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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 871
A deflationary trap is characterized by:
Select an option first.
Correct answer: B — Falling prices, weak demand, rising real debt
Explanation: ✔ Why correct: Deflation reduces demand and increases real debt burdens. Wrong: A, C, D: Not deflationary.
Question 872
When rates hit zero, conventional monetary policy becomes:
Select an option first.
Correct answer: B — Ineffective
Explanation: ✔ Why correct: Zero lower bound prevents further rate cuts. Wrong: A, C, D: Incorrect.
Question 873
Quantitative easing (QE) is best described as:
Select an option first.
Correct answer: B — Large-scale asset purchases by the central bank
Explanation: ✔ Why correct: QE expands reserves by buying assets. Wrong: A, C, D: Fiscal or unrelated tools.
Question 874
QE is operationally similar to:
Select an option first.
Correct answer: A — Open market purchases
Explanation: ✔ Why correct: QE is essentially large-scale open market purchases. Wrong: B, C, D: Not similar.
Question 875
QE aims to:
Select an option first.
Correct answer: B — Increase lending and broad money growth
Explanation: ✔ Why correct: QE increases reserves to stimulate lending. Wrong: A, C, D: Opposite.
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Question 876
A risk of QE is that banks may:
Select an option first.
Correct answer: B — Hold excess reserves instead of lending
Explanation: ✔ Why correct: Banks may prefer safety over lending in weak economies. Wrong: A, C, D: Not typical.
Question 877
QE in the UK focused on purchasing:
Select an option first.
Correct answer: B — Gilts with 3–5 year maturity
Explanation: ✔ Why correct: The Bank of England targeted medium-term gilts. Wrong: A, C, D: Not the assets purchased.
Question 878
QE in the United States initially focused on:
Select an option first.
Correct answer: B — Mortgage-backed securities
Explanation: ✔ Why correct: The Fed bought MBS issued/guaranteed by Fannie Mae and Freddie Mac. Wrong: A, C, D: Not the focus.
Question 879
QE1 was followed by QE2 because:
Select an option first.
Correct answer: B — QE1 did not sufficiently stimulate the economy
Explanation: ✔ Why correct: The Fed judged the economy had not responded enough. Wrong: A, C, D: Not true.
Question 880
QE2 involved purchasing:
Select an option first.
Correct answer: B — $600 billion of long-dated Treasuries
Explanation: ✔ Why correct: QE2 targeted long-term Treasury bonds. Wrong: A, C, D: Not correct.
Question 881
QE3 focused on purchasing:
Select an option first.
Correct answer: B — Agency mortgage-backed securities
Explanation: ✔ Why correct: QE3 bought $40 billion/month of agency MBS. Wrong: A, C, D: Not the assets purchased.
Question 882
QE3 continued until:
Select an option first.
Correct answer: B — The labor market improved substantially
Explanation: ✔ Why correct: QE3 was tied to labor market improvement. Wrong: A, C, D: Not the trigger.
Question 883
A risk of QE is that central banks may:
Select an option first.
Correct answer: A — Accumulate bad assets
Explanation: ✔ Why correct: Buying risky assets exposes the central bank to losses. Wrong: B, C, D: Not QE risks.
Question 884
If a central bank suffers losses on QE assets, it risks:
Select an option first.
Correct answer: B — Loss of confidence in fiat money
Explanation: ✔ Why correct: Losses undermine trust in the currency issuer. Wrong: A, C, D: Not consequences.
Question 885
A key limitation of monetary policy is that central banks cannot control:
Select an option first.
Correct answer: B — How much money households deposit
Explanation: ✔ Why correct: Deposits depend on private behavior. Wrong: A, C, D: Not monetary limitations.
Question 886
Another limitation is that central banks cannot control:
Select an option first.
Correct answer: A — Bank willingness to lend
Explanation: ✔ Why correct: Banks may refuse to lend even with high reserves. Wrong: B, C, D: Not monetary issues.
Question 887
Because banks may not lend, central banks cannot always control:
Select an option first.
Correct answer: B — The money supply
Explanation: ✔ Why correct: Money supply depends on credit creation. Wrong: A, C, D: Not directly affected.
Question 888
Monetary and fiscal policy interact because:
Select an option first.
Correct answer: A — They affect aggregate demand through different channels
Explanation: ✔ Why correct: Both influence demand but through different mechanisms. Wrong: B, C, D: Incorrect.
Question 889
Easy fiscal policy with tight monetary policy results in:
Select an option first.
Correct answer: B — Higher output and higher interest rates
Explanation: ✔ Why correct: Fiscal expansion raises output; tight money raises rates. Wrong: A, C, D: Not accurate.
Question 890
In easy fiscal/tight monetary conditions, government spending becomes:
Select an option first.
Correct answer: B — A larger share of GDP
Explanation: ✔ Why correct: Private demand is restrained by high rates. Wrong: A, C, D: Incorrect.
Question 891
Tight fiscal policy with easy monetary policy results in:
Select an option first.
Correct answer: B — Expanding private sector
Explanation: ✔ Why correct: Low rates stimulate private demand while government shrinks. Wrong: A, C, D: Not correct.
Question 892
Easy monetary + easy fiscal policy results in:
Select an option first.
Correct answer: B — Highly expansionary conditions
Explanation: ✔ Why correct: Both policies stimulate demand strongly. Wrong: A, C, D: Opposite.
Question 893
Tight monetary + tight fiscal policy results in:
Select an option first.
Correct answer: B — Falling demand
Explanation: ✔ Why correct: Both policies contract demand. Wrong: A, C, D: Not accurate.
Question 894
In tight monetary/tight fiscal conditions, interest rates:
Select an option first.
Correct answer: B — Rise
Explanation: ✔ Why correct: Tight money raises rates. Wrong: A, C, D: Incorrect.
Question 895
In tight monetary/tight fiscal conditions, aggregate demand falls because:
Select an option first.
Correct answer: B — Government spending falls and private demand weakens
Explanation: ✔ Why correct: Both public and private demand contract. Wrong: A, C, D: Not the mechanism.
Question 896
Easy fiscal policy increases output because:
Select an option first.
Correct answer: B — Government spending rises or taxes fall
Explanation: ✔ Why correct: Fiscal expansion boosts demand. Wrong: A, C, D: Not expansionary.
Question 897
Tight fiscal policy reduces output because:
Select an option first.
Correct answer: C — Spending falls or taxes rise
Explanation: ✔ Why correct: Fiscal contraction reduces demand. Wrong: A, B, D: Opposite.
Question 898
Easy monetary policy stimulates demand by:
Select an option first.
Correct answer: B — Lowering interest rates
Explanation: ✔ Why correct: Lower rates encourage borrowing and spending. Wrong: A, C, D: Not monetary stimulus.
Question 899
Tight monetary policy reduces demand by:
Select an option first.
Correct answer: B — Raising interest rates
Explanation: ✔ Why correct: Higher rates discourage borrowing. Wrong: A, C, D: Not contractionary.
Question 900
The effectiveness of fiscal policy depends partly on:
Select an option first.
Correct answer: A — Monetary policy stance
Explanation: ✔ Why correct: Fiscal effects differ under tight vs easy money. Wrong: B, C, D: Not primary.
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