CFA COURSE PPA FEB UI

Problems : Monetary and Fiscal Policy

CONCEPT CHECKERS

1. Both monetary and fiscal policy are used to:

A. balance the budget.
B. achieve economic targets.
C. redistribute income and wealth.

2. Which of the following statements is least accurate? The existence and use of money:
A. permits individuals to perform economic transactions.
B. requires the central bank to control the supply of currency.
C. increases the efficiency of transactions compared to a barter system.

3. Assume the Federal Reserve purchases $1 billion of securities in the open market. What
is the maximum increase in the money supply that can result from this action, if the

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required reserve ratio is 15%?
A. $850 million.
B. $1.00 billion.
C. $6.67 billion.

4. If money neutrality holds, the effect of an increase in the money supply is:
A. higher prices.
B. higher output.
C. lower unemployment.

5. If the money supply is increasing and velocity is decreasing:

A. prices will decrease.
B. real GDP will increase.
C. the impact on prices and real GDP is uncertain.

6. According to the quantity theory of money, if nominal GDP is $7 trillion, the price index
is 150, and the money supply is $1 trillion, then the velocity of the money supply is
closest to:
A. 4.7.
B. 7.0.
C. 10.5.

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7. The money supply curve is perfectly inelastic because the:
A. money supply is independent of interest rates.
B. money demand schedule is downward-sloping.
C. money supply is dependent upon interest rates.

8. The Fisher effect states that the nominal interest rate is equal to the real rate plus:
A. actual inflation.
B. average inflation.
C. expected inflation

9. A central bank’s policy goals least likely include:

A. price stability.
B. minimizing long-term interest rates.
C. maximizing the sustainable growth rate of the economy.

10. Which of the following is least likely a function or objective of a central bank?
A. Issuing currency.
B. Lending money to government agencies.
C. Keeping inflation within an acceptable range.

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11. A country that targets a stable exchange rate with another country’s currency least likely:
A. accepts the inflation rate of the other country.
B. will sell its currency if its foreign exchange value rises.
C. must also match the money supply growth rate of the other country.

12. A central bank conducts monetary policy primarily by altering the:

A. policy rate.
B. inflation rate.
C. long-term interest rate.

13. Purchases of securities in the open market by the monetary authorities are least likely to
increase:
A. excess reserves.
B. cash in investor accounts.
C. the interbank lending rate.

14. An increase in the policy rate will most likely lead to an increase in:
A. business investment in fixed assets.
B. consumer spending on durable goods.
C. the foreign exchange value of the domestic currency.

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15. If a country’s inflation rate is below the central bank’s target rate, the central bank is most
likely to:
A. sell government securities.
B. increase the reserve requirement.
C. decrease the overnight lending rate

16. Suppose an economy has a real trend rate of 2%. The central bank has set an inflation
target of 4.5%. To achieve the target, the central bank has set the policy rate at 6%.
Monetary policy is most likely:
A. balanced.
B. expansionary.
C. contractionary.

17. Monetary policy is most likely to fail to achieve its objectives when the economy is:
A. growing rapidly.
B. experiencing deflation.
C. experiencing disinflation.

18. A government enacts a program to subsidize farmers with an expansive spending

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program of $10 billion. At the same time, the government enacts a $10 billion tax
increase over the same period. Which of the following statements best describes the
impact on aggregate demand?
A. Lower growth because the tax increase will have a greater effect.
B. No effect because the tax and spending effects just offset each other.
C. Higher growth because the spending increase will have a greater effect.

19. A government reduces spending by $50 million. The tax rate is 30%, and consumers
exhibit a marginal propensity to consume of 80%. The change in aggregate demand
caused by the change in government spending is closest to:
A. –$66 million.
B. –$114 million.
C. –$250 million.

20. Sales in the retail sector have been sluggish, and consumer confidence has recently
declined, indicating fewer planned purchases. In response, the president sends an
expansionary government spending plan to the legislature. The plan is submitted on
March 30, and the legislature refines and approves the terms of the spending plan on June
30. What type of fiscal plan is being considered, and what type of delay did the plan
experience between March 30 and June 30?
Fiscal plan Type of lag
A. Discretionary Recognition
B. Automatic Action
C. Discretionary Action

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21. A government is concerned about the timing of the impact of fiscal policy changes and is
considering requiring the compilation and reporting of economic statistics weekly, rather
than quarterly. The new reporting frequency is intended to decrease the:
A. action lag.
B. impact lag.
C. recognition lag.

22. In the presence of tight monetary policy and loose fiscal policy, the most likely effect on
interest rates and the private sector share in GDP are:
Interest rates Share of private sector
A. lower lower
B. higher higher
C. higher lower

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 CFA COURSE PPA FEB UI
Problems : International Trade and Capital Flows

CONCEPT CHEKERS

1. The income from a financial investment in Country P by a citizen of Country Q is most

likely included in:
A. Country P’s GDP but not its GNP.
B. Country Q’s GNP and GDP.
C. Country P’s GDP and GNP

2. Which of the following effects is most likely to occur in a country that increases its
openness to international trade?
A. Increased prices of consumer goods.
B. Greater specialization in domestic output.
C. Decreased employment in exporting industries.

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3. Which of the following statements about international trade is least accurate? If two
countries have different opportunity costs of production for two goods, by engaging in
trade:
A. each country gains by importing the good for which it has a comparative advantage.
B. each country can achieve a level of consumption outside its domestic production
possibility frontier.
C. the low opportunity cost producer of each good will export to the high opportunity
cost producer of that good.

4. With regard to the Ricardian and Heckscher-Ohlin models of international trade, the
amount of capital relative to labor within a country is a factor in:
A. both of these models.
B. neither of these models.
C. only one of these models.

5. An agreement with another country to limit the volume of goods and services sold to
them is best described as a:
A. quota.
B. voluntary export restraint.
C. minimum domestic content rule.

6. The least likely result of import quotas and voluntary export restraints is:
A. increased revenue for the government.
B. a decrease in the quantity of imports of the product.

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 C. a shift in production toward higher-cost suppliers.

7. Which of the following groups would be most likely to suffer losses from the imposition
of a tariff on steel imports?
A. Domestic steel producers.
B. Workers in the domestic auto industry.
C. Workers in the domestic steel industry.

8. The most likely motivation for establishing a trading bloc is to:

A. increase economic welfare in the member countries.
B. increase tariff revenue for the member governments.
C. protect domestic industries in the member economies.

9. In which type of regional trade agreement are economic policies conducted independently
by the member countries, while labor and capital are free to move among member
countries?
A. Free trade area.
B. Common market.
C. Economic union.

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10. Which of the following is least likely a component of the current account?
A. Unilateral transfers.
B. Payments for fixed assets.
C. Payments for goods and services.

11. A current account deficit is most likely to decrease as a result of an increase in:
A. domestic savings.
B. private investment.
C. the fiscal budget deficit.

12. Which international organization is primarily concerned with providing economic

assistance to developing countries?
A. World Bank.
B. World Trade Organization.
C. International Monetary Fund

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 CFA COURSE PPA FEB UI
Problems: Currency Exchange Rates

CONCEPT CHEKERS

1. One year ago, the nominal exchange rate for USD/EUR was 1.300. Since then, the real
exchange rate has increased by 3%. This most likely implies that:
A. the nominal exchange rate is less than USD/EUR 1.235.
B. the purchasing power of the euro has increased approximately 3% in terms of U.S.
goods.
C. inflation in the euro zone was approximately 3% higher than inflation in the United
States.

2. Sell-side participants in the foreign exchange market are most likely to include:
A. banks.
B. hedge funds.
C. insurance companies.

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3. Suppose that the quote for British pounds (GBP) in New York is USD/GBP 1.3110. What
is the quote for U.S. dollars (USD) in London (GBP/USD)?
A. 0.3110.
B. 0.7628.
C. 1.3110.

4. The Canadian dollar (CAD) exchange rate with the Japanese yen (JPY) changes from
JPY/CAD 75 to JPY/CAD 78. The CAD has:
A. depreciated by 3.8%, and the JPY has appreciated by 4.0%.
B. appreciated by 3.8%, and the JPY has depreciated by 4.0%.
C. appreciated by 4.0%, and the JPY has depreciated by 3.8%.

5. Today’s spot rate for the Indonesian rupiah (IDR) is IDR/USD 2,400.00, and the New
Zealand dollar trades at NZD/USD 1.6000. The NZD/IDR cross rate is:
A. 0.00067.
B. 1,492.53.
C. 3,840.00.

6. The NZD is trading at USD/NZD 0.3500, and the SEK is trading at NZD/SEK 0.3100. The
USD/SEK cross rate is:
A. 0.1085.
B. 8.8573.
C. 9.2166.

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7. The spot CHF/GBP exchange rate is 1.3050. In the 180-day forward market, the
CHF/GBP exchange rate is –42.5 points. The 180-day forward CHF/GBP exchange rate is
closest to:
A. 1.2625.
B. 1.3008.
C. 1.3093.

8. The current spot rate for the British pound in terms of U.S. dollars is $1.533 and the 180-
day forward rate is $1.508. Relative to the pound, the dollar is trading closest to a 180-day
forward:
A. discount of 1.63%.
B. premium of 1.66%.
C. discount of 1.66%

9. The annual interest rates in the United States (USD) and Sweden (SEK) are 4% and 7%
per year, respectively. If the current spot rate is SEK/USD 9.5238, then the 1-year
forward rate in SEK/USD is:
A. 9.2568.
B. 9.7985.

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C. 10.2884.

10. The annual risk-free interest rate is 10% in the United States (USD) and 4% in
Switzerland (CHF), and the 1-year forward rate is USD/CHF 0.80. Today’s USD/CHF
spot rate is closest to:
A. 0.7564
B. 0.8462.
C. 0.8888.

11. The spot rate on the New Zealand dollar (NZD) is NZD/USD 1.4286, and the 180-day
forward rate is NZD/USD 1.3889. This difference means:
A. interest rates are lower in the United States than in New Zealand.
B. interest rates are higher in the United States than in New Zealand.
C. it takes more NZD to buy one USD in the forward market than in the spot market.

12. The monetary authority of The Stoddard Islands will exchange its currency for U.S.
dollars at a one-for-one ratio. As a result, the exchange rate of the Stoddard Islands
currency with the U.S. dollar is 1.00, and many businesses in the Islands will accept U.S.
dollars in transactions. This exchange rate regime is best described as:
A. a fixed peg.
B. dollarization.
C. a currency board.

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13. A country that wishes to narrow its trade deficit devalues its currency. If domestic demand
for imports is perfectly price-inelastic, whether devaluing the currency will result in a
narrower trade deficit is least likely to depend on:
A. the size of the currency devaluation.
B. the country’s ratio of imports to exports.
C. price elasticity of demand for the country’s exports

14. A devaluation of a country’s currency to improve its trade deficit would most likely
benefit a producer of:
A. luxury goods for export.
B. export goods that have no close substitutes.
C. an export good that represents a relatively small proportion of consumer expenditures.

15. Other things equal, which of the following is most likely to decrease a country’s trade
deficit?
A. Increase its capital account surplus.
B. Decrease expenditures relative to income.
C. Decrease domestic saving relative to domestic investment.

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