Economics is a key section of the CFA Level 1 curriculum, and practicing topic-specific questions is one of the most effective ways to build exam confidence. In this Part 2 set of CFA Level 1 Economics MCQs (Q51–100), we cover core exam concepts such as inflation, unemployment, fiscal & monetary policy, economic growth, trade, and demand-supply relationships. Each question comes with the correct answer and a clear explanation to help you understand both the reasoning and the exam approach.
These practice questions are carefully designed to match the style and difficulty level of the actual CFA exam, making them an excellent resource for candidates preparing for upcoming sessions. Whether you are revising before the exam or just beginning your study journey, these MCQs will strengthen your understanding and improve recall under time pressure.
📘 CFA Level 1 Economics – Part 2 (Q51–100)
Q51. Which of the following will NOT shift the aggregate demand curve?
A) Change in consumer spending
B) Change in government spending
C) Change in investment
D) Change in price level ✅
Explanation: Price level changes cause movement along the curve, not shifts.
Q52. An economy is said to be in a recession if:
A) GDP contracts for two consecutive quarters ✅
B) Inflation exceeds 10%
C) Unemployment falls below 3%
D) Government deficit increases
Explanation: Standard definition of recession = two consecutive quarters of negative GDP growth.
Q53. Which of the following is an example of expansionary fiscal policy?
A) Raising interest rates
B) Reducing government spending
C) Increasing taxes
D) Increasing infrastructure spending ✅
Explanation: Expansionary fiscal = more government spending or tax cuts.
Q54. Which exchange rate system allows currency values to fluctuate according to market forces?
A) Fixed exchange rate
B) Crawling peg
C) Managed float
D) Free float ✅
Explanation: Free float = determined by supply & demand with no central bank intervention.
Q55. What is the opportunity cost of holding money?
A) Interest foregone ✅
B) Inflation
C) Unemployment
D) Depreciation of capital
Explanation: By holding cash, investors lose potential interest income.
Q56. Which of the following is most likely a supply-side policy?
A) Tax rebates to consumers
B) Subsidies for R&D ✅
C) Increase in money supply
D) Increase in welfare payments
Explanation: Supply-side policies improve long-run productive capacity (R&D subsidies).
Q57. The natural rate of unemployment includes:
A) Frictional and structural unemployment ✅
B) Cyclical and frictional unemployment
C) Seasonal and cyclical unemployment
D) Structural and cyclical unemployment
Explanation: Natural rate = frictional + structural, excludes cyclical.
Q58. If the price elasticity of demand (PED) is greater than 1, demand is:
A) Perfectly inelastic
B) Inelastic
C) Elastic ✅
D) Unit elastic
Explanation: PED > 1 = elastic demand (quantity change > price change).
Q59. Which of the following would cause an appreciation of a country’s currency?
A) Higher domestic inflation
B) Increase in imports
C) Higher interest rates ✅
D) Larger trade deficit
Explanation: Higher interest rates attract foreign investment → stronger currency.
Q60. The law of diminishing returns states that:
A) Adding more labor to fixed capital eventually reduces marginal output ✅
B) Output always increases with more inputs
C) Marginal cost always falls with more production
D) Total utility decreases with consumption
Explanation: Beyond a point, extra units of input add less to output.
Q61. A tariff is best described as:
A) Tax on exports
B) Tax on imports ✅
C) Subsidy on imports
D) Quota on imports
Explanation: Tariff = government-imposed tax on imported goods.
Q62. In the IS-LM model, the LM curve shifts if there is a change in:
A) Money supply ✅
B) Fiscal deficit
C) Government spending
D) Taxes
Explanation: LM curve depends on money market; monetary policy shifts LM.
Q63. Which of the following is an automatic stabilizer?
A) Unemployment benefits ✅
B) Infrastructure spending
C) Interest rate cuts
D) Defense spending
Explanation: Automatic stabilizers kick in without new government action (e.g., welfare, benefits).
Q64. Which of the following is the largest component of GDP in most economies?
A) Government spending
B) Net exports
C) Consumption ✅
D) Investment
Explanation: Household consumption usually makes up 60–70% of GDP.
Q65. If the reserve requirement is 20%, the money multiplier is:
A) 2
B) 4
C) 5 ✅
D) 10
Explanation: Money multiplier = 1 / reserve ratio = 1 / 0.2 = 5.
Q66. An economy operating inside its production possibility frontier (PPF) indicates:
A) Full employment
B) Unused resources ✅
C) Maximum efficiency
D) Increasing opportunity cost
Explanation: Inside PPF = underutilization of resources.
Q67. A country running a persistent trade deficit is most likely to experience:
A) Currency appreciation
B) Rising unemployment
C) Capital inflows ✅
D) Declining government spending
Explanation: Deficits often financed by foreign capital inflows.
Q68. Which type of unemployment arises from economic downturns?
A) Cyclical ✅
B) Structural
C) Seasonal
D) Frictional
Explanation: Cyclical = unemployment due to recessions.
Q69. Which of the following would shift the short-run aggregate supply (SRAS) curve rightward?
A) Increase in oil prices
B) Decrease in wages ✅
C) Higher inflation expectations
D) Increase in taxes
Explanation: Lower costs of production → more supply.
Q70. Which theory suggests that countries should specialize where they have the lowest opportunity cost?
A) Absolute advantage
B) Comparative advantage ✅
C) Heckscher-Ohlin
D) Mercantilism
Explanation: Comparative advantage theory by David Ricardo.
Q71. The Laffer Curve illustrates the relationship between:
A) Tax rates and government revenue ✅
B) Inflation and unemployment
C) GDP and money supply
D) Trade balance and exchange rates
Explanation: Shows revenue first rises with taxes, then falls at high rates.
Q72. Which of the following monetary policies would reduce inflation?
A) Lowering reserve requirements
B) Increasing money supply
C) Raising policy interest rates ✅
D) Reducing taxes
Explanation: Higher rates contract credit, lowering inflation.
Q73. Which type of good has a positive income elasticity of demand?
A) Inferior good
B) Giffen good
C) Normal good ✅
D) Complement good
Explanation: Demand rises as income rises.
Q74. Which policy is most effective against structural unemployment?
A) Monetary easing
B) Retraining programs ✅
C) Increasing exports
D) Expansionary fiscal policy
Explanation: Structural unemployment requires skill adaptation.
Q75. Which of the following is an example of a public good?
A) Food
B) Clothing
C) National defense ✅
D) Automobiles
Explanation: Public goods are non-rival and non-excludable.
Q76. A country’s central bank buys government securities in the open market. This action will:
A) Increase money supply ✅
B) Decrease money supply
C) Raise interest rates
D) Decrease consumption
Explanation: Open market purchases inject liquidity → money supply rises, interest rates fall.
Q77. Which of the following is an example of price discrimination?
A) Charging higher prices in one city than another
B) Offering student discounts ✅
C) Increasing prices after inflation
D) Charging different taxes on goods
Explanation: Price discrimination = same product, different prices for different groups.
Q78. The Phillips Curve shows the relationship between:
A) Inflation and unemployment ✅
B) Money supply and GDP
C) Investment and consumption
D) Government spending and inflation
Explanation: Phillips curve: inverse short-run relationship between inflation & unemployment.
Q79. If a good is inferior, what happens when consumer income increases?
A) Demand increases
B) Demand decreases ✅
C) Supply decreases
D) Price decreases
Explanation: Inferior goods have negative income elasticity.
Q80. The substitution effect of a price decrease means:
A) Consumers buy more of the cheaper good ✅
B) Consumers buy less of the good
C) Firms reduce production
D) Government lowers taxes
Explanation: Consumers substitute away from more expensive goods toward cheaper ones.
Q81. Which of the following would lead to demand-pull inflation?
A) Oil price increase
B) Higher wages
C) Rapid increase in consumer spending ✅
D) Decrease in aggregate demand
Explanation: Demand-pull inflation occurs when aggregate demand > aggregate supply.
Q82. A perfectly competitive firm maximizes profit where:
A) MR = AR
B) MR = MC ✅
C) AR = MC
D) Price = AVC
Explanation: Profit maximization condition = marginal revenue = marginal cost.
Q83. Which trade policy limits the quantity of imports allowed?
A) Tariff
B) Quota ✅
C) Subsidy
D) Dumping
Explanation: Quotas restrict import quantities directly.
Q84. If MPC = 0.75, what is the simple spending multiplier?
A) 2
B) 3
C) 4 ✅
D) 5
Explanation: Multiplier = 1 / (1 – MPC) = 1 / 0.25 = 4.
Q85. A monopolist will set output where:
A) P = MC
B) MR = MC ✅
C) P = MR
D) AR = MR
Explanation: Monopolists also maximize profit at MR = MC, but price > MC.
Q86. An increase in productivity will:
A) Shift aggregate demand right
B) Shift aggregate supply right ✅
C) Increase unemployment
D) Reduce GDP
Explanation: Higher productivity reduces costs → SRAS shifts right.
Q87. Which of the following measures includes both inflation and unemployment?
A) Phillips Curve
B) Misery Index ✅
C) Laffer Curve
D) IS-LM Model
Explanation: Misery Index = inflation rate + unemployment rate.
Q88. Which of the following describes stagflation?
A) High unemployment + low inflation
B) High inflation + high unemployment ✅
C) Low GDP growth + low unemployment
D) High GDP growth + low inflation
Explanation: Stagflation = stagnation (low growth + unemployment) + inflation.
Q89. Which type of economic integration allows free trade among members but independent external policies?
A) Customs union
B) Free trade area ✅
C) Common market
D) Monetary union
Explanation: Free trade areas remove internal tariffs but keep external independence.
Q90. The Ricardian equivalence theory suggests:
A) Government borrowing increases national saving
B) Government borrowing has no effect on demand ✅
C) Deficits reduce investment
D) Taxes are better than debt
Explanation: Households anticipate future taxes and save more, offsetting government borrowing.
Q91. Which policy tool is most effective in fighting demand-pull inflation?
A) Expansionary fiscal policy
B) Contractionary monetary policy ✅
C) Cutting taxes
D) Subsidies
Explanation: Tighter monetary policy reduces demand pressures.
Q92. If the demand for money increases, the LM curve will:
A) Shift right
B) Shift left ✅
C) Not change
D) Become horizontal
Explanation: Higher demand for money → less liquidity → LM shifts left.
Q93. Which measure of inflation excludes food and energy prices?
A) Consumer Price Index (CPI)
B) Producer Price Index (PPI)
C) Core inflation ✅
D) GDP deflator
Explanation: Core inflation removes volatile food and energy.
Q94. Which of the following is an example of structural unemployment?
A) Seasonal layoffs in farming
B) Recession-based layoffs
C) Workers lacking skills for new industries ✅
D) Students entering the workforce
Explanation: Structural unemployment arises from mismatches between skills and jobs.
Q95. Which of the following would cause a movement ALONG the demand curve?
A) Change in income
B) Change in price ✅
C) Change in taste
D) Change in population
Explanation: Movements along the curve = due to price changes only.
Q96. If aggregate demand decreases, in the short run:
A) Prices rise
B) Output falls ✅
C) Wages increase
D) SRAS shifts left
Explanation: Lower demand → lower output & possibly lower prices.
Q97. What is the GDP deflator used for?
A) Adjusting nominal GDP for inflation ✅
B) Measuring unemployment
C) Measuring exports
D) Comparing income levels
Explanation: GDP deflator = Nominal GDP / Real GDP × 100.
Q98. Which of the following is most likely to increase a country’s long-run growth rate?
A) Higher consumption
B) Increased investment in technology ✅
C) Trade protection
D) Expansionary monetary policy
Explanation: Long-run growth depends on productivity improvements (tech, capital).
Q99. In the short run, an increase in money supply typically:
A) Lowers interest rates ✅
B) Raises interest rates
C) Has no effect
D) Reduces GDP
Explanation: More money supply → liquidity ↑ → rates ↓.
Q100. Which of the following goods is most likely to be price inelastic?
A) Luxury cars
B) Designer handbags
C) Salt ✅
D) Airline tickets
Explanation: Essentials like salt are price inelastic (demand barely changes).
You’ve now completed CFA Level 1 Economics Part 2 (Q51–100), which builds on fundamental principles while testing deeper applications of macroeconomics, monetary systems, and market structures. Practicing such exam-style questions not only helps with memorization but also prepares you for the problem-solving mindset required in the CFA exam.
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
To maximize your preparation, make sure you work through all parts in sequence. Start with Part 1 (Q1–50) for the basics, then move through Parts 2, 3, and 4 for a complete 200-question economics practice set. By combining consistent practice with CFA Institute’s official material, you’ll be well-equipped for exam day.
Next, continue to CFA Level 1 Economics Part 3 (Q101–150) for advanced-level questions with detailed solutions.