✅ CFA Level 1 Economics MCQs (Part 4: Q151–175)
151. Which of the following is considered a leakage from the circular flow of income?
A. Government spending
B. Exports
C. Savings
D. Investment
Answer: C. Savings
Explanation: Savings reduce consumption expenditure and act as a leakage from the circular flow. Exports and investment are injections.
152. A country experiences both high inflation and unemployment. This situation is best described as:
A. Deflation
B. Hyperinflation
C. Stagflation
D. Disinflation
Answer: C. Stagflation
Explanation: Stagflation refers to stagnant growth combined with inflation and unemployment.
153. When the central bank decreases the reserve requirement, the money multiplier:
A. Increases
B. Decreases
C. Remains unchanged
D. Becomes zero
Answer: A. Increases
Explanation: Lower reserve requirements allow banks to lend more, increasing money supply through the multiplier effect.
154. If a country’s real GDP increases by 4% and population grows by 2%, the per capita GDP growth is:
A. 6%
B. 2%
C. 4%
D. 8%
Answer: B. 2%
Explanation: Per capita growth = real GDP growth – population growth = 4% – 2% = 2%.
155. Which of the following is NOT a tool of monetary policy?
A. Open market operations
B. Reserve requirements
C. Government spending
D. Discount rate
Answer: C. Government spending
Explanation: Government spending is fiscal policy, not monetary policy.
156. If the marginal propensity to consume (MPC) is 0.75, the spending multiplier is:
A. 2
B. 3
C. 4
D. 5
Answer: C. 4
Explanation: Multiplier = 1 / (1 – MPC) = 1 / (0.25) = 4.
157. An import quota differs from a tariff in that it:
A. Raises revenue for the government
B. Limits the quantity of imports
C. Encourages exports
D. Has no effect on domestic production
Answer: B. Limits the quantity of imports
Explanation: A quota restricts quantity, while a tariff raises price and generates revenue.
158. A country has a current account deficit. This implies:
A. Exports > Imports
B. Imports > Exports
C. Savings > Investment
D. Capital inflows are negative
Answer: B. Imports > Exports
Explanation: A current account deficit means the country spends more on imports than it earns from exports.
159. In the long run, inflation is caused primarily by:
A. Cost-push shocks
B. Demand shocks
C. Money supply growth
D. Exchange rate changes
Answer: C. Money supply growth
Explanation: In the long run, inflation is a monetary phenomenon linked to excessive money supply.
160. Which economic indicator is considered a “leading indicator”?
A. Unemployment rate
B. Housing starts
C. Inflation rate
D. GDP growth
Answer: B. Housing starts
Explanation: Housing starts are forward-looking and indicate future economic activity.
161. If the interest rate rises, the quantity of money demanded:
A. Increases
B. Decreases
C. Remains constant
D. Becomes infinite
Answer: B. Decreases
Explanation: Higher interest rates increase opportunity cost of holding money, reducing money demand.
162. Which of the following is an example of expansionary fiscal policy?
A. Increasing taxes
B. Reducing government spending
C. Lowering interest rates
D. Increasing government investment in infrastructure
Answer: D. Increasing government investment in infrastructure
Explanation: More government spending boosts aggregate demand, making it expansionary.
163. The Phillips curve shows the relationship between:
A. Inflation and unemployment
B. GDP and interest rates
C. Money supply and fiscal deficit
D. Consumption and investment
Answer: A. Inflation and unemployment
Explanation: The Phillips curve demonstrates an inverse relationship between inflation and unemployment in the short run.
164. If the price elasticity of demand for imports is greater than one, a depreciation of the domestic currency will likely:
A. Increase the trade deficit
B. Improve the trade balance
C. Have no impact
D. Increase imports
Answer: B. Improve the trade balance
Explanation: With elastic demand, depreciation makes imports costlier and exports cheaper, improving trade balance.
165. A decrease in corporate tax rates is most likely to:
A. Reduce aggregate demand
B. Increase investment spending
C. Increase government revenue
D. Reduce employment
Answer: B. Increase investment spending
Explanation: Lower taxes increase after-tax profits, encouraging businesses to invest.
166. The term “crowding out” in fiscal policy refers to:
A. Private investment decreasing due to government borrowing
B. Government debt being repaid by the central bank
C. Households reducing savings due to low interest rates
D. Imports displacing domestic production
Answer: A. Private investment decreasing due to government borrowing
Explanation: Government borrowing raises interest rates, discouraging private investment.
167. The law of comparative advantage states that:
A. Countries benefit by producing goods they can make most efficiently
B. A country should produce everything it can
C. Trade only benefits the wealthiest countries
D. All countries must have identical production costs
Answer: A. Countries benefit by producing goods they can make most efficiently
Explanation: Comparative advantage allows countries to specialize in goods with lower opportunity costs.
168. The long-run aggregate supply (LRAS) curve is:
A. Upward sloping
B. Horizontal
C. Vertical
D. Downward sloping
Answer: C. Vertical
Explanation: In the long run, output depends on resources and technology, not prices, hence LRAS is vertical.
169. An expansionary monetary policy is most likely to lead to:
A. Lower unemployment and higher inflation
B. Higher unemployment and lower inflation
C. Higher savings rates
D. Currency appreciation
Answer: A. Lower unemployment and higher inflation
Explanation: Expansionary policy increases money supply, boosting demand and employment but also raising inflation.
170. Which of the following best describes structural unemployment?
A. Caused by business cycle downturns
B. Caused by workers lacking skills needed by employers
C. Due to temporary layoffs
D. Caused by seasonal industries
Answer: B. Caused by workers lacking skills needed by employers
Explanation: Structural unemployment arises when there is a mismatch between workers’ skills and job requirements.
171. If a country’s currency appreciates, its exports will likely:
A. Increase
B. Decrease
C. Remain unchanged
D. Double
Answer: B. Decrease
Explanation: Appreciation makes exports more expensive abroad, reducing demand.
172. Which of the following is included in M1 money supply?
A. Savings deposits
B. Demand deposits
C. Bonds
D. Certificates of deposit
Answer: B. Demand deposits
Explanation: M1 includes cash and demand deposits, the most liquid forms of money.
173. The World Trade Organization (WTO) was established to:
A. Provide loans to developing countries
B. Oversee international trade rules and settle disputes
C. Control exchange rates
D. Manage global monetary policy
Answer: B. Oversee international trade rules and settle disputes
Explanation: WTO’s role is promoting fair global trade practices and resolving trade disputes.
174. A country’s Gini coefficient increases from 0.35 to 0.45. This implies:
A. More equal income distribution
B. Less equal income distribution
C. Higher GDP
D. Lower unemployment
Answer: B. Less equal income distribution
Explanation: A higher Gini coefficient means rising inequality.
175. If the economy is at full employment, an increase in aggregate demand will lead to:
A. Higher output without inflation
B. Higher unemployment
C. Higher prices (inflation) without output gains
D. Lower wages
Answer: C. Higher prices (inflation) without output gains
Explanation: At full employment, output cannot expand further, so extra demand causes inflation.
176. If the central bank sells government securities in the open market, the money supply will:
A. Increase
B. Decrease
C. Remain constant
D. Double
Answer: B. Decrease
Explanation: Selling securities withdraws money from circulation, reducing the money supply.
177. Which of the following best describes frictional unemployment?
A. Unemployment due to recession
B. Unemployment due to lack of skills
C. Temporary unemployment as workers change jobs
D. Unemployment caused by government policies
Answer: C. Temporary unemployment as workers change jobs
Explanation: Frictional unemployment arises when workers are between jobs or entering the labor market.
178. An increase in the price of crude oil, a key input, will likely cause:
A. A rightward shift in aggregate supply
B. A leftward shift in aggregate supply
C. A rightward shift in aggregate demand
D. No impact on supply
Answer: B. A leftward shift in aggregate supply
Explanation: Higher input costs reduce aggregate supply.
179. Which of the following is a function of the IMF (International Monetary Fund)?
A. Promote long-term development loans
B. Stabilize exchange rates and provide emergency lending
C. Regulate world trade
D. Set global interest rates
Answer: B. Stabilize exchange rates and provide emergency lending
Explanation: IMF provides financial assistance and monitors exchange rate stability.
180. A negative output gap occurs when:
A. Actual GDP > Potential GDP
B. Actual GDP < Potential GDP
C. Unemployment is below natural rate
D. Inflation is rising rapidly
Answer: B. Actual GDP < Potential GDP
Explanation: A negative output gap indicates underutilized resources and higher unemployment.
181. Which of the following is NOT part of the current account?
A. Trade balance
B. Net income from abroad
C. Unilateral transfers
D. Foreign direct investment
Answer: D. Foreign direct investment
Explanation: FDI is part of the financial account, not the current account.
182. When the economy is experiencing deflation, which policy is most appropriate?
A. Increase taxes
B. Reduce government spending
C. Expansionary monetary policy
D. Increase reserve requirements
Answer: C. Expansionary monetary policy
Explanation: Increasing money supply combats falling prices and stimulates demand.
183. The concept of diminishing marginal returns applies when:
A. Adding more inputs results in proportional increases in output
B. Adding more inputs results in smaller increases in output
C. Output falls as inputs increase
D. Output grows faster than inputs
Answer: B. Adding more inputs results in smaller increases in output
Explanation: Diminishing returns occur when additional input yields less extra output.
184. Which of the following is an example of a price floor?
A. Rent ceiling
B. Minimum wage
C. Import tariff
D. Export subsidy
Answer: B. Minimum wage
Explanation: A minimum wage sets a legal minimum price for labor, creating a price floor.
185. If inflation expectations rise, the short-run Phillips curve will:
A. Shift upward
B. Shift downward
C. Remain unchanged
D. Become vertical
Answer: A. Shift upward
Explanation: Higher inflation expectations raise the short-run inflation-unemployment trade-off.
186. Which of the following would lead to a depreciation of a country’s currency?
A. Higher interest rates
B. Increase in exports
C. Higher inflation
D. Capital inflows
Answer: C. Higher inflation
Explanation: Inflation reduces currency value, leading to depreciation.
187. The unemployment rate understates the true level of unemployment because:
A. It includes discouraged workers
B. It excludes discouraged workers
C. It includes underemployed workers
D. It excludes part-time workers
Answer: B. It excludes discouraged workers
Explanation: Discouraged workers not actively seeking jobs are excluded from official unemployment data.
188. In the long run, the effect of expansionary monetary policy on real output is:
A. Positive and permanent
B. Positive but temporary
C. Negative
D. Neutral
Answer: D. Neutral
Explanation: In the long run, monetary policy affects only prices (inflation), not real output.
189. A country with high capital inflows and low savings is likely to run:
A. A trade surplus
B. A trade deficit
C. Balanced trade
D. A budget surplus
Answer: B. A trade deficit
Explanation: Low savings and high inflows imply dependence on imports, creating deficits.
190. Which of the following would shift the demand curve for money to the right?
A. Lower real GDP
B. Higher real GDP
C. Lower interest rates
D. Reduced government spending
Answer: B. Higher real GDP
Explanation: Higher GDP increases transactions, raising money demand.
191. An example of a supply-side policy is:
A. Cutting taxes on investment
B. Increasing welfare benefits
C. Expanding government consumption
D. Printing more money
Answer: A. Cutting taxes on investment
Explanation: Supply-side policies aim to boost productive capacity by encouraging investment.
192. Which of the following is an example of cyclical unemployment?
A. A factory worker laid off during a recession
B. A farmer unemployed after harvest season
C. A programmer lacking required skills
D. A student entering the job market
Answer: A. A factory worker laid off during a recession
Explanation: Cyclical unemployment results from downturns in the business cycle.
193. When the aggregate demand curve shifts right, the equilibrium price level and real GDP will:
A. Both rise
B. Both fall
C. Price falls, GDP rises
D. Price rises, GDP falls
Answer: A. Both rise
Explanation: Higher aggregate demand increases both output and price level in the short run.
194. Which of the following is the best example of a public good?
A. Education
B. National defense
C. Roads
D. Healthcare
Answer: B. National defense
Explanation: Public goods are non-excludable and non-rival; defense fits both criteria.
195. Which of the following policies directly reduces structural unemployment?
A. Job retraining programs
B. Increasing unemployment benefits
C. Cutting interest rates
D. Expanding government spending
Answer: A. Job retraining programs
Explanation: Retraining equips workers with skills needed for available jobs.
196. If a country’s nominal GDP grows 10% while inflation is 6%, real GDP growth is approximately:
A. 16%
B. 6%
C. 4%
D. 10%
Answer: C. 4%
Explanation: Real GDP = Nominal GDP growth – Inflation = 10% – 6% = 4%.
197. An expansionary fiscal policy financed by borrowing may result in:
A. Lower interest rates
B. Crowding out of private investment
C. Lower government debt
D. Deflation
Answer: B. Crowding out of private investment
Explanation: Borrowing increases interest rates, discouraging private sector investment.
198. Which of the following is an automatic stabilizer?
A. Tax cuts
B. Unemployment insurance
C. Government subsidies
D. Infrastructure spending
Answer: B. Unemployment insurance
Explanation: Automatic stabilizers like unemployment benefits adjust without new policies, stabilizing demand.
199. The natural rate of unemployment includes:
A. Cyclical unemployment only
B. Frictional and structural unemployment
C. Seasonal unemployment only
D. No unemployment
Answer: B. Frictional and structural unemployment
Explanation: The natural rate excludes cyclical unemployment, including only structural and frictional types.
200. If the velocity of money is constant and real output is fixed, an increase in money supply will:
A. Raise prices proportionally
B. Lower prices
C. Increase output
D. Have no effect
Answer: A. Raise prices proportionally
Explanation: According to the Quantity Theory of Money (MV = PQ), with V and Q constant, increasing M raises P.
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