📘 CFA Level 1 Economics MCQs – Part 3 (Questions 101–150 with Answers & Explanations)
Q101. Which of the following is most likely to occur if a government increases its spending without increasing taxes?
A) Deflationary gap
B) Inflationary pressure
C) Increase in unemployment
D) Reduction in money supply
Answer: B) Inflationary pressure
Explanation: When government spending rises without matching tax revenue, aggregate demand increases. This can lead to inflationary pressure as demand outpaces supply, especially in the short run.
Q102. In the short run, when wages are sticky, an increase in aggregate demand will result in:
A) A decrease in output and employment
B) Higher output and lower unemployment
C) A decrease in the price level
D) No change in real GDP
Answer: B) Higher output and lower unemployment
Explanation: Sticky wages prevent immediate wage adjustments. As demand rises, firms produce more, hiring additional workers, reducing unemployment, and raising real GDP.
Q103. A monopolistically competitive firm differs from a perfectly competitive firm in that it:
A) Produces homogeneous goods
B) Faces a perfectly elastic demand curve
C) Can influence price due to product differentiation
D) Always earns abnormal profits in the long run
Answer: C) Can influence price due to product differentiation
Explanation: Monopolistic competition allows firms to differentiate products, giving them some pricing power. However, long-run profits are normal due to new entrants.
Q104. The primary goal of the World Trade Organization (WTO) is to:
A) Provide loans to developing countries
B) Promote global financial stability
C) Facilitate free trade by reducing trade barriers
D) Regulate currency exchange rates
Answer: C) Facilitate free trade by reducing trade barriers
Explanation: The WTO’s mission is to ensure smooth global trade, reduce tariffs, and resolve trade disputes among member countries.
Q105. If the marginal propensity to consume (MPC) is 0.8, the spending multiplier will be:
A) 1.25
B) 2
C) 4
D) 5
Answer: D) 5
Explanation: Spending multiplier = 1 ÷ (1 – MPC). With MPC = 0.8, multiplier = 1 ÷ (0.2) = 5.
Q106. An inverted yield curve typically indicates:
A) Strong economic growth
B) High inflation expectations
C) Upcoming recession
D) Rising interest rates
Answer: C) Upcoming recession
Explanation: An inverted yield curve occurs when short-term rates exceed long-term rates, often seen as a predictor of economic slowdown or recession.
Q107. Structural unemployment occurs when:
A) Workers are between jobs
B) There is insufficient demand for goods
C) Skills do not match available jobs
D) Seasonal industries reduce output
Answer: C) Skills do not match available jobs
Explanation: Structural unemployment arises from mismatches between workers’ skills and employers’ needs, often due to technological change or industry shifts.
Q108. Which policy is most appropriate to combat inflation caused by excessive demand?
A) Increase government spending
B) Decrease interest rates
C) Sell government securities in the open market
D) Reduce taxes
Answer: C) Sell government securities in the open market
Explanation: Selling securities contracts money supply, raises interest rates, and reduces aggregate demand, helping control demand-pull inflation.
Q109. In international economics, “comparative advantage” suggests that:
A) Countries should specialize in goods where they have the lowest absolute cost
B) Trade is beneficial only if one country has lower costs in all goods
C) Countries benefit by specializing in goods with the lowest opportunity cost
D) Trade should only occur between developed countries
Answer: C) Countries benefit by specializing in goods with the lowest opportunity cost
Explanation: Comparative advantage emphasizes relative efficiency. Even if one country is less efficient in all goods, both benefit from specialization based on opportunity cost.
Q110. The Phillips Curve represents the relationship between:
A) Inflation and unemployment
B) Interest rates and investment
C) Money supply and output
D) Savings and consumption
Answer: A) Inflation and unemployment
Explanation: The Phillips Curve shows an inverse short-run relationship between inflation and unemployment, though this trade-off breaks down in the long run.
Q111. If the central bank reduces reserve requirements for commercial banks, the immediate effect is likely to be:
A) A decrease in the money supply
B) An increase in lending capacity
C) Higher interest rates
D) Lower inflation
Answer: B) An increase in lending capacity
Explanation: Lower reserve requirements allow banks to lend a larger portion of deposits, increasing the money supply and credit creation.
Q112. Which of the following is NOT an example of fiscal policy?
A) Increasing government expenditure
B) Cutting personal income tax
C) Adjusting interest rates
D) Providing subsidies for renewable energy
Answer: C) Adjusting interest rates
Explanation: Fiscal policy involves taxation and spending decisions. Interest rates are part of monetary policy.
Q113. When the price elasticity of demand is greater than 1, a price reduction will:
A) Decrease total revenue
B) Increase total revenue
C) Not affect total revenue
D) Reduce quantity demanded
Answer: B) Increase total revenue
Explanation: Elastic demand means consumers are highly responsive. A lower price results in a proportionally larger increase in demand, raising total revenue.
Q114. Which of the following describes the “crowding-out effect”?
A) Private investment rises when government spending falls
B) Government borrowing reduces private sector investment
C) Rising consumption reduces private savings
D) Tax cuts lead to higher inflation
Answer: B) Government borrowing reduces private sector investment
Explanation: When governments borrow heavily, interest rates rise, making borrowing costlier for private investors, thus reducing private investment.
Q115. Which economic indicator is considered a “lagging indicator”?
A) Stock market performance
B) Unemployment rate
C) Consumer confidence index
D) Housing starts
Answer: B) Unemployment rate
Explanation: Unemployment reacts after changes in the economy, making it a lagging indicator. Stock prices and housing are leading indicators.
Q116. Which market structure typically results in the most efficient allocation of resources?
A) Monopoly
B) Oligopoly
C) Perfect competition
D) Monopolistic competition
Answer: C) Perfect competition
Explanation: Perfect competition ensures price equals marginal cost, achieving allocative and productive efficiency.
Q117. Purchasing Power Parity (PPP) suggests that exchange rates adjust to:
A) Equalize the interest rates between countries
B) Equalize the inflation rates between countries
C) Equalize the price of a basket of goods across countries
D) Equalize trade balances between countries
Answer: C) Equalize the price of a basket of goods across countries
Explanation: PPP theory states that in the long run, exchange rates adjust so identical goods have the same price globally when expressed in a common currency.
Q118. If the marginal cost (MC) is less than the average total cost (ATC), then:
A) ATC will increase
B) ATC will decrease
C) ATC remains constant
D) MC will equal ATC
Answer: B) ATC will decrease
Explanation: When MC < ATC, additional production lowers the average total cost, pulling ATC down.
Q119. Which of the following best explains why short-run aggregate supply (SRAS) slopes upward?
A) Sticky wages and prices
B) Perfect labor mobility
C) Constant returns to scale
D) Diminishing marginal utility
Answer: A) Sticky wages and prices
Explanation: In the short run, wages and prices adjust slowly, so firms increase output when price levels rise, causing SRAS to slope upward.
Q120. The natural rate of unemployment includes:
A) Only frictional unemployment
B) Frictional and structural unemployment
C) Cyclical unemployment
D) No unemployment
Answer: B) Frictional and structural unemployment
Explanation: The natural rate excludes cyclical unemployment. It reflects normal job search (frictional) and skill mismatches (structural).
Q121. An increase in the money supply in the long run will:
A) Increase real GDP
B) Reduce unemployment permanently
C) Increase only nominal variables like prices
D) Reduce inflation
Answer: C) Increase only nominal variables like prices
Explanation: In the long run, money is neutral—it does not affect real GDP or employment, but raises the price level.
Q122. Which type of inflation occurs when businesses face rising costs of production?
A) Demand-pull inflation
B) Cost-push inflation
C) Imported inflation
D) Structural inflation
Answer: B) Cost-push inflation
Explanation: Rising costs of wages, raw materials, or energy lead to cost-push inflation as firms raise prices to maintain margins.
Q123. In game theory, a Nash equilibrium occurs when:
A) Players choose strategies that maximize collective welfare
B) Each player chooses the best strategy given others’ choices
C) Firms collude to maximize profits
D) No dominant strategy exists
Answer: B) Each player chooses the best strategy given others’ choices
Explanation: At Nash equilibrium, no player benefits from unilaterally changing their strategy, given the strategies of others.
Q124. Which monetary policy tool is considered the most frequently used?
A) Discount rate
B) Open market operations
C) Reserve requirements
D) Credit rationing
Answer: B) Open market operations
Explanation: Central banks primarily use open market operations (buying/selling securities) to influence short-term interest rates and money supply.
Q125. Which of the following will cause a country’s currency to depreciate?
A) Higher domestic interest rates
B) Large trade surpluses
C) Expansionary monetary policy
D) Strong capital inflows
Answer: C) Expansionary monetary policy
Explanation: Lower interest rates from expansionary policy make domestic assets less attractive, reducing demand for the currency and causing depreciation.
Q126. What is the “law of diminishing marginal returns”?
A) Each additional unit of input eventually increases output at an increasing rate
B) Each additional unit of input eventually produces less additional output
C) Inputs and outputs always increase proportionally
D) Firms always benefit from adding more labor
Answer: B) Each additional unit of input eventually produces less additional output
Explanation: Beyond a certain point, adding more input (like labor) reduces the additional output gained, leading to diminishing returns.
Q127. A country’s GDP deflator measures:
A) Changes in export prices only
B) Changes in import prices only
C) The average price level of all goods and services produced domestically
D) The cost of a fixed basket of goods and services
Answer: C) The average price level of all goods and services produced domestically
Explanation: GDP deflator reflects the overall price level by comparing nominal GDP to real GDP.
Q128. Which of the following statements is TRUE regarding automatic stabilizers?
A) They require new legislation to be enacted
B) They magnify economic fluctuations
C) They include unemployment benefits and progressive taxes
D) They are discretionary fiscal tools
Answer: C) They include unemployment benefits and progressive taxes
Explanation: Automatic stabilizers work without new policies—progressive taxes and welfare reduce the severity of economic fluctuations.
Q129. A key limitation of GDP as a measure of economic well-being is that it:
A) Excludes government spending
B) Excludes imports
C) Does not measure non-market activities and income distribution
D) Does not include consumption
Answer: C) Does not measure non-market activities and income distribution
Explanation: GDP overlooks household work, environmental costs, and inequality, limiting its usefulness in measuring welfare.
Q130. Which of the following is most consistent with Keynesian economics?
A) Markets are always self-correcting
B) Government should not intervene in recessions
C) Fiscal stimulus can boost demand during downturns
D) Money supply is the sole driver of inflation
Answer: C) Fiscal stimulus can boost demand during downturns
Explanation: Keynes argued that active fiscal policy (government spending, tax cuts) can counteract recessions and restore demand.
Q131. Which of the following would cause the aggregate demand curve to shift right?
A) Increase in income taxes
B) Higher interest rates
C) Increase in consumer confidence
D) Decrease in government spending
Answer: C) Increase in consumer confidence
Explanation: When consumers are optimistic, they spend more, increasing aggregate demand.
Q132. Which unemployment type arises from technological changes that make some skills obsolete?
A) Frictional
B) Structural
C) Seasonal
D) Cyclical
Answer: B) Structural
Explanation: Structural unemployment occurs when worker skills do not match job requirements due to technological or industry shifts.
Q133. The IS curve in macroeconomics shows combinations of:
A) Inflation and unemployment
B) Interest rates and output where investment equals saving
C) Consumption and government spending
D) Imports and exports
Answer: B) Interest rates and output where investment equals saving
Explanation: The IS curve represents equilibrium in the goods market where investment = saving.
Q134. A perfectly inelastic demand curve is represented by:
A) A horizontal line
B) A vertical line
C) A downward-sloping curve
D) An upward-sloping curve
Answer: B) A vertical line
Explanation: Perfectly inelastic demand means quantity demanded does not change regardless of price.
Q135. Which type of economic integration involves free trade among members and a common external tariff?
A) Free trade area
B) Customs union
C) Common market
D) Economic union
Answer: B) Customs union
Explanation: A customs union eliminates internal trade barriers and applies a unified external tariff on imports.
Q136. Which of the following policies is contractionary fiscal policy?
A) Increasing government spending
B) Reducing taxes
C) Selling government bonds
D) Cutting public sector wages
Answer: D) Cutting public sector wages
Explanation: Contractionary fiscal policy reduces aggregate demand through lower spending or higher taxation. Cutting wages lowers government expenditure.
Q137. Which measure of money supply is the most liquid?
A) M1
B) M2
C) M3
D) L
Answer: A) M1
Explanation: M1 includes currency in circulation and checkable deposits—the most liquid form of money.
Q138. A monopolist maximizes profit where:
A) Price = Average cost
B) Marginal revenue = Marginal cost
C) Demand = Supply
D) Price = Marginal cost
Answer: B) Marginal revenue = Marginal cost
Explanation: Profit maximization occurs at the point where MR = MC.
Q139. 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
Answer: D) Source of production
Explanation: Money facilitates trade but is not itself a productive input.
Q140. Which economic concept explains why countries specialize in producing goods where they have lower opportunity costs?
A) Absolute advantage
B) Comparative advantage
C) Law of supply
D) Law of demand
Answer: B) Comparative advantage
Explanation: Comparative advantage leads to specialization and trade based on relative efficiency.
Q141. Which of the following is an example of expansionary monetary policy?
A) Raising the discount rate
B) Selling government bonds
C) Reducing reserve requirements
D) Increasing taxes
Answer: C) Reducing reserve requirements
Explanation: Lower reserve requirements allow banks to lend more, expanding the money supply.
Q142. If the price elasticity of supply is greater than 1, supply is considered:
A) Inelastic
B) Perfectly inelastic
C) Elastic
D) Unit elastic
Answer: C) Elastic
Explanation: Elastic supply means producers can respond strongly to price changes.
Q143. In the long run, monopolistic competition differs from perfect competition because:
A) Firms earn supernormal profits
B) Firms face downward-sloping demand curves due to product differentiation
C) Firms produce at minimum average cost
D) Prices equal marginal cost
Answer: B) Firms face downward-sloping demand curves due to product differentiation
Explanation: In monopolistic competition, differentiation gives firms some pricing power, unlike perfect competition.
Q144. What is the main goal of the World Trade Organization (WTO)?
A) To provide loans to developing countries
B) To regulate currency exchange rates
C) To promote free trade and resolve disputes
D) To set global interest rates
Answer: C) To promote free trade and resolve disputes
Explanation: The WTO reduces trade barriers and settles disputes among member nations.
Q145. Which of the following best explains the Phillips Curve in the short run?
A) Trade-off between inflation and unemployment
B) Relationship between wages and productivity
C) Connection between imports and exports
D) Relationship between taxes and investment
Answer: A) Trade-off between inflation and unemployment
Explanation: The Phillips Curve suggests lower unemployment comes with higher inflation in the short run.
Q146. Which of the following is NOT included in GDP calculations?
A) Government purchases
B) Exports
C) Intermediate goods
D) Consumer spending
Answer: C) Intermediate goods
Explanation: GDP includes only final goods and services to avoid double-counting.
Q147. In the foreign exchange market, an increase in demand for US dollars relative to euros will cause:
A) Dollar appreciation and euro depreciation
B) Dollar depreciation and euro appreciation
C) Both currencies to depreciate
D) Both currencies to appreciate
Answer: A) Dollar appreciation and euro depreciation
Explanation: Higher demand for dollars raises its value while lowering the value of euros.
Q148. If a country’s central bank unexpectedly tightens monetary policy, bond prices are likely to:
A) Increase
B) Decrease
C) Remain unchanged
D) Double
Answer: B) Decrease
Explanation: Higher interest rates reduce bond prices because yields rise.
Q149. Which of the following is an example of a public good?
A) Street lighting
B) Cell phones
C) Automobiles
D) Clothing
Answer: A) Street lighting
Explanation: Public goods are non-excludable and non-rivalrous, like national defense and street lights.
Q150. Which policy tool directly affects the supply of reserves in the banking system?
A) Open market operations
B) Government spending
C) Progressive taxation
D) Import tariffs
Answer: A) Open market operations
Explanation: By buying or selling securities, central banks control the reserves in the system, influencing money supply.
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