CFA Level 1 Economics: notes and free practice
CFA Level 1 Economics explains how firms, economic policy and currency markets affect investment decisions. Identify the market structure or policy change first, then trace its effect through costs, output, rates or exchange values.
The key ideas, at a glance
Compare marginal choices
Read the visual, then follow the worked example below. Use the stated case assumptions.
Illustrative worked case
$ per unit
- Variable cost
- 7
- Selling price
- 9
- Total cost
- 11
The case price contributes $2 per unit toward fixed cost. Short-run operation still depends on the competitive output conditions.
| Concept | Rule or decision | Common mistake |
|---|---|---|
| Compare marginal choices | Choose output where MR = MC, subject to operating conditions | A loss does not automatically imply immediate shutdown when fixed costs cannot be avoided. |
| Trace the policy channel | Policy tool → financing or spending → demand | An intended policy effect is not a guaranteed immediate outcome. |
| Track costs and incentives | Trade restriction → domestic price → winners and losers | A tariff and a quota can both restrict trade but create different revenue and rent allocations. |
| Write the currency units | Cancel units before calculating | A currency’s percentage gain is not the same magnitude as the reciprocal currency’s percentage loss. |
01Compare marginal choices
Choose output where MR = MC, subject to operating conditions
Watch for: A loss does not automatically imply immediate shutdown when fixed costs cannot be avoided.
02Trace the policy channel
Policy tool → financing or spending → demand
Watch for: An intended policy effect is not a guaranteed immediate outcome.
03Track costs and incentives
Trade restriction → domestic price → winners and losers
Watch for: A tariff and a quota can both restrict trade but create different revenue and rent allocations.
04Write the currency units
Cancel units before calculating
Watch for: A currency’s percentage gain is not the same magnitude as the reciprocal currency’s percentage loss.
Selected 2026 study concepts. Match your preparation to your registered exam-year curriculum. These notes are not complete curriculum coverage.
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CFA Level I: 20 practice MCQs
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Put the method to work
One worked example, from facts to answer
Given
A price-taking firm receives $9 per unit; average variable cost is $7 and average total cost is $11.
Method
Revenue covers variable cost and contributes $2 per unit toward fixed cost.
Answer and interpretation
It may operate in the short run despite an accounting loss, assuming the usual competitive output conditions.
Original independent teaching example. Assumptions are stated above; this is not an official exam question or scoring key.
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10 free Economics questions
Choose an answer, check the reasoning, then use ‘Review the method’ to revisit the exact idea. Selected practice, not a complete syllabus or pass prediction.
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- Question 1 of 10Level I topic sampleEconomicsMultiple choice
A competitive firm is a price taker. For an interior profit-maximizing output with the usual cost conditions, what relationship should hold?
Answer and explanations
For a price taker, marginal revenue equals price; the interior condition is price = marginal cost.
Review the method- A - correct: For a price taker, marginal revenue equals price; the interior condition is price = marginal cost.
- B: Fixed cost is not the incremental cost of the next unit and does not define this condition.
- C: A positive market price gives positive marginal revenue for a competitive firm.
- Question 2 of 10Level I topic sampleEconomicsMultiple choice
At its optimal positive output, a competitive firm has price $8, average variable cost $6 and average total cost $10. Fixed costs are unavoidable this period. Its short-run decision is generally to:
Answer and explanations
Price exceeds average variable cost, so operating reduces the short-run loss relative to producing nothing.
Review the method- A: Continuing contributes toward unavoidable fixed cost even though total profit is negative.
- B - correct: Price exceeds average variable cost, so operating reduces the short-run loss relative to producing nothing.
- C: Avoidable variable costs are central to the shutdown comparison.
- Question 3 of 10Level I topic sampleEconomicsMultiple choice
A market has a few large sellers whose pricing choices depend on rivals’ likely responses. Which structure best fits?
Answer and explanations
Oligopoly involves a small number of important sellers whose decisions are strategically interdependent.
Review the method- A: Perfect competition has many price-taking suppliers rather than strategic dependence among a few.
- B: A pure monopoly has one seller rather than a few strategic rivals.
- C - correct: Oligopoly involves a small number of important sellers whose decisions are strategically interdependent.
- Question 4 of 10Level I topic sampleEconomicsMultiple choice
A government increases infrastructure spending without an offsetting tax rise. Holding other conditions constant, this is an example of:
Answer and explanations
Higher government spending is a fiscal action intended to support aggregate demand under these assumptions.
Review the method- A - correct: Higher government spending is a fiscal action intended to support aggregate demand under these assumptions.
- B: Monetary policy concerns central-bank tools; this action changes government spending.
- C: Spending policy is not a method of quoting currencies.
- Question 5 of 10Level I topic sampleEconomicsMultiple choice
A central bank raises policy rates to restrain demand. Which channel is most consistent with that aim, other things equal?
Answer and explanations
More expensive credit can discourage interest-sensitive consumption and investment; the effect is neither instant nor certain.
Review the method- A: A rate increase generally raises, rather than lowers, financing costs through this channel.
- B - correct: More expensive credit can discourage interest-sensitive consumption and investment; the effect is neither instant nor certain.
- C: There is no rule making all prices fall instantly by the same number of percentage points.
- Question 6 of 10Level I topic sampleEconomicsMultiple choice
Production, employment and consumer spending are all falling across several industries. Which cycle phase is most consistent with these observations?
Answer and explanations
Declining activity across several measures is consistent with contraction, although classification requires broader evidence.
Review the method- A: Broad declines in activity are not the usual indicators of expansion.
- B: These observations do not establish the exact date of a future turning point.
- C - correct: Declining activity across several measures is consistent with contraction, although classification requires broader evidence.
- Question 7 of 10Level I topic sampleEconomicsMultiple choice
A government caps the number of imported vehicles at a fixed annual quantity. Which trade restriction is this?
Answer and explanations
A quota limits the physical quantity that may be imported.
Review the method- A - correct: A quota limits the physical quantity that may be imported.
- B: A tariff is a tax on imports rather than a direct quantity ceiling.
- C: An export subsidy supports outbound sales rather than limiting imports by quantity.
- Question 8 of 10Level I topic sampleEconomicsMultiple choice
An import costs $50 before a $10 tariff. Assume full pass-through, no exchange-rate change and no other costs. What price does the domestic buyer pay?
Answer and explanations
Full pass-through adds the $10 tariff to $50, giving a $60 buyer price.
Review the method- A: $40 subtracts a tax that the assumptions say is passed on to the buyer.
- B - correct: Full pass-through adds the $10 tariff to $50, giving a $60 buyer price.
- C: $50 would require no pass-through, contrary to the assumption.
- Question 9 of 10Level I topic sampleEconomicsMultiple choice
The USD-per-EUR quote rises from 1.10 to 1.21. Measured in USD, the euro has:
Answer and explanations
1.21 / 1.10 - 1 = 10%; the quote directly measures the dollar value of one euro.
Review the method- A: One euro buys more dollars, so it has appreciated in dollar terms.
- B: 9.09% is the magnitude of the reciprocal dollar depreciation, not the euro’s gain in USD.
- C - correct: 1.21 / 1.10 - 1 = 10%; the quote directly measures the dollar value of one euro.
- Question 10 of 10Level I topic sampleEconomicsMultiple choice
Quotes are 1.25 USD per EUR and 144 JPY per USD. The implied cross rate is:
Answer and explanations
1.25 USD/EUR × 144 JPY/USD = 180 JPY/EUR; the intermediate USD units cancel.
Review the method- A - correct: 1.25 USD/EUR × 144 JPY/USD = 180 JPY/EUR; the intermediate USD units cancel.
- B: Dividing 144 by 1.25 reverses the first conversion.
- C: The very small result does not preserve the requested JPY-per-EUR units.
Four ideas to put to work
Find the method you need
Start with: Percentage changes, opportunity cost and the difference between a price and a quantity.
METHOD 01
Compare marginal choices
Choose output where MR = MC, subject to operating conditions
- Distinguish market structure from the number of firms alone.
- Compare revenue with variable costs for a short-run shutdown decision.
- Separate movement along demand from a change in demand.
Worked example
- Given
- A price-taking firm receives $9 per unit; average variable cost is $7 and average total cost is $11.
- Calculate / decide
- Revenue covers variable cost and contributes $2 per unit toward fixed cost.
- Result
- It may operate in the short run despite an accounting loss, assuming the usual competitive output conditions.
Watch for: A loss does not automatically imply immediate shutdown when fixed costs cannot be avoided.
Practise this ideaMETHOD 02
Trace the policy channel
Policy tool → financing or spending → demand
- Separate government tax/spending decisions from central-bank actions.
- Follow the assumed transmission mechanism rather than predicting certainty.
- Use several indicators to judge a cycle; one series can mislead.
Worked example
- Given
- A central bank raises its policy rate while other conditions are unchanged.
- Calculate / decide
- Higher financing costs can reduce interest-sensitive borrowing and spending.
- Result
- The intended demand effect is contractionary; timing and strength are uncertain.
Watch for: An intended policy effect is not a guaranteed immediate outcome.
Practise this ideaMETHOD 03
Track costs and incentives
Trade restriction → domestic price → winners and losers
- Distinguish a tax on imports from a quantity restriction.
- Track the domestic buyer’s cost, not only producer protection.
- Separate efficiency effects from how gains and losses are distributed.
Worked example
- Given
- An imported item costs $40 before a $6 tariff; assume full pass-through and no other changes.
- Calculate / decide
- 40 + 6 = 46.
- Result
- The domestic buyer pays $46 under those assumptions; the tariff is not a price discount.
Watch for: A tariff and a quota can both restrict trade but create different revenue and rent allocations.
Practise this ideaMETHOD 04
Write the currency units
Cancel units before calculating
- Read USD per EUR differently from EUR per USD.
- Invert the quote when switching the currency being measured.
- Cross rates must cancel the intermediate currency.
Worked example
- Given
- USD per EUR is 1.20; JPY per USD is 150.
- Calculate / decide
- 1.20 USD/EUR × 150 JPY/USD.
- Result
- 180 JPY per EUR; USD cancels.
Watch for: A currency’s percentage gain is not the same magnitude as the reciprocal currency’s percentage loss.
Practise this ideaQuestions about this topic
- Why is MR = MC not the whole production decision?
- It identifies a candidate profit-maximizing output under the relevant assumptions. The firm must also consider whether operating at that output is preferable to shutting down or exiting under the stated cost conditions.
- Do fiscal and monetary policy use the same tools?
- No. Fiscal policy concerns government spending and taxation; monetary policy concerns the central bank’s policy instruments and transmission through financial conditions. Trace the channel specified in the case.
- How do I avoid reversing an exchange-rate calculation?
- Write the quote as currency units, such as USD per EUR, and cancel units in the conversion. A higher quote in that convention means more dollars per euro; the inverse quote has the opposite numerical direction.
Sources and curriculum scope
Official outlines establish curriculum scope. The explanations and worked examples are independent teaching material; the sources do not verify or endorse them.
- 2026 CFA Level I outline: Economics
- 2026 CFA Level 1 curriculum outline
- 2027 CFA Level 1 curriculum outline
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