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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 541
In expansion, earnings and cash flow generally:
Select an option first.
Correct answer: B — Rise strongly
Explanation: ✔ Why correct: Expansion features rising demand, higher sales, and stronger profits. ✘ Why others wrong: A & D: Opposite of expansion. C: Earnings do not stay flat; they rise.
Question 542
In expansion, companies increase capital spending because:
Select an option first.
Correct answer: B — They have rising earnings and cash flow
Explanation: ✔ Why correct: Higher profits and cash flow give firms the ability to invest. ✘ Why others wrong: A: Demand rises, not falls. C: Rates may rise later in expansion. D: No legal requirement.
Question 543
During expansion, capacity constraints may lead firms to:
Select an option first.
Correct answer: B — Expand capacity
Explanation: ✔ Why correct: Firms expand capacity to meet strong demand. ✘ Why others wrong: A, C, D: Opposite of expansion behavior.
Question 544
Orders for capital equipment are watched closely because they:
Select an option first.
Correct answer: B — Indicate future capital spending trends
Explanation: ✔ Why correct: Orders precede shipments and signal future investment. ✘ Why others wrong: A, C, D: Not their purpose.
Question 545
In slowdown, business conditions are:
Select an option first.
Correct answer: B — At peak levels but decelerating
Explanation: ✔ Why correct: Slowdown occurs at the peak, with strong but slowing activity. ✘ Why others wrong: A & C: Describe contraction. D: Incorrect.
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Question 546
In slowdown, interest rates tend to be:
Select an option first.
Correct answer: B — High to cool overheating
Explanation: ✔ Why correct: Central banks raise rates to prevent overheating. ✘ Why others wrong: A, C, D: Not typical in slowdown.
Question 547
In slowdown, companies often continue placing new orders because:
Select an option first.
Correct answer: B — They are still operating near capacity
Explanation: ✔ Why correct: Firms still run near full capacity at the peak. ✘ Why others wrong: A, C, D: Not accurate for slowdown.
Question 548
A classic example of overinvestment during slowdown is:
Select an option first.
Correct answer: B — Late-1990s fiber-optic overinvestment
Explanation: ✔ Why correct: The text cites fiber-optic overinvestment as a slowdown example. ✘ Why others wrong: A, C, D: Not the example referenced.
Question 549
In contraction, new capital orders are typically:
Select an option first.
Correct answer: B — Halted
Explanation: ✔ Why correct: Firms stop new orders as demand collapses. ✘ Why others wrong: A, C, D: Opposite of contraction behavior.
Question 550
In contraction, existing capital orders may be:
Select an option first.
Correct answer: B — Canceled
Explanation: ✔ Why correct: Firms cancel orders to conserve cash. ✘ Why others wrong: A, C, D: Not typical.
Question 551
Initial cutbacks in capital spending during contraction:
Select an option first.
Correct answer: B — Can be sharp and deepen the downturn
Explanation: ✔ Why correct: Sharp cuts amplify the recession. ✘ Why others wrong: A: Not mild. C & D: Incorrect.
Question 552
In contraction, maintenance spending is usually:
Select an option first.
Correct answer: B — Scaled back
Explanation: ✔ Why correct: Firms reduce maintenance to save cash. ✘ Why others wrong: A, C, D: Opposite.
Question 553
In contraction, the first equipment category cut is usually:
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 554
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 555
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 556
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 557
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 558
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 559
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 560
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 561
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 562
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 563
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 564
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.
Question 565
In recovery, capital spending focuses on:
Select an option first.
Correct answer: A — Efficiency improvements
Explanation: ✔ Why correct: Early recovery emphasizes efficiency, not expansion. ✘ Why others wrong: B, C, D: Too large for early recovery.
Question 566
In expansion, orders for heavy equipment:
Select an option first.
Correct answer: B — Increase
Explanation: ✔ Why correct: Firms expand capacity as demand rises. ✘ Why others wrong: A, C, D: Opposite.
Question 567
In slowdown, companies may still place new orders because:
Select an option first.
Correct answer: B — They operate near full capacity
Explanation: ✔ Why correct: Firms still run near capacity at the peak. ✘ Why others wrong: A, C, D: Not accurate.
Question 568
In contraction, cuts in heavy equipment spending:
Select an option first.
Correct answer: B — Occur later as the downturn matures
Explanation: ✔ Why correct: Heavy equipment cuts intensify later in contraction. ✘ Why others wrong: A: Too early. C & D: Incorrect.
Question 569
Inventory fluctuations occur because:
Select an option first.
Correct answer: C — Sales and production grow or decline at different speeds
Explanation: ✔ Why correct: Inventories rise or fall depending on mismatches between sales growth and production growth. ✘ Why others wrong: A & B: Only sometimes true. D: Inventories change frequently.
Question 570
The inventory–sales ratio measures:
Select an option first.
Correct answer: B — Inventories relative to sales levels
Explanation: ✔ Why correct: It shows how much inventory exists relative to sales volume. ✘ Why others wrong: A, C, D: Not what the ratio measures.
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