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CFA Level 2 Classroom Test 1

Subjects: Ethics & Economics

Time: 90 minutes

SECTION I - ECONOMICS
1) Labor productivity may be decomposed into which of the following two
factors?
a) Growth in both physical capital and human capital per labor hour.
b) Growth in physical capital per labor hour and growth in real interest rates.
c) Growth in physical capital per labor hour and technological change.
2) The Japanese government has decided that it wants to maintain a constant
exchange rate with the U.S. dollar at a time when supply and demand
conditions in the foreign exchange market are causing the Japanese yen to
appreciate. Which of the following actions would most likely achieve their
objective?
a) A shift to a more expansionary monetary policy.
b) Reduce taxes and create a budget deficit in order to increase domestic
interest rates.
c) A shift to a more restrictive monetary policy.
3) In the currency market, traders quote the:
a) base currency rate.
b) nominal exchange rate.
c) real exchange rate.
4) If a German electronics manufacturer builds an electronics plant in Mexico,
this action will create which of the following with regard to the demand and
supply of the euro and the peso in the foreign exchange market? This action
creates a:
a) demand for both pesos and euros in the foreign exchange market.
b) demand for pesos and a supply of euros in the foreign exchange market.
c) supply of pesos and demand for euros in the foreign exchange market.
5) Which of the following would increase the supply of dollars in foreign
exchange markets? The:
a) purchase of Korean televisions by an American distributor.
b) sale of a U.S. company to a Dutch investor.
c) sale of U.S. made automobiles to Vietnamese consumers.

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6) Which of the following statements regarding purchasing power parity is most
accurate? Purchasing power states that exchange rates:
a) will change to reflect differences in inflation between countries.
b) will change to reflect differences in real interest rates between countries.
c) will change to reflect differences in nominal interest rates between
countries.
7) Terrance Burnhart, a junior analyst at Wertheim Investments Inc., was
discussing the concepts of purchasing power parity (PPP) and interest rate
parity (IRP) with his colleague, Francis Ferngood. During the conversation
Burnhart made the following statements:
Statement 1: PPP is based on a number of unrealistic assumptions that limits
its real-world usefulness. These assumptions are: that all goods and services
can be transported among countries at no cost; all countries use the same
basket of goods and services to measure their price levels; and all countries
measure their rates of inflation the same way.
Statement 2: IRP rests on the idea of equal real interest rates across
international borders. Real interest rate differentials would result in capital
flows to the higher real interest rate country, equalizing the rates over time.
Another way to say this is that differences in interest rates are equal to
differences in expected changes in exchange rates.
With respect to these statements:
a) both are correct.
b) only statement 1 is correct.
c) only statement 2 is correct.
8) According to the concept of purchasing power parity, when the relationship
between prices in two countries changes, those changes should be reflected
in the:
a) interest rates.
b) exchange rate.
c) relative inflation rate.
9) The Federal Reserve has determined that, although the yen/USD exchange
rate is volatile, its equilibrium value is approximately 105 yen/USD. The Fed
has decided to intervene in foreign exchange markets to keep the exchange
rate in a fairly narrow band around 105 yen/USD. If the exchange rate rises
above 110 yen what should the Fed do? If the exchange rate falls below 100
yen what action should the Fed take?
Rise above 110 yen/USD Fall below 100 yen/USD
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a) Buy dollars Sell dollars

b) Buy dollars No action
c) Sell dollars Buy dollars
10)
If the exchange rate is USD:JPY 120, a bottle of rice wine that costs
JPY2,400 costs:
a) USD 24.
b) USD 20.
c) USD 200.
11)
Todays spot CAD bid exchange rate is EUR:CAD 1.425 and the ask
exchange rate is EUR:CAD 1.435. The percent spread is closest to:
a) 0.697%.
b) 0.702%.
c) 0.489%.
12)
A bank in Canada is quoting USD:CAD @ 1.4950 : 1.5005, and EUR:USD @
0.9350 : 0.9400. What is exchange rate bid and ask for EUR:CAD?
a) EUR:CAD - 1.5904 : 1.6048.
b) EUR:CAD - 0.6254 : 0.6264.
c) EUR:CAD - 1.3978 : 1.4105.
13)

Which of the following statements about exchange rates is most accurate?

a) The bid-ask spread is a function of breadth, depth, and volatility of the

market for a currency.
b) Given the bid-ask spread between pesos and dollars is 6.0000-6.0025, and
the bid-ask spread between pounds and dollars is 2.0000-2.0015, then the
bid-ask spread between pesos and pounds is 2.875-2.934.
c) A bid of USD:MXN 8.000, means the bank will sell you 1 USD for 8 MXN.
14)
The spot and 30-day forward rates for the Euro are $1.1525 and $1.1015,
respectively. The Euro is selling at a forward:
a) discount of $0.051.
b) discount of 0.956%.
c) premium of $0.051.
15)
Isaac Long is an English investor. He notices the 90day forward rate for
the Norwegian kroner is GBP 0.0859 and the spot rate is GBP 0.0887. Long
calculates the annualized rate of the kroner to be trading at a:
a) premium of 9.478%.
b) discount of 12.63%.
c) premium of 21.17%.
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16)
If the exchange rate value of the euro goes from $0.95 to $1.10, then the
euro has:
a) depreciated and the Dutch will find U.S. goods more expensive.
b) depreciated and the Dutch will find U.S. goods cheaper.
c) appreciated and the Dutch will find U.S. goods cheaper.
17)
Which of the following statements regarding the balance of payments
accounts is most accurate?
a) The total of the balance of payments accounts does not have to equal
zero.
b) A current account surplus is an indication of economic strength.
c) Running a deficit in the current account balance means a country imports
more than it exports.
18)
Larry Goren, CFA, is an economist for the Federal Reserve Bank. He is
interested in using a countrys balance of payments as a forecasting tool in
determining exchange rates. He notices that China has a high current account
balance resulting in a large surplus in its balance payments. It can be implied
that:
a) China received a great deal of income flows from the sale of trade
merchandise and services and payments on its existing investments.
b) China provided a great deal of financial assistance to other nations.
c) Chinas international currency reserve holdings have increased.
19)
Which of the following statements regarding relative Purchasing Power
Parity (PPP) is least accurate?
a) It claims that exchange rate movements should exactly offset inflation
differential between two countries.
b) In order for relative PPP to hold, countries with higher rates of expected
inflation should see their currencies appreciate.
c) Because PPP holds in the long run, it is somewhat useful in exchange-rate
determination in the short run.
20)
Kathy Smith, CFA, is an analyst with the Borderless Fund and is doing
research on the country of Kenya for her colleague, John Dolan. Smith wants
to calculate the inflation rate implied in the forward rates that she obtains
from her bank, Global Bank. The current spot exchange rate is 90.772 Kenyan
Shillings (KS) for one euro (EUR). The one-year forward rate for the Kenyan
Shilling is 95.7686 KS/EUR. The current rate of inflation the European
Economic Community is 9%. Smith does not know the current inflation rate
for Kenya. Assuming relative purchasing power parity (PPP) applies, the
calculated expected inflation rate implied in the forward rate is:
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a) 10%.
b) 17%.
c) 15%.

SECTION II ETHICAL & PROFESSIONAL STANDARDS

21)

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