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Free Questions › CFA › Economics
Free CFA Economics Practice Questions & Answers
2,050 exam-style Economics questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 511
In prolonged contractions, companies eventually:
Select an option first.
Correct answer: C — Reduce costs aggressively, including layoffs
Explanation: ✔ Why correct: Deep contractions force aggressive cost cuts. ✘ Why others wrong: A, B, D: Opposite of contraction behavior.
Question 512
During contraction, capacity utilization is:
Select an option first.
Correct answer: B — Low
Explanation: ✔ Why correct: Weak demand reduces utilization. ✘ Why others wrong: A: Opposite. C & D: Incorrect.
Question 513
During contraction, banks typically:
Select an option first.
Correct answer: B — Become reluctant to lend
Explanation: ✔ Why correct: Bankruptcy risk rises, so banks tighten credit. ✘ Why others wrong: A, C, D: Opposite.
Question 514
Capital spending is highly sensitive to:
Select an option first.
Correct answer: B — Changes in economic activity
Explanation: ✔ Why correct: Investment is procyclical and volatile. ✘ Why others wrong: A, C, D: Not primary drivers.
Question 515
Capital spending is one of the most:
Select an option first.
Correct answer: B — Procyclical and volatile components
Explanation: ✔ Why correct: Investment fluctuates strongly with the cycle. ✘ Why others wrong: A: Not stable. C: Not countercyclical. D: Not government-controlled.
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Question 516
In recovery, capital spending is:
Select an option first.
Correct answer: B — Low but increasing
Explanation: ✔ Why correct: Firms begin reinvesting cautiously as conditions improve. ✘ Why others wrong: A: Too early for high spending. C & D: Incorrect.
Question 517
In recovery, firms focus capital spending on:
Select an option first.
Correct answer: B — Efficiency improvements
Explanation: ✔ Why correct: Early recovery emphasizes efficiency, not expansion. ✘ Why others wrong: A, C, D: Too large for early recovery.
Question 518
In recovery, orders first rise for:
Select an option first.
Correct answer: C — Software and tech hardware
Explanation: ✔ Why correct: High-obsolescence items (software, systems) are reinstated first. ✘ Why others wrong: A, B, D: Come later.
Question 519
In expansion, capacity utilization:
Select an option first.
Correct answer: B — Rises from low levels
Explanation: ✔ Why correct: Firms use more capacity as demand rises. ✘ Why others wrong: A: Opposite. C & D: Incorrect.
Question 520
In expansion, firms begin focusing on:
Select an option first.
Correct answer: B — Capacity expansion
Explanation: ✔ Why correct: Rising demand pushes firms to expand capacity. ✘ Why others wrong: A, C, D: Opposite of expansion.
Question 521
Orders for capital equipment are important because:
Select an option first.
Correct answer: B — They are leading indicators of future capital spending
Explanation: ✔ Why correct: Orders precede shipments and signal future investment. ✘ Why others wrong: A, C, D: Not their purpose.
Question 522
In slowdown, interest rates tend to be:
Select an option first.
Correct answer: B — High
Explanation: ✔ Why correct: Central banks raise rates to cool overheating. ✘ Why others wrong: A, C, D: Not typical in slowdown.
Question 523
In slowdown, companies continue placing orders because:
Select an option first.
Correct answer: B — They operate near capacity
Explanation: ✔ Why correct: Firms still run near capacity at the peak. ✘ Why others wrong: A, C, D: Not accurate for slowdown.
Question 524
A historical example of overinvestment in slowdown is:
Select an option first.
Correct answer: B — Fiber-optic overinvestment of late 1990s
Explanation: ✔ Why correct: The text cites fiber-optic overinvestment as a slowdown example. ✘ Why others wrong: A, C, D: Not the example given.
Question 525
In contraction, capital spending:
Select an option first.
Correct answer: B — Halts and orders are canceled
Explanation: ✔ Why correct: Firms stop new orders and cancel existing ones. ✘ Why others wrong: A, C, D: Opposite.
Question 526
In contraction, initial cutbacks in capital spending:
Select an option first.
Correct answer: B — Can be sharp and deepen the downturn
Explanation: ✔ Why correct: Sharp cuts amplify the downturn. ✘ Why others wrong: A: Not mild. C & D: Incorrect.
Question 527
In contraction, maintenance spending:
Select an option first.
Correct answer: C — Is scaled back
Explanation: ✔ Why correct: Firms cut maintenance to save cash. ✘ Why others wrong: A, B, D: Opposite.
Question 528
In contraction, which equipment is cut first?
Select an option first.
Correct answer: B — Technology and light equipment
Explanation: ✔ Why correct: Short lead-time tech equipment is cut first. ✘ Why others wrong: A, C, D: Cut later.
Question 529
Cuts in heavy equipment occur:
Select an option first.
Correct answer: B — Late in contraction
Explanation: ✔ Why correct: Heavy equipment cuts intensify as contraction matures. ✘ Why others wrong: A, C, D: Incorrect timing.
Question 530
Credit cycles influence business cycles because:
Select an option first.
Correct answer: B — Credit availability affects investment and spending
Explanation: ✔ Why correct: Credit availability drives investment and consumption. ✘ Why others wrong: A: False. C & D: Not primary drivers.
Question 531
Financial cycles tend to be:
Select an option first.
Correct answer: B — Longer and more volatile
Explanation: ✔ Why correct: Financial cycles are longer, deeper, and sharper. ✘ Why others wrong: A, C, D: Incorrect.
Question 532
Recessions with house and equity price busts are:
Select an option first.
Correct answer: C — Longer and deeper
Explanation: ✔ Why correct: Financial disruptions worsen recessions. ✘ Why others wrong: A & B: Opposite. D: Incorrect.
Question 533
Recoveries with rapid credit growth are:
Select an option first.
Correct answer: B — Strong
Explanation: ✔ Why correct: Credit expansion fuels strong recoveries. ✘ Why others wrong: A, C, D: Opposite.
Question 534
Financial variables can help explain:
Select an option first.
Correct answer: B — The size of expansions or contractions
Explanation: ✔ Why correct: Financial variables co-vary with economic cycles. ✘ Why others wrong: A, C, D: Too narrow.
Question 535
Credit cycles are visualized as:
Select an option first.
Correct answer: B — Longer waves than business cycles
Explanation: ✔ Why correct: Credit cycles have longer, deeper waves. ✘ Why others wrong: A, C, D: Incorrect.
Question 536
Workforce adjustments lag the cycle because:
Select an option first.
Correct answer: B — Hiring and firing are costly
Explanation: ✔ Why correct: Training and hiring costs cause delays. ✘ Why others wrong: A: Opposite. C: False. D: Incorrect.
Question 537
In contraction, companies try to liquidate:
Select an option first.
Correct answer: B — Inventories
Explanation: ✔ Why correct: Firms sell unsold inventory to raise cash. ✘ Why others wrong: A: Cash is preserved. C & D: Not first priority.
Question 538
In contraction, banks tighten lending because:
Select an option first.
Correct answer: A — Bankruptcy risk rises
Explanation: ✔ Why correct: Higher default risk reduces lending. ✘ Why others wrong: B, C, D: Not the cause.
Question 539
Capital spending is procyclical because:
Select an option first.
Correct answer: B — Profits and cash flows rise and fall with the cycle
Explanation: ✔ Why correct: Investment follows profitability and demand. ✘ Why others wrong: A, C, D: Incorrect.
Question 540
In recovery, interest rates tend to be:
Select an option first.
Correct answer: B — Low
Explanation: ✔ Why correct: Low rates support early-cycle investment. ✘ Why others wrong: A, C, D: Not typical.
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