Free CFA Level I Economics Practice Questions
Economics on the CFA Level I exam covers microeconomic and macroeconomic principles, monetary and fiscal policy, international trade, and currency exchange rates. Weighted 6-9% of the exam (CFA Institute).
Sample Questions
Question 1
Easy
In a Cournot duopoly, each firm:
Solution
C is correct.
In the Cournot model, duopolists choose their output quantities simultaneously and independently, each taking the rival's quantity as given (the Cournot-Nash assumption). The equilibrium output lies between the competitive output and the monopoly output.
In the Cournot model, duopolists choose their output quantities simultaneously and independently, each taking the rival's quantity as given (the Cournot-Nash assumption). The equilibrium output lies between the competitive output and the monopoly output.
Question 2
Medium
A natural monopoly arises when:
Solution
B is correct.
A natural monopoly exists when the minimum efficient scale of production is so large relative to market demand that one firm can serve the entire market at a lower average total cost than multiple firms. This typically occurs in industries with very high fixed costs and low marginal costs, such as utilities.
A natural monopoly exists when the minimum efficient scale of production is so large relative to market demand that one firm can serve the entire market at a lower average total cost than multiple firms. This typically occurs in industries with very high fixed costs and low marginal costs, such as utilities.
Question 3
Hard
A country operates under a currency board arrangement. If the domestic money supply must be fully backed by foreign reserves, which of the following is a key limitation of this system?
Solution
B is correct.
Under a currency board, every unit of domestic currency must be backed by foreign exchange reserves, severely limiting the central bank's ability to expand the monetary base. This means it cannot act as a lender of last resort during banking crises by injecting liquidity freely, making the financial system more vulnerable to bank runs.
Under a currency board, every unit of domestic currency must be backed by foreign exchange reserves, severely limiting the central bank's ability to expand the monetary base. This means it cannot act as a lender of last resort during banking crises by injecting liquidity freely, making the financial system more vulnerable to bank runs.