A candidate stared at the screen, a currency cross-rate question blocking their path. They saw the dealer quotes for AUD/EUR and EUR/USD. They knew the formula, but under pressure, they multiplied the wrong sides of the bid-ask spread. They chose the rate that was best for the client, not the one the dealer would actually provide. One question, two minutes, gone. That single point can be the difference between a pass and a fail, and it wasn't about memorizing a formula. It was about failing to think like the dealer.
This page provides a free set of 15 exam-style CFA Level I Economics practice questions for the 2026 exam. Each question includes a detailed explanation of the correct answer and an analysis of why the incorrect options are common traps, allowing you to benchmark your knowledge against the official curriculum.
Key facts
- Exam
- Chartered Financial Analyst (CFA) Level I
- Topic
- Economics
- 2026 Blueprint Weight
- 8-12% of the exam
- Question Format
- Multiple Choice (3 options)
- Official Body
- CFA Institute
- Recommended Study
- 300+ total hours for Level I
The CFA Institute reported the May 2024 Level I pass rate was 37% (CFA Institute), underscoring the exam's difficulty.
Why Trust These Free Economics Questions?
These questions are not a random dump. They are designed by CFA charterholders to mirror the difficulty, style, and scope of the real CFA Level I exam. You will find a mix of questions that test both foundational knowledge and your ability to apply concepts from the Economics curriculum, including microeconomics, macroeconomics, and currency exchange rates.
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This is a sample from the complete VoraPrep CFA Level I course, which includes over 2,500 adaptive practice questions across all 10 topic areas. Each question in our full bank comes with a detailed rationale and instant coaching from Vory, your 24/7 personal tutor.
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CFA Level 1 Economics Practice Questions
Work through these 15 questions one by one. Read the explanations carefully, especially for any you get wrong. Pay close attention to why the incorrect answers are tempting.
Question 1
A country's central bank has observed rising inflation and an overheating economy. To implement contractionary monetary policy, the central bank is most likely to:
Correct Answer: ASelling government securities on the open market is a primary tool of contractionary monetary policy. When the central bank sells securities, commercial banks buy them, which pulls cash (reserves) out of the banking system. This reduction in the money supply puts upward pressure on the overnight interbank lending rate.
The ultimate goal is often to raise the policy rate (the target for that interbank rate). Selling securities is the mechanism used to achieve that higher rate, which in turn makes credit more expensive, slows investment, and cools the economy.
Why B is wrong: Decreasing the policy rate is an expansionary move. It makes borrowing cheaper and is used to stimulate economic growth, not to fight inflation. Why C is wrong: Lowering the reserve requirement is also an expansionary tool. It allows banks to lend out a larger portion of their deposits, increasing the money supply.
Question 2
The market for a specific type of luxury electric vehicle is best described as an oligopoly. Which of the following is least likely a characteristic of this market structure?
Correct Answer: BIn an oligopoly, a small number of large firms dominate the market. These firms are price searchers, not price takers. They have enough market power to influence the price of their products. The statement that firms are "price takers" is a defining characteristic of perfect competition, where individual firms have no market power.
Why A is wrong: Significant barriers to entry (high capital costs, patents, economies of scale) are a hallmark of an oligopoly. This is what prevents new competitors from easily entering the market. Why C is wrong: Interdependence is a key feature. Each firm's pricing and output decisions directly affect the others. This often leads to strategic behavior, like price wars or collusion.
How to Differentiate Market Structures
The exam requires you to quickly identify a market structure from a short description. This table summarizes the key differences.
| Characteristic | Perfect Competition | Monopolistic Competition | Oligopoly | Monopoly |
|---|---|---|---|---|
| Number of Firms | Many | Many | Few | One |
| Product | Homogeneous | Differentiated | Standard or Differentiated | Unique |
| Barriers to Entry | Very Low | Low | High | Very High |
| Pricing Power | None (Price Taker) | Some | Considerable | Significant |
Question 3
An analyst is given the following currency quotes from a dealer:
- GBP/USD: 1.2510 / 1.2515
- USD/CHF: 0.9130 / 0.9135
The GBP/CHF cross-rate bid price is closest to:
Correct Answer: AThis is a classic cross-rate calculation that tests your understanding of bid-ask spreads. The key is to think from the dealer's perspective. The bid is the price the dealer will buy at, and the ask is the price the dealer will sell at.
Step 1: Identify the relevant rates.
We need the GBP/CHF bid. Our common currency is USD. So we need the bid for GBP/USD and the bid for USD/CHF.- Bid(GBP/USD) = 1.2510
- Bid(USD/CHF) = 0.9130
Step 2: Calculate the cross-rate bid.
Bid(GBP/CHF) = Bid(GBP/USD) × Bid(USD/CHF) Bid(GBP/CHF) = 1.2510 × 0.9130 = 1.142163The closest answer is 1.1422.
Question 4
If the price elasticity of demand for a product is -0.5, a 10% increase in price will most likely lead to:
Correct Answer: APrice elasticity of demand measures the responsiveness of quantity demanded to a change in price.
We are given: Elasticity = -0.5 % Change in Price = +10%
Rearranging the formula: % Change in Quantity Demanded = Elasticity × % Change in Price % Change in Quantity Demanded = -0.5 × 10% = -5%
This means quantity demanded will decrease by 5%. The demand is described as inelastic because the absolute value of the elasticity (0.5) is less than 1.
Why B is wrong: This result comes from incorrectly dividing the price change by the elasticity (10% ÷ 0.5 = 20%). Why C is wrong: This confuses the sign. A price increase, according to the law of demand, leads to a decrease in quantity demanded for a normal good.Question 5
A government increases its spending on infrastructure projects without an offsetting increase in taxes. Assuming the economy is operating below full employment, this fiscal policy will most likely lead to:
Correct Answer: AIncreased government spending (G) is an expansionary fiscal policy.
Why B is wrong: Leftward shifts would correspond to contractionary fiscal policy, such as a decrease in government spending or an increase in taxes. Why C is wrong: The LM (Liquidity preference-Money supply) curve represents equilibrium in the money market. It is shifted by changes in the money supply (monetary policy), not by fiscal policy.
- IS Curve: The IS (Investment-Saving) curve represents equilibrium in the market for goods and services. An increase in G directly increases aggregate demand, shifting the IS curve to the right.
- AD Curve: The AD (Aggregate Demand) curve also shifts to the right because, at any given price level, total planned expenditure in the economy is now higher due to the increased government spending.
Question 6
A government wishes to protect its domestic auto industry from foreign competition. Which trade policy would provide domestic producers with the most certainty about the quantity of imports they will face?
Correct Answer: CWhile tariffs, quotas, and voluntary export restraints (VERs) all restrict trade to benefit domestic producers, they operate differently. An import quota provides the most certainty about the quantity of imports.
A quota is a hard, legal limit on the quantity of a good that can be imported. Domestic producers know exactly how much foreign competition will be allowed into the market.
Why A is wrong: A tariff is a tax on imports. While it makes imports more expensive and reduces their quantity, the actual quantity imported can still fluctuate depending on the elasticity of demand and the willingness of foreign producers to absorb some of the tax. It doesn't provide the same level of certainty as a quota. Why B is wrong: A voluntary export restraint is an agreement where the exporting country agrees to limit its exports. While it functions similarly to a quota, it is an "agreement" and may be less certain or binding than a domestic legal quota. Between a VER and a quota, the quota is the more direct and certain tool imposed by the importing country's government.
Question 7
The Gini coefficient is a measure of:
Correct Answer: AThe Gini coefficient is a statistical measure of distribution used to represent income or wealth inequality. A Gini coefficient of 0 represents perfect equality (everyone has the same income), while a coefficient of 1 (or 100%) represents maximal inequality (one person has all the income).
Why B is wrong: Economic growth is typically measured by the percentage change in real GDP. Why C is wrong: Inflation is measured by the percentage change in a price index, such as the Consumer Price Index (CPI).
Question 8
According to the theory of purchasing power parity (PPP), if the inflation rate in the United States is 2% and the inflation rate in the Eurozone is 5%, the EUR is expected to:
Correct Answer: BRelative purchasing power parity suggests that the change in the exchange rate between two currencies should reflect the difference in their inflation rates. The currency of the country with the higher inflation rate is expected to depreciate.
In this case, the Eurozone has higher inflation (5%) than the U.S. (2%). Therefore, the Euro (EUR) is expected to depreciate against the U.S. Dollar (USD).
Approximate Change in EUR vs USD ≈ (Inflation_USA - Inflation_EUR) = 2% - 5% = -3%.
The EUR is expected to depreciate by approximately 3%.
Why C is wrong: This would imply the EUR is appreciating. This would happen if Eurozone inflation were lower than U.S. inflation. The question asks about the EUR, not the USD. If it asked about the USD, it would be expected to appreciate by 3%.
Question 9
A consumer's demand for a product is more elastic when:
Correct Answer: BDemand is more elastic (more sensitive to price changes) when the good represents a larger portion of a consumer's budget. If the price of a car increases by 10%, it's a significant financial impact, and consumers will react strongly. If the price of salt increases by 10%, the impact is negligible, and demand will be very inelastic.
Why A is wrong: Necessities (like medicine or basic food) tend to have inelastic demand. Consumers need to buy them regardless of price changes. Why C is wrong: The availability of close substitutes is a primary determinant of elasticity. When there are many substitutes, consumers can easily switch to another product if the price rises, making demand more elastic.
Question 10
Which phase of the business cycle is characterized by accelerating inflation, rising wages, and an economy operating above its sustainable capacity?
Correct Answer: BThe peak is the turning point in the business cycle where economic activity is at its highest point. During the late stage of the expansion leading up to the peak, resource constraints become binding. This leads to upward pressure on wages and input costs, which translates into accelerating inflation. The economy is often described as "overheating."
Why A is wrong: While the expansion phase sees growth, accelerating inflation and operating above sustainable capacity are hallmarks of the very end of the expansion, which is the peak itself. Why C is wrong: The contraction (or recession) phase is characterized by falling economic activity, rising unemployment, and disinflation or deflation.
Question 11
A Japanese company exports cars to the United States. If the Japanese Yen (JPY) appreciates relative to the U.S. Dollar (USD), the revenue for the Japanese company, measured in JPY, will most likely:
Correct Answer: BLet's think through the transaction. The cars are sold in the U.S. for USD. The Japanese company then converts those USD revenues back into JPY. If the JPY appreciates, it means one USD buys fewer JPY.
- Scenario 1 (Initial Rate): 1 USD = 150 JPY. A car is sold for $30,000 USD. The revenue in JPY is 30,000 × 150 = 4,500,000 JPY.
- Scenario 2 (JPY Appreciates): The new rate is 1 USD = 140 JPY. The car is still sold for $30,000 USD. The revenue in JPY is now 30,000 × 140 = 4,200,000 JPY.
The revenue measured in JPY has decreased. An appreciating home currency hurts exporters.
Why A is wrong: Revenue would increase if the JPY depreciated (e.g., 1 USD = 160 JPY). This is a common point of confusion.Question 12
The sum of the market values of all final goods and services produced within a country's borders over a specific time period is known as:
Correct Answer: BThis is the textbook definition of Gross Domestic Product (GDP). The key word is "within a country's borders." GDP measures production based on geography.
Why A is wrong: Gross National Product (GNP) measures the total value of goods and services produced by the labor and capital supplied by a country's citizens, regardless of where they are located. For example, the profits of a U.S. company's factory in Germany would be included in U.S. GNP but in German GDP. Why C is wrong: National Income is a related but different measure. It represents the total income earned by a country's residents and businesses and is derived from GDP after certain adjustments.
Question 13
The "crowding-out effect" suggests that:
Correct Answer: AThe crowding-out effect is a potential negative consequence of expansionary fiscal policy. When a government runs a budget deficit, it must borrow money by issuing bonds. This increased demand for loanable funds can drive up interest rates. Higher interest rates make it more expensive for private firms to borrow for investment projects, thus "crowding out" private investment.
Why B is wrong: This describes the effect of expansionary monetary policy, not the crowding-out effect. Why C is wrong: The crowding-out effect is one reason why expansionary fiscal policy may not lead to a proportional increase in GDP.
Question 14
A market with a single seller of a unique product with no close substitutes is best described as:
Correct Answer: CThis is the definition of a pure monopoly. Key characteristics are a single seller, a unique product, and high barriers to entry that prevent competition.
Why A is wrong: Perfect competition involves many sellers of a homogeneous product. Why B is wrong: Monopolistic competition involves many sellers of differentiated products (e.g., restaurants). While firms have some pricing power, there are still many competitors.
Question 15
Which of the following is an example of a lagging economic indicator?
Correct Answer: CLagging indicators are statistics that change after the economy has already begun to follow a particular trend. The average duration of unemployment is a classic lagging indicator. It tends to rise even after a recession has ended because businesses are slow to re-hire and long-term unemployment can be persistent.
Why A and B are wrong: Both are leading economic indicators. They change before the overall economy changes. A rise in manufacturing hours or building permits suggests that businesses and consumers are optimistic about the future, signaling future economic growth.
Calculate Your CFA Level 1 Score & Study Hours by Domain
Adjust your practice scores across official CFA Level 1 blueprint domains to predict your pass probability and generate a domain-weighted study schedule.
How Should You Interpret Your Score?
Take a moment to evaluate your performance honestly. This isn't about a grade; it's about diagnosing your readiness.
- 13-15 Correct (85%+): Excellent. You have a strong command of the core Economics curriculum. Your focus should be on maintaining this knowledge and practicing questions from other topic areas.
- 9-12 Correct (60-80%): Solid foundation, but with clear gaps. You likely missed questions requiring a specific formula or a nuanced concept. Your next step is targeted review. Use VoraPrep's adaptive CFA question bank to drill down on these weak areas.
- Below 9 Correct (<60%): This is a red flag. A score in this range suggests a foundational weakness. Do not panic. You need to go back to the beginning of the Economics material and build your understanding from the ground up before attempting more advanced questions.
Your score here is a data point. Use it to build a smarter study plan.
Beyond Free Practice Questions
If you found these questions helpful, they are just a small preview of what a complete prep system can do for you. Many candidates waste time on passive video lectures, only to discover they can't apply the knowledge under pressure.
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