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Economics 【Reading 14】Sample

Which of the following most completely identifies the institutions in an economy that are necessary for markets to be effective?
A)
Property rights and a supporting legal system.
B)
Property rights and monetary exchange.
C)
A legal system and a central banking system.



For markets to be effective, property rights and monetary exchange are required. If property rights are properly established and enforced, people will be assured that government will not confiscate their savings and investments. Monetary exchange provides for the efficient exchange of goods and services.

Which of the following is least likely to be considered as one of the three social institutions that are critical to the development of an incentive system?
A)
A specific form of political organization.
B)
Markets.
C)
Property rights.



The three social institutions that are critical to the development of incentives are markets, property rights, and monetary exchange. Collectively, these three social institutions create incentives for people to specialize and trade, save and invest, and discover new technologies. A specific form of political organization is not necessary for economic growth as communist and authoritarian countries have experienced economic growth.

TOP

Which of the following is least likely to be considered as one of the three social institutions that are critical to the development of an incentive system?
A)
A specific form of political organization.
B)
Markets.
C)
Property rights.


Click for Answer and Explanation

The three social institutions that are critical to the development of incentives are markets, property rights, and monetary exchange. Collectively, these three social institutions create incentives for people to specialize and trade, save and invest, and discover new technologies. A specific form of political organization is not necessary for economic growth as communist and authoritarian countries have experienced economic growth. Which of the following is least likely to be considered as one of the three social institutions that are critical to the development of an incentive system?
A)
A specific form of political organization.
B)
Markets.
C)
Property rights.




The three social institutions that are critical to the development of incentives are markets, property rights, and monetary exchange. Collectively, these three social institutions create incentives for people to specialize and trade, save and invest, and discover new technologies. A specific form of political organization is not necessary for economic growth as communist and authoritarian countries have experienced economic growth.

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Economist Davey Jarvis is studying time series data from the nation-state of Northwestern Island. He has created the following summary chart on the average annual change in real GDP per capita:

1886-1905 estimated <1%
1906-1925 unknown
1926-1945 +0.9%
1946-1965 +1.1%
1966-1985 +4.2%
1986-2005 +2.3%

Which of the following is most likely the source of the growth spurt between 1966 and 1985?
A)
Reduction in the federal budget deficit.
B)
Growth in physical capital.
C)
Trade policy shift from import restrictions to tariffs.



The sources of economic growth are Aggregate Hours, Labor Productivity, Physical Capital Growth, Human Capital Growth, and Technological Advance. A trade policy shift to tariffs or a reduction in the federal budget deficit may or may not help real GDP growth.

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Which of the following is a source of economic growth?
A)
Property Rights.
B)
Capricious Government.
C)
Technological Advance.



The sources of economic growth are Aggregate Hours, Labor Productivity, Physical Capital Growth, Human Capital Growth, and Technological Advance. Property Rights are a precondition, but not a source.

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Bond analyst Davey Jarvis is writing an article on sources of economic growth for a monthly investment newsletter. He is least likely to include a discussion of:
A)
human capital growth.
B)
monetary exchange.
C)
aggregate hours.



The sources of economic growth are Aggregate Hours, Labor Productivity, Physical Capital Growth, Human Capital Growth, and Technological Advance. Monetary exchange is a precondition, but not a source.

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Rob Hartwell, CFA, is a portfolio manager whose client base is primarily comprised of high net worth individuals. Hartwell has been hired by Joan McCarthy, a highly successful entrepreneur who has recently retired from her position as CEO of her company. Prior to the retention of Hartwell, McCarthy’s portfolio had been poorly managed by another investment advisor who had never formulated an investment policy for her and had invested Hartwell’s money in assets that were not particularly suitable for either her risk tolerance or her return requirements. One of Hartwell’s first tasks as McCarthy’s new portfolio manager is to formulate an investment policy for McCarthy in light of her new retirement status, taking into account her current and future needs for income-generating investment vehicles. Hartwell will then evaluate all current holdings and determine, on an individual basis and with regards to the portfolio as a whole, whether each position should be retained or liquidated.
Hartwell identifies two large positions in companies located in Slotvenski, an Eastern European country that, until twenty years ago, was under communist rule. The investments are in two manufacturing concerns: one that produces paper products for domestic use, while the other manufactures leather goods for export to EU countries and the United States. Hartwell believes that the fundamental financial analysis of the two corporations should be relatively straightforward, but knows that he must first gain a firm understanding of the country’s economic climate in order to evaluate the investments in the context of the overall portfolio.
Since the early 1990s, the government of Slotvenski has worked to replace its country’s formerly closed economy with a free market system with the hope of encouraging domestic economic growth. Policies were formulated specifically to create incentives for the country’s citizens to trade, invest and develop new technologies. As a result, over the past decade, the country has experienced a twenty percent increase in the growth rate of its labor productivity. In addition, over the same time period, the country has enjoyed an eight percent increase in the real GDP per labor hour. On the surface, both of these developments would appear to be of benefit to McCarthy’s investments in the developing country.
Hartwell is impressed by Slotvenski’s recent economic progress, but in light of McCarthy’s return parameters, he wants to do further analysis to attempt to determine whether or not this pattern of growth is sustainable in the future. He first will evaluate the country’s economic progress to determine which of the three predominant growth theories is most applicable to this situation. He observes that over the past decade, real interest rates have declined slightly, and Hartwell must determine what impact this may have on future economic growth.
In his analysis, Hartwell also notes several demographic trends emerging in the country’s economy. Of particular interest to Harwell is the change in the composition of the country’s workforce. As the country has become more industrialized, more opportunities for women to enter the workforce have led to a slight decrease in the country’s birth rate. At the same time, increased disposable income per capita has led to an increased domestic demand for consumer goods.An incentive system that will encourage a country’s economy to realize economic growth is composed of three main social institutions. Which of the following institutions must be present for a society to be able to create incentives for economic growth?
A)
Establishment of property rights.
B)
Increased labor productivity.
C)
Savings and investment in new capital.



Property rights must be established to assure citizens and foreign investors alike that the government will never confiscate their savings and investments.

With a proper incentive system in place, the economic growth of a country will least likely come from which of the following sources?
A)
The efficient exchange of goods and services.
B)
Investment in human capital.
C)
Increased savings and investment in new capital.



A monetary system that allows for the efficient exchange of goods and services is an integral part of the incentive system that must exist in order for a country to realize economic growth. Investment in human capital, technological advancements, increased savings, and investment in new capital are the actual sources of economic growth.

Which of the following statements regarding the growth rate of labor productivity is most accurate?
A)
Labor productivity can be quantified as capital per labor hour.
B)
The two factors that contribute to the growth of labor productivity are growth in physical capital per labor hour and technological change.
C)
Technological change is largely dependent upon growth in savings and investment in physical capital.



Labor productivity is calculated by dividing real GDP by aggregate labor hours, and the two factors having the greatest influence on labor productivity are growth in physical capital per labor hour and technological change.


Assuming that the Slotvenski economy experiences a 6 percent increase in capital per labor hour, calculate the amount of the increase in real pre capital GDP per labor hour attributable to investment in new capital and the amount attributable to technological advancement.
Investment in New
Capital Advancement
Technological Advancement
A)
6.00%2.00%
B)
2.67%5.33%
C)
2.00%6.00%



The one-third rule states that at a given level of technology, a one percent increase in capital per labor hour will result in a one third of one percent increase in real GDP per labor hour. Thus, capital per labor hour contributed 2 percent of the increase (1/3 × 6 percent) while technological change contributed the remaining 6 percent of the increase (8 percent - 2 percent).

In accordance with the new growth theory, a decrease in real interest rates:
A)
will act as an incentive for people to discover new products and technology.
B)
will have little or no effect on population growth.
C)
is caused by an accumulation of capital, which will eventually stifle economic growth.



Under the new growth theory, lower real interest rates will increase the drive to discover new products and technology in order to earn higher profits.

The economic theory that argues that the most important economic influence on population growth in a society is the opportunity cost to women for entering the workplace is:
A)
new growth theory.
B)
neoclassical growth theory.
C)
classical growth theory.



Neoclassical growth theory differs significantly from other growth theories in the assumptions that population growth is not simply a matter of adjustment centered on the subsistence real wage rate. Neoclassic economists believe that as the opportunity cost of having children increases for women, birth rates decline and population growth slows.

TOP

Consider the following three statements.
Statement 1: “The most important precondition for a society to realize economic growth is an incentive system that includes markets, property rights, and monetary exchange.”
Statement 2: “Most technological progress involves improvements in the productivity of physical capital.”
Statement 3: “The classical theory of economic growth contends that the most important economic influence on population growth is the opportunity cost for women entering the workplace.”

Which of the following best describes the accuracy of these statements?
Statement 1Statement 2Statement 3
A)
CorrectIncorrectIncorrect
B)
CorrectCorrectCorrect
C)
CorrectCorrectIncorrect



Statement 3 is incorrect. It is the neoclassical theory of economic growth (not the classical theory) that contends that population growth is a direct function of the opportunity cost for women entering the workplace. The other statements are correct.

TOP

Which of the following is the most basic precondition to economic growth?
A)
Property rights.
B)
Markets.
C)
An incentive system.



A suitable incentive system is the most basic precondition that must exist in order for a society to realize economic growth. The three social institutions that are critical to the development of incentives are markets, property rights, and monetary exchange. Collectively, these three social institutions create incentives for people to specialize and trade, save and invest, and discover new technologies.

TOP

Assume that real GDP per labor hour grew by 6 percent over the past 5 years while capital per labor hour grew by 5.25 percent. Based on the one third rule, the amount of real GDP growth attributable to the increase in capital per labor hour and the amount attributable to technological change are closest to:
Increase in CapitalTechnological Change
A)
2.00%4.00%
B)
0.75%5.25%
C)
1.75%4.25%



According to the one third rule, capital has contributed one third of 5.25% toward the increase in real GDP per labor hour. So, the capital growth contribution to the increase in GDP is 1/3 × 5.25% = 1.75%. The remaining 4.25% (= 6% – 1.75%) growth in real GDP per labor hour is attributable to technological change.

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