Economics

    Exam weight 6–9%
    142 questions in the bank
    6 subtopics

    Economics rewards clear direction-of-effect reasoning far more than computation. Most questions ask what happens to something when something else moves, and the reliable candidates are the ones who can trace the chain in one pass rather than recall a conclusion.

    What you need to be able to do

    • Distinguish a movement along a curve from a shift of it
    • Match a market structure to its pricing and profit implications
    • Trace a monetary or fiscal action through to output, rates, and the currency
    • Apply covered and uncovered interest rate parity to a quoted exchange rate

    Where candidates lose marks

    Currency quote conventions. Half the marks lost in exchange rates come from reading the base and price currencies the wrong way round.

    10 free Economics practice questions

    Real questions from the CFAQuiz bank, one or two per subtopic, with the full explanation. No account needed.

    1
    Aggregate Output and Growth
    medium
    ECON-AOG-05

    Real GDP grows by 3.5% and population grows by 1.2% over a year. What is the exact growth rate of real GDP per capita?

    1. A.2.2722%
    2. B.2.30%
    3. C.4.70%
    Show answer and explanation

    Correct answer: A

    Per capita real GDP growth is the ratio of total real GDP growth to population growth minus 1:

    (1+0.0351+0.012)−1=1.0351.012−1=1.022722−1=0.022722=2.2722%\left(\frac{1 + 0.035}{1 + 0.012}\right) - 1 = \frac{1.035}{1.012} - 1 = 1.022722 - 1 = 0.022722 = 2.2722\%
    • Option B (2.30%): Uses the approximation gpc≈gY−gpop=3.5%−1.2%=2.30%g_{pc} \approx g_Y - g_{pop} = 3.5\% - 1.2\% = 2.30\%, ignoring compounding.
    • Option C (4.70%): Adds rates 3.5%+1.2%3.5\% + 1.2\%, which is conceptually wrong (population growth reduces per capita growth).
    2
    Currency Exchange Rates
    medium
    ECON-FX-QUOTE-05

    A client wants to sell GBP for USD. The dealer’s GBP/USD quote (USD per GBP) is 1.2970–1.2990. If the client sells 1,000,000 GBP, how many USD will they receive?

    1. A.$1,299,000
    2. B.$1,297,000
    3. C.$1,298,000
    Show answer and explanation

    Correct answer: B

    For GBP/USD, the dealer buys GBP (base) at the bid. The client selling GBP receives the bid (1.2970 USD/GBP).

    USD received=1,000,000×1.2970=1,297,000\text{USD received} = 1{,}000{,}000 \times 1.2970 = 1{,}297{,}000
    • Option A uses the ask (1.2990), which applies when the client buys GBP.
    • Option C uses the midrate: 1.2970+1.29902=1.2980\frac{1.2970 + 1.2990}{2} = 1.2980; 1,000,000×1.2980=1,298,0001{,}000{,}000 \times 1.2980 = 1{,}298{,}000.
    3
    Demand and Supply
    medium
    ECON-DS-05

    Given linear inverse demand and supply: P = 50 − 0.5Q (demand) and P=10+0.25QP = 10 + 0.25Q (supply). What is consumer surplus at the competitive equilibrium?

    1. A.355.56
    2. B.1,333.33
    3. C.711.11
    Show answer and explanation

    Correct answer: C

    First find equilibrium by setting demand equal to supply:

    50−0.5Q=10+0.25Q50 - 0.5Q = 10 + 0.25Q 40=0.75Q40 = 0.75Q Q∗=400.75=53.3333Q^* = \frac{40}{0.75} = 53.3333

    Price at equilibrium:

    P∗=50−0.5(53.3333)=50−26.6667=23.3333P^* = 50 - 0.5(53.3333) = 50 - 26.6667 = 23.3333

    Choke price (where Q = 0) on demand is 50. Consumer surplus (triangle under demand above P∗P^*):

    CS=12×(50−23.3333)×53.3333\text{CS} = \tfrac{1}{2} \times (50 - 23.3333) \times 53.3333 =12×26.6667×53.3333=711.11= \tfrac{1}{2} \times 26.6667 \times 53.3333 = 711.11
    • Option A uses the supply intercept instead of the choke price: 12×(23.3333−10)×53.3333=12×13.3333×53.3333=355.56\tfrac{1}{2} \times (23.3333 - 10) \times 53.3333 = \tfrac{1}{2} \times 13.3333 \times 53.3333 = 355.56.
    • Option B incorrectly uses the demand Q-intercept (100) instead of Q∗Q^*: 12×(50−23.3333)×100=1333.33\tfrac{1}{2} \times (50 - 23.3333) \times 100 = 1333.33.
    4
    Firms and Market Structures
    easy
    ECO-FMS-02

    A price-taking firm faces a market price of $12. At the output at which it would produce if it stays open, the firm's average variable cost is $10 and its average total cost is $14. In the short run, what should the firm do?

    1. A.Produce in the short run and incur losses.
    2. B.Shut down because price is below average total cost.
    3. C.Produce because price exceeds average total cost.
    Show answer and explanation

    Correct answer: A

    In perfect competition, the short-run shutdown rule is to produce if P≥AVCP \geq AVC. Here, P=12P = 12 and AVC=10AVC = 10, so the firm should produce, even though P<ATCP < ATC, and incur a loss.

    • Option B is wrong because the shutdown comparison is to AVC, not ATC; since P>AVCP > AVC, the firm should not shut down.
    • Option C is wrong because P=12<ATC=14P = 12 < ATC = 14; price does not exceed average total cost.
    5
    International Trade
    easy
    ECON-IT-04

    A small country wants to reduce imports by a fixed amount. Compare imposing an import tariff that achieves this reduction with imposing a binding import quota of the same quantity when the government gives import licenses away for free to domestic firms. Which statement is most accurate?

    1. A.Government revenue is higher under the quota than under the tariff.
    2. B.The deadweight loss is lower under the quota than under the tariff.
    3. C.Domestic price rises by the same amount in both cases, but under the quota the rents accrue to domestic license holders rather than the government.
    Show answer and explanation

    Correct answer: C

    For a small country, a binding quota set to match the import reduction from a tariff raises the domestic price by the same amount as the tariff. The key difference is who captures the rents.

    • Option A is wrong: With free license allocation, government revenue under the quota is zero, whereas the tariff raises government revenue.
    • Option B is wrong: With the same import reduction, the deadweight loss is the same; the difference lies in rent distribution, not efficiency.

    Correct: Under the quota with free domestic licenses, quota rents accrue to domestic license holders; under the tariff, the government collects tariff revenue.

    6
    Monetary and Fiscal Policy
    medium
    ECON-MFP-5

    Which statement best characterizes policy implementation lags?

    A central bank can change its policy rate without new legislation, whereas fiscal measures typically require legislative approval.

    1. A.Monetary policy generally has shorter inside lags but longer outside lags than fiscal policy.
    2. B.Fiscal policy typically has shorter inside lags and shorter outside lags than monetary policy.
    3. C.Both monetary and fiscal policy have long inside lags because central banks require legislative approval for routine rate changes.
    Show answer and explanation

    Correct answer: A

    Monetary policy decisions can be made and enacted quickly (short inside lags) but take time to work through the economy (longer outside lags). Fiscal policy usually faces long inside lags (planning/legislation) but, once implemented, can affect demand more directly (shorter outside lags).

    • Option B is wrong because fiscal policy generally has longer inside lags, not shorter.
    • Option C is wrong because central banks do not require legislative approval for routine policy rate changes, so monetary inside lags are not typically long.
    7
    Aggregate Output and Growth
    medium
    ECON-AOG-06

    Potential real GDP growth equals growth in labor productivity compounded with growth in aggregate hours. If labor productivity grows by 4.0% and aggregate hours grow by 3.0%, what is the exact potential real GDP growth rate?

    1. A.7.00%
    2. B.7.12%
    3. C.4.00%
    Show answer and explanation

    Correct answer: B

    Potential growth is the compounded product of productivity and hours growth minus 1:

    (1+0.040)×(1+0.030)−1=1.04×1.03−1=1.0712−1=0.0712=7.12%(1 + 0.040) \times (1 + 0.030) - 1 = 1.04 \times 1.03 - 1 = 1.0712 - 1 = 0.0712 = 7.12\%
    • Option A (7.00%): Simply adds rates (4.0%+3.0%4.0\% + 3.0\%), ignoring the cross term from compounding.
    • Option C (4.00%): Ignores growth in aggregate hours, using productivity growth only.
    8
    Currency Exchange Rates
    medium
    ECON-FX-CIP-07

    Which statement about forward premiums/discounts under covered interest parity (CIP) is most accurate?

    1. A.The currency with the lower nominal interest rate will trade at a forward premium relative to the higher-rate currency.
    2. B.Under CIP, the higher-interest-rate currency trades at a forward premium to eliminate arbitrage.
    3. C.Under CIP, the forward premium equals the difference in inflation rates between the two countries.
    Show answer and explanation

    Correct answer: A

    Under CIP, the no-arbitrage forward premium/discount equals the nominal interest rate differential. Therefore, the currency with the lower interest rate trades at a forward premium relative to the higher-rate currency.

    • Option B reverses the direction: the higher-rate currency trades at a forward discount, not a premium, under CIP.
    • Option C confuses CIP with PPP/UIP: the CIP relation ties the forward premium to interest rates, not inflation.
    9
    Demand and Supply
    medium
    ECO-DS-01

    In a competitive market, demand and supply are given by: Qd = 180 − 4P and Qs=20+2PQs = 20 + 2P, where P is the price per unit. What is the equilibrium price?

    1. A.33.33
    2. B.80.00
    3. C.26.67
    Show answer and explanation

    Correct answer: C

    Set Qd = Qs and solve for P.

    180−4P=20+2P180 - 4P = 20 + 2P 160=6P160 = 6P P=1606=26.67P = \frac{160}{6} = 26.67

    Therefore, the equilibrium price is 26.67 (Option C).

    • Option A (33.33) adds the intercepts instead of subtracting: P=180+204+2=2006=33.33P = \frac{180 + 20}{4 + 2} = \frac{200}{6} = 33.33
    • Option B (80.00) incorrectly subtracts the slopes in the denominator: P=180−204−2=1602=80.00P = \frac{180 - 20}{4 - 2} = \frac{160}{2} = 80.00
    10
    Firms and Market Structures
    hard
    ECO-FMS-04

    A market has linear demand given by P = 100 − Q and constant marginal cost MC = 40. Assume no fixed costs. What is the deadweight loss (DWL) from monopoly relative to perfect competition?

    1. A.$450
    2. B.$900
    3. C.$0
    Show answer and explanation

    Correct answer: A

    Under perfect competition, price equals marginal cost.

    Qc:100−Q=40⇒Qc=60Q_c: 100 - Q = 40 \Rightarrow Q_c = 60 Pc=40P_c = 40

    For a linear demand P=100−QP = 100 - Q, marginal revenue is MR=100−2QMR = 100 - 2Q. Set MR=MCMR = MC for monopoly output.

    100−2Qm=40⇒Qm=30100 - 2Q_m = 40 \Rightarrow Q_m = 30 Pm=100−Qm=70P_m = 100 - Q_m = 70

    Deadweight loss is the triangle between QmQ_m and QcQ_c with height Pm−MCP_m - MC:

    DWL=12×(Qc−Qm)×(Pm−MC)=0.5×30×30=450DWL = \tfrac{1}{2} \times (Q_c - Q_m) \times (P_m - MC) = 0.5 \times 30 \times 30 = 450
    • Option B calculates the rectangle area instead of the triangle: (Qc−Qm)×(Pm−MC)=30×30=900(Q_c - Q_m)\times(P_m - MC) = 30 \times 30 = 900.
    • Option C incorrectly uses Pc−MCP_c - MC as the height: 12×30×(40−40)=0\tfrac{1}{2} \times 30 \times (40 - 40) = 0.

    132 more Economics questions

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