CFA® Economics: Summary, Syllabus, Topics, and Sample Questions (L1, L2, L3) New

What to Expect in CFA Level 1 Economics

In CFA Level 1 Economics, you will delve into fundamental micro- and macroeconomic principles that are essential forfinancial and investment analysis. Although Economics carries a weight of 6%-9% on the exam, which is relativelylower compared to Ethics and Financial Statement Analysis, it is equally important. Throughout this course, you willgain insights into crucial aspects of economic forecasting, top-down investment analysis, and bottom-up securityselection strategies.

The CFA Economics topic has a weighting of 6%-9% of the L1 exam, so approximately 11-16 of the 180 exam questionsfocus on this topic.

Level 1 Economics 2025 Syllabus, Learning Modules,and Changes

CFA Level 1 Economics’ syllabus for 2025 spans 8 learning modules and contains 30learning outcome statements (LOS). The CFALevel 1 exam has minor updates to the overall structure for economics, with some reshuffling in thelearning outcomes.

The Firm and Market Structures

Market structures are intimately tied to how firms price their products and their potential profitability. Forexample, long-term profits are typically decreased in highly competitive markets but still attainable in lesscompetitive markets. Familiarity with the effects of various market forces is a boon to financial analysts whenevaluating a firm’s short- and long-term prospects.

• The reading distinguishes between various market structure classifications and how each structure influences theoutcomes of demand and supply relations.
• The reading also covers company competition and interaction in various market conditions, such as perfectcompetition, monopolistic competition, oligopoly, and pure monopoly.

Understanding Business Cycles

Typical business cycles and phases exist within economies despite their complexity. Understanding cycle phases aidsthe analyst in projecting how outcomes and decisions of individuals and firms affect the performance of sectors andcompanies.

• The reading familiarizes you with the business cycle and its phases and how various economic factors fluctuateaccordingly.
• The reading also elaborates on methods to interpret a set of economic indicators and covers measurements ofinflations.

Monetary and Fiscal Policy

Governments in developed countries have an outsized impact on their economies due to the size of the workforce theyemploy and of their fiscal budgets. This influence is augmented by taxation and spending decisions (fiscal policy)and a central bank’s influence over credit and the quantity of money (monetary policy).

• The reading introduces how money is created, the role of central banks, and various theories regarding thedemand for and supply of money.
• The reading also distinguishes between expansionary and contractionary monetary policies and the advantages anddisadvantages of various tools for implementing fiscal policies.

Introduction to Geopolitics

Geopolitics is closely related to globalization, as the interconnectedness of the world’s economies and politicalsystems has increased in recent decades. This has led to cooperation and competition between countries as they seekto advance their own interests in an increasingly interconnected world.

• The reading analyzes geopolitics from the perspective of cooperation versus competition.
• The reading also assesses geopolitics and its relationship with globalization, explores tools of geopolitics andtheir impact on regions and economies, and analyzes geopolitical risk and its impact on investments.

International Trade and Capital Flows

The attractiveness of a global investment may depend on a particular country’s economic robustness, price stabilityor interest rates, the strength of a specific sector or industry, GDP growth rates, trade policies, demographics,human capital, etc.

• The reading explores the benefits of international trade and describes the dynamics of trading blocs, commonmarkets, and economic unions.
• The reading also explains how international financial organizations influence and facilitate international tradeand the implications of various trade and capital restrictions.

Currency Exchange Rates

The global economy is becoming increasingly interwoven, and this integration is impossible without currency exchange.As a result, the foreign exchange market (FX) is the largest market on the planet. Furthermore, purely domesticportfolios are not exempt from the influences of globalization, making an understanding of foreign exchange criticalfor any financial analyst.

• The reading explores exchange rate mechanics and familiarizes with major players.
• The reading also covers alternative exchange rate regimes and how exchange rates influence a country’s imports,exports, and capital flows.

CFA Economics Level 1 Sample Questions and Answers

These sample questions are typical of the probing multiple-choice questions on the L1 exam. During the exam, you haveabout 90 seconds to read and answer each question, carefully designed to test knowledge from the CFA Curriculum.UWorld’s question bank will expose you to exam-like questions and thoroughly illustrate the concepts tested.

• Question 1
• Question 2
• Question 3

In the short run, a company maximizing profit in a market with perfect competition produces at a quantity that most likely results in:

1. economic profits equal to zero.
2. marginal revenue equal to marginal cost.
3. market price greater than marginal revenue.

Submit

• Explanation

A firm operating under perfect competition maximizes economic profit by producing and selling at the quantity where marginal revenue (MR) equals marginal cost (MC). Cost in this context includes opportunity costs (eg, the owners’ required return from the business). Perfectly competitive firms can earn economic profits in the short run, but even if economic profits are zero or negative, a firm may be earning an accounting profit.

MR, the incremental revenue from selling one additional unit, depends on the firm’s demand curve. In the case of perfect competition, the demand curve for any individual firm is a horizontal line at the market equilibrium price, since demand is perfectly elastic. Therefore, market price equals MR at all quantities (Choice C).

MC, the incremental cost to produce one additional unit, depends on the firm’s cost structure. Producing at a quantity greater than where MR = MC means that the incremental cost for each unit exceeds the incremental revenue generated by that unit and the firm generates a loss on each additional unit sold. Producing at a lower quantity means that the firm forgoes economic profit (in the short run) since the additional revenue from a unit sold would exceed the cost of the unit.

(Choice A) Perfectly competitive firms can earn economic profits in the short run. However, in the long-run, the positive economic profits will attract new firms, which will increase supply/lower price until economic profit is zero.

Note: Although this question specifically addresses perfect competition, the condition that firms optimally produce when MR = MC applies to all market structures. It is likely that the exam will have questions on this topic.

Things to remember:
Under perfect competition, a firm maximizes short-run economic profit by producing and selling at the quantity where marginal revenue (MR) equals marginal cost (MC). Since there is perfectly elastic demand, price also equals MR for all quantities. Short-run, but not long-run, economic profits are possible. However, a firm may earn an accounting profit even if economic profits are zero or negative.

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A demand curve for money is depicted in the graph below:

Which of the following best explains the shape of the curve between M ₀ and M ₁?

1. Liquidity trap
2. Policy rate of zero
3. Neutral rate of interest

Submit

• Explanation

There are limits to the effectiveness of monetary policy. This is often true in a deflationary environment when the demand curve for money becomes horizontal (ie, infinitely elastic), as shown in the graphs above. A liquidity trap occurs when the quantity of money continues to expand but fails to lower interest rates since economic agents would rather hold cash than borrow or lend.  At this point, monetary policy stops stimulating economic activity and loses its effectiveness.

A central bank’s monetary policy tools depend on others to implement them.  For example, a central bank can lower interest rates or reduce reserve requirements but cannot force anyone to borrow or lend.  A liquidity trap is an example of such ineffectiveness.

The economist John Maynard Keynes is credited with coining the phrase “pushing on a string” to describe the limitations of monetary policy.  It is easy to visualize how pulling on a string can bring something closer and how pushing on a string has no effect since it crumples and goes nowhere.  In a liquidity trap, the central bank is effectively “pushing on a string.”

(Choice B)  Central bank policy is not constrained by the zero boundary; policy rates can and have been negative. The demand for money does not necessarily stagnate at a zero-bound policy rate.

(Choice C)  The neutral rate of interest is the central bank’s policy rate that neither slows nor accelerates economic activity and is not specifically associated with the money demand curve.

Things to remember:
A liquidity trap results when the demand curve for money is horizontal and infinitely elastic, which often occurs in a deflationary environment.  In a liquidity trap, monetary policy stops stimulating economic activity and loses its effectiveness.

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A currency trader observes the following currency spot exchange rates from two dealers:

Source	Currency	Exchange Rate
Dealer 1	CNY/THB	0.22
Dealer 1	INR/THB	2.35
Dealer 2	INR/CNY	10.75

Based on only this information, the arbitrage profit available per every CNY 1 is closest to:

1. INR 0.0682
2. INR 0.0064
3. CNY 0.0682

Submit

• Explanation

A cross-rate is the exchange rate implied by two related exchange rates, assuming that no arbitrage opportunities exist.  If the actual exchange rate differs from the no-arbitrage exchange rate implied by the cross-rate, then an arbitrage opportunity exists. An investor can profit by purchasing a currency from the source where it is underpriced and simultaneously selling the same currency to the source where it is overpriced.

Finding an arbitrage opportunity from cross-rates can be conceptualized as a triangle, as shown above. Potential arbitrage profits can be observed by moving from one currency to another in two directions around the triangle. When moving around the triangle, one currency is multiplied by the actual exchange rate to convert to another currency.

In this scenario, the INR/CNY rate from Dealer 2 is 10.75. Using the INR/THB and CNY/THB rates quoted by Dealer 1, Dealer 1’s INR/CNY cross-rate is 10.6818. The arbitrage profit is the difference between buying CNY 1 for INR 10.6818 from Dealer 1 and simultaneously selling CNY 1 for INR 10.75 to Dealer 2. The profit is INR 10.75 − INR 10.6818 = INR 0.0682 per every CNY 1 (Choice C).

(Choice B)  0.0064 is the potential arbitrage profit in CNY, not INR.

Things to remember:
If an actual exchange rate differs from a cross-rate derived from two related exchange rates, an arbitrage opportunity becomes available by purchasing a currency from the underpriced source and selling the same currency to the overpriced source.

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What to Expect in CFA Level 2 Economics?

At 5-10% of the total exam content, CFA Level 2 Economics is less heavily weighted than about half of the topics onthe Level 2 exam and contains only 1 study session. The topic readings focus on foreign exchange concepts andtheories of exchange rate determination. You will explore 3 theories of growth and how regulation affects particularindustries.

Exam Weighting

The CFA Economics topic has a weighting of 5-10% of the L2 exam content, meaning that approximately 4-8 item setquestions or 1-2 item sets focus on this topic.

Level 2 Economics 2025 Syllabus, Readings, and Changes

The CFA Level 2 Economics syllabus will remainthe same in 2025 and has no substantive changes from prior readings in 2023 and 2024.

Currency Exchange Rates: Understanding Equilibrium Value

Exchange rate fluctuations are known to be unpredictable. Therefore, financial analysts are better off understandinglong-run equilibrium value, risk exposure, and currency hedges.

• The reading reviews fundamental theories and important influences regarding currency equilibrium dynamics.
• The reading also explores international parity conditions and how to calculate important variables related tolong-term currency value.

Economic Growth

Global investors are concerned with forecasts of long-term economic growth. To develop global portfolio strategies,investors must become familiar with identifiers of long-term sustainable growth. You will explore factors that drivelong-term growth and that may be predictive of success or failure.

• The reading discusses the possibility of developing countries catching up with developed countries in thelong-run and how policies affect sustainable growth rates.

Economics of Regulation

Regulations are developed and implemented when market solutions can’t adequately address an issue. These regulationsinfluence national economies, companies, and individuals.

• The reading discusses the reasoning behind regulation, its role in ensuring market fairness, and its costs andbenefits.
• The reading also reveals the tools regulators use domestically and internationally.

CFA Economics Level 2 Sample Questions and Answers

These sample questions mirror the complexity and depth of the Level 2 exam. They are presented as item sets,accompanied by a vignette, which assesses your knowledge of the CFA Level 2 Curriculum. Please note that eachvignette corresponds to 4 questions on the actual exam. We have included a few extra questions to enhance yourlearning experience.

Make sure to review the detailed answer explanations provided for each question. UWorld’s question bank willfamiliarize you with exam-style questions and provide comprehensive explanations for the tested concepts.

Latest Changes in the Level 3 Curriculum

For the 2025 CFA Program Level 3, CFA Institute has introduced substantial enhancements and expansions, marking oneofthe most significant developments since the program’s inception. This year features the debut of specialized pathwaysinPrivate Wealth, Private Markets, and Portfolio Management, allowing you to tailor your learning to align closelywithyour career aspirations. Each pathway builds on a robust “common core” enriched with specialized content anddesigned todeepen expertise in your chosen area.

A detailed description of each new pathway seamlessly integrates into our Level 3 curriculum topic outline guide.