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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 1711
Open market purchases by the central bank generally:
Select an option first.
Correct answer: B — Lower interest rates
Explanation: ✔ Why correct: Purchases increase reserves, lowering rates. Wrong: A, C, D: Opposite.
Question 1712
Open market sales by the central bank generally:
Select an option first.
Correct answer: B — Raise interest rates
Explanation: ✔ Why correct: Sales drain reserves, raising rates. Wrong: A, C, D: Opposite.
Question 1713
The money multiplier effect depends on:
Select an option first.
Correct answer: B — Banks lending out available reserves
Explanation: ✔ Why correct: Lending expands deposits and broad money. Wrong: A: Reduces multiplier. C & D: Not the mechanism.
Question 1714
A central bank’s credibility is crucial because:
Select an option first.
Correct answer: B — It influences expectations about inflation
Explanation: ✔ Why correct: Credibility anchors inflation expectations. Wrong: A, C, D: Not accurate.
Question 1715
A central bank that loses credibility risks:
Select an option first.
Correct answer: B — Higher inflation and unstable expectations
Explanation: ✔ Why correct: Loss of trust leads to inflation fears and instability. Wrong: A, C, D: Not typical.
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Question 1716
The central bank’s role as supervisor of the banking system aims to:
Select an option first.
Correct answer: B — Ensure financial stability and soundness
Explanation: ✔ Why correct: Supervision ensures banks operate safely and protect depositors. Wrong: A, C, D: Not central bank responsibilities.
Question 1717
The discount rate in the United States is:
Select an option first.
Correct answer: B — The rate member banks pay when borrowing from the Federal Reserve
Explanation: ✔ Why correct: The discount rate is the Fed’s lending rate to member banks. ✘ Why others wrong: A, C, D: Not definitions of the discount rate.
Question 1718
The most important interest rate in US monetary policy is the:
Select an option first.
Correct answer: B — Federal funds rate
Explanation: ✔ Why correct: The fed funds rate is the key interbank overnight lending rate targeted by the FOMC. ✘ Why others wrong: A, C, D: Influenced by but not central to policy.
Question 1719
The federal funds rate is the rate on:
Select an option first.
Correct answer: B — Overnight interbank reserve lending
Explanation: ✔ Why correct: It is the overnight rate at which banks lend reserves to each other. ✘ Why others wrong: A, C, D: Not interbank reserve lending.
Question 1720
The FOMC influences the federal funds rate by:
Select an option first.
Correct answer: B — Open market operations
Explanation: ✔ Why correct: Buying or selling bonds changes bank reserves and moves the fed funds rate. ✘ Why others wrong: A & C: Fiscal policy. D: Not relevant.
Question 1721
When the central bank raises the policy rate, banks are more likely to:
Select an option first.
Correct answer: B — Reduce lending
Explanation: ✔ Why correct: Higher policy rates increase the penalty for running short of reserves. ✘ Why others wrong: A, C, D: Opposite or unrealistic.
Question 1722
Higher policy rates generally cause broad money growth to:
Select an option first.
Correct answer: B — Shrink
Explanation: ✔ Why correct: Higher rates discourage lending, slowing money creation. Wrong: A, C, D: Not typical.
Question 1723
Reserve requirements influence money supply because:
Select an option first.
Correct answer: A — Higher reserve requirements reduce banks’ ability to lend
Explanation: ✔ Why correct: Higher required reserves reduce the money multiplier. Wrong: B, C, D: Incorrect.
Question 1724
Reserve requirements are rarely used in developed economies because:
Select an option first.
Correct answer: B — They are disruptive to banks
Explanation: ✔ Why correct: Sudden changes force banks to halt lending to rebuild reserves. Wrong: A, C, D: Not accurate.
Question 1725
The Bank of England no longer uses:
Select an option first.
Correct answer: B — Minimum reserve requirements
Explanation: ✔ Why correct: The UK removed minimum reserve requirements. Wrong: A, C, D: Still used.
Question 1726
Reserve requirements remain widely used in:
Select an option first.
Correct answer: B — Emerging market economies
Explanation: ✔ Why correct: Emerging markets use them to control lending. Wrong: A, C, D: Not accurate.
Question 1727
Central banks manipulate money supply using:
Select an option first.
Correct answer: B — Open market operations, policy rates, and reserve requirements
Explanation: ✔ Why correct: These are the three primary monetary tools. Wrong: A & C: Fiscal tools. D: Only one tool.
Question 1728
The overarching goal of monetary policy is usually:
Select an option first.
Correct answer: B — Maintaining price stability
Explanation: ✔ Why correct: Price stability is the core mandate of most central banks. Wrong: A, C, D: Not primary goals.
Question 1729
The monetary transmission mechanism describes:
Select an option first.
Correct answer: B — How policy rates affect inflation through the economy
Explanation: ✔ Why correct: It explains how interest rate changes influence demand and inflation. Wrong: A, C, D: Not definitions.
Question 1730
A rise in the policy rate tends to:
Select an option first.
Correct answer: B — Reduce domestic demand
Explanation: ✔ Why correct: Higher rates reduce borrowing and spending. Wrong: A, C, D: Opposite or unrelated.
Question 1731
A stronger currency resulting from higher interest rates tends to:
Select an option first.
Correct answer: B — Reduce import prices
Explanation: ✔ Why correct: A stronger currency makes imports cheaper. Wrong: A, C, D: Opposite effects.
Question 1732
A stronger currency tends to reduce inflation because:
Select an option first.
Correct answer: B — Imports become cheaper
Explanation: ✔ Why correct: Cheaper imports reduce price pressures. Wrong: A, C, D: Not mechanisms.
Question 1733
The transmission mechanism works through:
Select an option first.
Correct answer: B — Interest rates, asset prices, exchange rates, expectations
Explanation: ✔ Why correct: These are the four main channels. Wrong: A, C, D: Too narrow.
Question 1734
Operational independence means a central bank:
Select an option first.
Correct answer: B — Controls interest rates but not inflation targets
Explanation: ✔ Why correct: Operational independence = freedom to set rates. Wrong: A, C, D: Not definitions.
Question 1735
Target independence means a central bank:
Select an option first.
Correct answer: A — Sets the inflation target itself
Explanation: ✔ Why correct: Target independence = freedom to define inflation goals. Wrong: B, C, D: Incorrect.
Question 1736
The ECB is:
Select an option first.
Correct answer: B — Both operationally and target independent
Explanation: ✔ Why correct: The ECB sets both its target and its policy tools. Wrong: A, C, D: Not accurate.
Question 1737
Central banks like the UK and New Zealand are:
Select an option first.
Correct answer: B — Only operationally independent
Explanation: ✔ Why correct: Their inflation targets are set by government. Wrong: A, C, D: Not correct.
Question 1738
Credibility is crucial because:
Select an option first.
Correct answer: B — It anchors inflation expectations
Explanation: ✔ Why correct: Expectations influence wage-setting and price-setting. Wrong: A, C, D: Not the main reason.
Question 1739
Inflation expectations can become self-fulfilling because:
Select an option first.
Correct answer: A — They affect wage claims and contracts
Explanation: ✔ Why correct: Expected inflation influences wage demands, raising actual inflation. Wrong: B, C, D: Incorrect.
Question 1740
A rapid rise in inflation expectations may occur after:
Select an option first.
Correct answer: B — A surge in oil prices
Explanation: ✔ Why correct: Higher energy costs often raise inflation expectations. Wrong: A, C, D: Opposite or unrelated.
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