Free CFA Level II Economics Practice Questions
Economics on the CFA Level II exam tests currency valuation models (covered and uncovered interest rate parity), economic growth theories, and the effects of regulation on financial markets. Weighted 5-10% (CFA Institute).
Sample Questions
Question 1
Easy
The Solow residual in growth accounting represents:
Solution
C is correct.
The Solow residual is calculated as the difference between total GDP growth and the weighted contributions of capital and labor growth. It represents total factor productivity (TFP) growth—the portion of economic growth attributable to factors other than increased quantities of inputs. These factors include technological progress, improvements in education and workforce skills, better institutions, economies of scale, and improved resource allocation.
The Solow residual is calculated as the difference between total GDP growth and the weighted contributions of capital and labor growth. It represents total factor productivity (TFP) growth—the portion of economic growth attributable to factors other than increased quantities of inputs. These factors include technological progress, improvements in education and workforce skills, better institutions, economies of scale, and improved resource allocation.
Question 2
Medium
The Dutch disease phenomenon refers to a situation where:
Solution
B is correct.
Dutch disease describes the economic phenomenon where a surge in natural resource revenues (such as oil or gas) leads to appreciation of the domestic currency. The stronger currency makes the country's non-resource exports (particularly manufactured goods) more expensive in international markets, reducing their competitiveness. The manufacturing sector contracts as a result, creating an economy that becomes overly dependent on the resource sector. The term originates from the Netherlands' experience after discovering natural gas in the 1960s.
Dutch disease describes the economic phenomenon where a surge in natural resource revenues (such as oil or gas) leads to appreciation of the domestic currency. The stronger currency makes the country's non-resource exports (particularly manufactured goods) more expensive in international markets, reducing their competitiveness. The manufacturing sector contracts as a result, creating an economy that becomes overly dependent on the resource sector. The term originates from the Netherlands' experience after discovering natural gas in the 1960s.
Question 3
Hard
Based on the vignette data, Valeria's labor productivity growth rate (growth in output per worker) is closest to:
Solution
C is correct.
Labor productivity growth (growth in output per worker, ) equals GDP growth minus labor force growth:
Alternatively, using the intensive form of the growth accounting equation:
Using the simpler approach (GDP growth minus labor growth), labor productivity growth is 2.3%, which is the closest answer.
Labor productivity growth (growth in output per worker, ) equals GDP growth minus labor force growth:
Alternatively, using the intensive form of the growth accounting equation:
Using the simpler approach (GDP growth minus labor growth), labor productivity growth is 2.3%, which is the closest answer.