Economics - 2 - Free MCQ Practice Test with solutions, CFA Level 2

An analyst is evaluating the EUR/USD exchange rate. The current spot rate is 1.0800 USD per EUR. Annual inflation in the US is 4.2% and in the Eurozone is 1.8%. Using relative purchasing power parity, the expected spot rate (USD per EUR) in one year is closest to:

Which of the following most accurately distinguishes absolute purchasing power parity (PPP) from relative PPP?

A currency strategist gathers the following data: the spot rate for GBP/USD is 1.2500. The 1-year risk-free rate in the US is 5.0% and in the UK is 3.0%. Using covered interest rate parity, the 1-year forward rate (USD per GBP) is closest to:

An analyst notes that the 1-year forward rate for JPY/USD implies JPY appreciation of 2.5% relative to the current spot rate. The analyst states: “According to uncovered interest rate parity, this forward rate is an unbiased predictor of the future spot rate, and therefore the JPY is expected to appreciate by 2.5%.” The analyst’s statement is best described as:

A country reports the following international transactions for the year:

• Merchandise exports: $450 billion
• Merchandise imports: $380 billion
• Services exports: $120 billion
• Services imports: $90 billion
• Net primary income (investment income): −$30 billion
• Net secondary income (transfers): −$15 billion

The country’s current account balance is closest to:

A country records the following international transactions during the year:

• $5 billion in inbound foreign direct investment
• $2 billion in portfolio equity outflows by domestic investors
• $3 billion in sovereign bonds sold to foreign investors
• $1 billion transfer of intellectual property rights to a foreign government as part of an aid arrangement

Which transaction is most appropriately recorded in the capital account (rather than the financial account) of the balance of payments?

An economist analyzes the effects of expansionary fiscal policy in a small open economy characterized by a floating exchange rate and high international capital mobility. Under the Mundell-Fleming framework, expansionary fiscal policy in this economy is most likely to result in:

Under the Mundell-Fleming model, a small open economy operating under a fixed exchange rate with high international capital mobility implements an expansionary monetary policy. The most likely outcome is:

In a Solow growth model, output per worker is given by y = k^0.5. The savings rate is 30%, the depreciation rate is 5%, and the population growth rate is 1%. The steady-state output per worker is closest to:

Country Alpha and Country Beta share identical production functions, savings rates, depreciation rates, and population growth rates. Country Alpha, however, has meaningfully higher total factor productivity (TFP) than Country Beta. According to the neoclassical (Solow) growth model, which of the following best describes the long-run outcome?

Which of the following statements best distinguishes endogenous growth theory from the neoclassical (Solow) growth model?

An industry regulator established to protect consumer welfare has, over time, developed close relationships with the firms it oversees. The regulator consistently makes decisions favoring incumbent firms-blocking new entrants and approving above-market price increases. Senior executives from the regulated firms routinely join the regulatory agency in leadership roles. This scenario is best described as an example of:

An analyst is evaluating market concentration in the commercial banking sector. The five largest banks hold the following market shares: 28%, 22%, 18%, 12%, and 8%. The Herfindahl-Hirschman Index (HHI) calculated using only these five banks is closest to:

A real estate appraiser is valuing an industrial facility that is structurally sound and well-maintained. A newly established environmental protection zone adjacent to the property now restricts operating hours and mandates expensive emissions upgrades, significantly reducing the facility’s projected cash flows. The decline in the facility’s value is best attributed to:

An analyst enters into a forward contract to sell CAD and buy USD in 6 months at a pre-agreed forward rate. The analyst states: “My return is locked in regardless of what the spot rate turns out to be at contract expiry.” The analyst’s strategy is best described as an application of:

Country Z has run persistent current account deficits for five years. Its financial account has shown consistent surpluses as foreign investors purchase domestic bonds attracted by relatively high interest rates. An analyst argues that, despite short-term capital inflows, the currency will depreciate in the long run. This view is most consistent with:

The current spot rate is 7.20 CNY per USD. Annual inflation in China is 3.5% and in the US is 1.5%. Using relative purchasing power parity, the expected CNY/USD spot rate in one year is closest to:

An economist recommends that a developing country increase public investment in education and provide R&D subsidies to achieve sustained long-run economic growth. This policy recommendation is most consistent with:

A competition authority is reviewing a proposed merger between the second- and third-largest firms in a market. Before the merger, the top four firms hold market shares of 30%, 25%, 20%, and 15%, respectively. The second and third firms would combine to form a single entity. The post-merger HHI, calculated using the three remaining major firms, is closest to:

A country’s real GDP grew at 4.0% annually over the past decade. Labor input grew at 2.0% and capital input grew at 2.0%. The output elasticity of labor is 0.60 and the output elasticity of capital is 0.40. Using the growth accounting framework, total factor productivity (TFP) growth is closest to:

Which of the following transactions is most appropriately recorded in the financial account of the balance of payments?

A competition economist is reviewing the pharmaceutical sector. A regulator requires a 5–7 year drug approval process. A new entrant alleges this constitutes an anti-competitive barrier to entry. The four-firm concentration ratio in the sector is 82%. Which of the following statements about this market is least accurate?

An equity analyst covering a multinational consumer goods company notes that 40% of revenues originate from emerging markets where local inflation averages 8% annually, compared to 2% in developed markets. Spot exchange rates have been stable over the past year. The analyst projects that relative PPP will hold over the next three years. The analyst should most likely expect that:

The spot rate is 110.00 JPY/USD. The 1-year risk-free rate is 2.0% in the US and 0.5% in Japan. According to covered interest rate parity, the JPY is trading at a 1-year forward:

Two countries, Alpha and Beta, share identical production functions, savings rates, population growth rates, and depreciation rates. Country Alpha is currently operating below its steady-state capital per worker, while Country Beta is at its steady state. According to the neoclassical Solow growth model, which of the following best describes the expected future growth rates of the two countries?

A researcher runs a regression of the actual 1-year-ahead spot rate (S₁) on the current 1-year forward rate (F₀) using 120 monthly observations of the EUR/USD exchange rate. The regression output is shown below:

The critical t-value at the 5% significance level (two-tailed) is 1.96. Based solely on these results, which conclusion is most appropriate?

An economist seeks a theoretical framework to explain short-run exchange rate fluctuations driven primarily by changes in monetary policy and international capital flows. The most appropriate model to apply is:

A portfolio manager analyzes two healthcare companies. Company X operates in a market with an HHI of 2,800 and faces minimal regulatory oversight of pricing. Company Y operates in a market with an HHI of 1,200 that is subject to strict regulatory price controls, and the regulator has recently signaled more aggressive enforcement. From an asset valuation perspective, which company is most likely to sustain higher profit margins over time, and what is the primary risk to that assessment?

A country experiencing a large current account deficit depreciates its currency by 15%. An economist confirms that the Marshall-Lerner condition is satisfied. Following the depreciation, the current account balance will most likely:

A currency strategist must determine the 1-year forward exchange rate between two countries with materially different interest rates and moderate inflation differentials. Short-term capital flows are large and the currency market is highly liquid. The theoretically most appropriate model for pricing the 1-year forward exchange rate is: