Free CFA Level II Economics Practice Questions

Economics on the CFA Level II exam tests currency valuation models (covered and uncovered interest rate parity), economic growth theories, and the effects of regulation on financial markets. Weighted 5-10% (CFA Institute).

79 Questions
30 Easy
23 Medium
26 Hard
2026 Syllabus

Sample Questions

Question 1 Easy
The Solow residual in growth accounting represents:
Solution
C is correct.

The Solow residual is calculated as the difference between total GDP growth and the weighted contributions of capital and labor growth. It represents total factor productivity (TFP) growth—the portion of economic growth attributable to factors other than increased quantities of inputs. These factors include technological progress, improvements in education and workforce skills, better institutions, economies of scale, and improved resource allocation.
Question 2 Medium
Using the vignette data for China, the TFP growth rate is closest to:
Solution
A is correct.

Using the Cobb-Douglas growth accounting equation:
ΔY/Y=ΔA/A+α(ΔK/K)+(1−α)(ΔL/L)\Delta Y/Y = \Delta A/A + \alpha(\Delta K/K) + (1-\alpha)(\Delta L/L)
Given: GDP growth = 5.2%, capital growth = 6.8%, labor growth = −0.3%-0.3\%, and α=0.50\alpha = 0.50:
5.2%=ΔA/A+0.50(6.8%)+0.50(−0.3%)5.2\% = \Delta A/A + 0.50(6.8\%) + 0.50(-0.3\%)
5.2%=ΔA/A+3.40%−0.15%5.2\% = \Delta A/A + 3.40\% - 0.15\%
5.2%=ΔA/A+3.25%5.2\% = \Delta A/A + 3.25\%
ΔA/A=5.2%−3.25%=1.95%\Delta A/A = 5.2\% - 3.25\% = 1.95\%
China's TFP growth of 1.95% indicates meaningful technological progress, though the majority of GDP growth still comes from capital accumulation, which contributes 3.40 percentage points.
Question 3 Hard
Based on the vignette data, Valeria's labor productivity growth rate (growth in output per worker) is closest to:
Solution
C is correct.

Labor productivity growth (growth in output per worker, Δ(Y/L)/(Y/L)\Delta (Y/L)/(Y/L)) equals GDP growth minus labor force growth:

Labor productivity growth=ΔY/Y−ΔL/L=3.5%−1.2%=2.3%\text{Labor productivity growth} = \Delta Y/Y - \Delta L/L = 3.5\% - 1.2\% = 2.3\%

Alternatively, using the intensive form of the growth accounting equation:
Δ(Y/L)/(Y/L)=ΔA/A+α×(ΔK/K−ΔL/L)\Delta (Y/L)/(Y/L) = \Delta A/A + \alpha \times (\Delta K/K - \Delta L/L)
=0.5%+0.38×(4.2%−1.2%)= 0.5\% + 0.38 \times (4.2\% - 1.2\%)
=0.5%+0.38×3.0%= 0.5\% + 0.38 \times 3.0\%
=0.5%+1.14%=1.64%= 0.5\% + 1.14\% = 1.64\%

Using the simpler approach (GDP growth minus labor growth), labor productivity growth is 2.3%, which is the closest answer.
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