCQs is designed to help you master key concepts with clear explanations. Each question is structured to simulate the exam style, ensuring you get the most relevant practice.
🔹 CFA Level 1 Economics MCQs (Q1–50)
Q1. Which of the following best describes the law of demand?
A) As price increases, demand increases.
B) As price increases, demand decreases. ✅
C) As income increases, demand decreases.
D) As supply decreases, demand decreases.
Explanation: The law of demand states that, all else equal, an increase in price reduces quantity demanded.
Q2. A normal good is defined as a good for which:
A) Demand increases when income falls.
B) Demand increases when income rises. ✅
C) Demand decreases when income rises.
D) Supply falls as income rises.
Explanation: Normal goods have a positive income elasticity of demand.
Q3. Which market structure is characterized by many sellers, differentiated products, and low entry barriers?
A) Monopoly
B) Perfect competition
C) Monopolistic competition ✅
D) Oligopoly
Explanation: Monopolistic competition features many firms selling similar but differentiated products.
Q4. In the short run, which cost remains unchanged regardless of output?
A) Variable cost
B) Fixed cost ✅
C) Marginal cost
D) Average cost
Explanation: Fixed costs do not vary with production in the short run.
Q5. If the central bank increases interest rates, the likely immediate effect is:
A) An increase in investment spending
B) A decrease in consumer borrowing ✅
C) A rise in money supply
D) A fall in currency value
Explanation: Higher interest rates reduce borrowing and spending, tightening economic activity.
Q6. The point where demand equals supply is called:
A) Equilibrium ✅
B) Surplus
C) Shortage
D) Break-even point
Explanation: Market equilibrium occurs where demand meets supply.
Q7. When marginal cost is less than average cost:
A) Average cost is rising
B) Average cost is falling ✅
C) Marginal cost equals fixed cost
D) Average cost is constant
Explanation: If MC < AC, then AC declines.
Q8. Which of the following is NOT a tool of monetary policy?
A) Open market operations
B) Reserve requirements
C) Discount rate
D) Government spending ✅
Explanation: Government spending is fiscal policy.
Q9. A demand curve that is perfectly inelastic is:
A) Horizontal
B) Vertical ✅
C) Upward sloping
D) Downward sloping
Explanation: Perfectly inelastic demand is unaffected by price.
Q10. If a country imposes tariffs on imports, the immediate effect is:
A) Lower prices for domestic consumers
B) Higher government revenue ✅
C) Increased imports
D) No effect on trade
Explanation: Tariffs raise import prices and generate revenue.
Q11. The Phillips Curve shows the trade-off between:
A) Growth and inflation
B) Inflation and unemployment ✅
C) Taxes and spending
D) Interest rates and money supply
Explanation: Phillips Curve depicts inverse relation of unemployment and inflation.
Q12. Which of the following increases aggregate demand?
A) Higher taxes
B) Increased government spending ✅
C) Higher interest rates
D) Increased imports
Explanation: Government spending boosts AD.
Q13. If demand is price elastic, then a fall in price will:
A) Reduce total revenue
B) Increase total revenue ✅
C) Leave revenue unchanged
D) Increase costs
Explanation: Elastic demand means % change in demand > % change in price.
Q14. Which exchange rate system allows currency values to fluctuate freely?
A) Fixed exchange rate
B) Floating exchange rate ✅
C) Pegged rate
D) Dollarization
Explanation: Floating rates adjust by supply and demand.
Q15. In a perfectly competitive market, firms are:
A) Price makers
B) Price takers ✅
C) Price controllers
D) Colluding
Explanation: Competition prevents pricing power.
Q16. GDP measured at constant prices is known as:
A) Nominal GDP
B) Real GDP ✅
C) Per capita GDP
D) Gross national income
Explanation: Real GDP removes inflation effects.
Q17. Which of the following is a leading economic indicator?
A) Stock market performance ✅
B) GDP growth
C) Unemployment rate
D) Inflation rate
Explanation: Stock markets anticipate future activity.
Q18. If marginal propensity to consume (MPC) = 0.8, the multiplier is:
A) 2
B) 4 ✅
C) 5
D) 8
Explanation: Multiplier = 1/(1-MPC) = 1/0.2 = 5. Wait correction → should be 5 ✅.
Q19. An appreciation of domestic currency makes:
A) Exports cheaper, imports expensive
B) Exports expensive, imports cheaper ✅
C) Both exports and imports cheaper
D) Both exports and imports expensive
Explanation: Stronger currency reduces export competitiveness.
Q20. A monopolist maximizes profit where:
A) MC = MR ✅
B) AC = MR
C) MR = AR
D) MC = AR
Explanation: Profit-maximization occurs at MC = MR.
Q21. If two goods are substitutes, an increase in the price of one will:
A) Reduce demand for the other
B) Increase demand for the other ✅
C) Not affect the other
D) Increase supply of the other
Explanation: Consumers switch to substitutes when prices rise.
Q22. Which type of unemployment results from workers moving between jobs?
A) Structural
B) Frictional ✅
C) Cyclical
D) Seasonal
Explanation: Frictional unemployment comes from job transitions.
Q23. A country experiencing hyperinflation should:
A) Increase money printing
B) Adopt stricter monetary policy ✅
C) Cut interest rates
D) Increase subsidies
Explanation: Reducing money supply stabilizes currency.
Q24. The slope of the production possibility frontier (PPF) represents:
A) Marginal rate of substitution
B) Opportunity cost ✅
C) Total utility
D) Consumer surplus
Explanation: The slope shows trade-offs between goods.
Q25. Fiscal deficit occurs when:
A) Government spending = Government revenue
B) Government spending > Government revenue ✅
C) Government revenue > Government spending
D) Government debt is zero
Explanation: Excess expenditure creates a fiscal deficit.
Q26. Which market structure has significant barriers to entry and a single seller?
A) Oligopoly
B) Monopoly ✅
C) Monopolistic competition
D) Perfect competition
Explanation: Monopoly = single seller + high barriers.
Q27. In balance of payments, exports are recorded as:
A) Debits
B) Credits ✅
C) Liabilities
D) Errors
Explanation: Exports bring foreign currency, hence recorded as credit.
Q28. The concept of “comparative advantage” was introduced by:
A) Adam Smith
B) David Ricardo ✅
C) John Keynes
D) Milton Friedman
Explanation: Ricardo explained trade benefits from relative efficiency.
Q29. Which of the following would shift the aggregate demand curve to the right?
A) Decrease in consumer confidence
B) Increase in government expenditure ✅
C) Increase in interest rates
D) Decrease in investment
Explanation: Higher government spending boosts demand.
Q30. The Lorenz Curve is used to measure:
A) Inflation
B) Income inequality ✅
C) GDP growth
D) Trade balance
Explanation: The Lorenz Curve shows income distribution.
Q31. A central bank buying government securities in open market operations will:
A) Reduce money supply
B) Increase money supply ✅
C) Increase tax revenue
D) Reduce inflation directly
Explanation: Buying securities injects money into economy.
Q32. Which of the following is an example of a regressive tax?
A) Corporate tax
B) Sales tax ✅
C) Income tax
D) Wealth tax
Explanation: Sales tax burdens the poor more proportionally.
Q33. In international trade, a quota is:
A) A tax on imports
B) A restriction on the quantity of imports ✅
C) A subsidy on exports
D) A currency devaluation
Explanation: Quota limits volume of imports allowed.
Q34. Which type of inflation occurs when costs of production rise?
A) Demand-pull inflation
B) Cost-push inflation ✅
C) Structural inflation
D) Hyperinflation
Explanation: Rising costs = cost-push inflation.
Q35. If the price elasticity of demand is 0.5, demand is:
A) Elastic
B) Inelastic ✅
C) Unitary elastic
D) Perfectly elastic
Explanation: PED < 1 means inelastic demand.
Q36. Which of the following is included in GDP calculation?
A) Illegal activities
B) Intermediate goods
C) Final goods ✅
D) Second-hand sales
Explanation: Only final goods are counted to avoid double-counting.
Q37. An increase in productivity will:
A) Shift aggregate supply to the right ✅
B) Shift aggregate demand to the left
C) Increase unemployment
D) Increase costs
Explanation: Higher productivity increases supply capacity.
Q38. Which of the following is considered expansionary fiscal policy?
A) Increasing interest rates
B) Cutting government expenditure
C) Reducing taxes ✅
D) Increasing reserve ratio
Explanation: Tax cuts encourage spending.
Q39. If the natural rate of unemployment is 5% and actual unemployment is 9%, the economy is:
A) At full employment
B) Facing cyclical unemployment ✅
C) Overheating
D) Facing labor shortage
Explanation: Actual > natural → cyclical unemployment present.
Q40. Which of the following best explains “crowding out”?
A) Government borrowing reduces private investment ✅
B) Government spending reduces imports
C) Central bank reduces money supply
D) Private investment reduces consumption
Explanation: Higher govt borrowing raises interest rates, limiting private investment.
Q41. A depreciation of the domestic currency will likely:
A) Make imports cheaper
B) Make exports more competitive ✅
C) Increase capital inflows
D) Reduce aggregate demand
Explanation: Weaker domestic currency boosts exports.
Q42. Which of the following would most likely cause a leftward shift in the supply curve of wheat?
A) Improvement in farming technology
B) Increase in fertilizer costs ✅
C) Subsidies for farmers
D) Good weather conditions
Explanation: Higher costs reduce supply.
Q43. The Phillips Curve illustrates the relationship between:
A) Inflation and unemployment ✅
B) GDP and income inequality
C) Trade balance and exchange rate
D) Money supply and interest rate
Explanation: Shows trade-off between inflation & unemployment (short run).
Q44. Which of the following is considered a leakage in the circular flow of income?
A) Government spending
B) Investment
C) Savings ✅
D) Exports
Explanation: Savings reduce income flow unless reinvested.
Q45. Which international institution resolves trade disputes?
A) IMF
B) World Bank
C) WTO ✅
D) UN
Explanation: World Trade Organization ensures fair global trade practices.
Q46. If real GDP increases by 4% and nominal GDP increases by 7%, inflation is approximately:
A) 3% ✅
B) 4%
C) 7%
D) 11%
Explanation: Nominal GDP – Real GDP growth = inflation rate.
Q47. Which of the following best describes stagflation?
A) Low inflation with high GDP growth
B) High inflation with high growth
C) High inflation with high unemployment ✅
D) Low growth with deflation
Explanation: Stagflation = inflation + unemployment.
Q48. Which of the following is NOT a function of money?
A) Medium of exchange
B) Store of value
C) Unit of account
D) Source of production ✅
Explanation: Money facilitates transactions but is not a production factor.
Q49. Which factor is most likely to increase the long-run aggregate supply (LRAS)?
A) Increase in wages
B) Increase in labor productivity ✅
C) Increase in money supply
D) Increase in consumption
Explanation: Productivity growth expands LRAS.
Q50. If the marginal propensity to consume (MPC) is 0.8, the multiplier is:
A) 2
B) 4
C) 5 ✅
D) 10
Explanation: Multiplier = 1 / (1 – MPC) = 1 / 0.2 = 5.
That concludes Part 1 of our CFA Level 1 Economics Practice Questions (Q1–50). By now, you’ve reviewed key exam areas such as GDP, inflation, unemployment, trade, fiscal and monetary policies, and market structures. Consistent practice with these MCQs will help you retain core concepts and improve speed on exam day. Stay tuned for Part 2 (Q51–100), where we’ll cover advanced economics concepts with more exam-style questions and explanations.
👉 CFA Level I Economics Questions (51–100)
👉 CFA Level I Economics Questions (101–150)
Also, explore other CFA Level I topics:
📊 CFA Level I Ethics Practice Questions
📈 CFA Level I Quantitative Methods Practice Questions
📊 CFA Level I FRA Practice Questions
Keep practicing, and you’ll be well on your way to success in the CFA exam. 🚀