CBE Practice Exam and Answer Key Version II 1.23

Certified Business Economist® (CBE)
Practice Exam, Version II: Answers, Content Areas and
Explanations

The CBE Practice Exam includes questions from the six content areas which will be tested on the
CBE Exam; Applied Econometrics, Economic Measurement, Macroeconomics,
Microeconomics, Statistics and Data Analytics, and Strategy and Managerial Decision Making.
Each question on the examination is followed by four possible answers or completions. Select
the best answer for each question.
The CBE Exam has been grouped into three sections:
Section 1: Macroeconomics and Economic Measurement

Section 2: Statistics and Data Analytics and Applied Econometrics
Section 3: Microeconomics and Strategy and Managerial Decision Making
Please use this answer key to determine where additional study may be required before sitting for
the exam. Please note that difficulty levels of actual test questions and the scope and depth of
coverage of the actual examination will vary. You are encouraged to review the detailed content
outlines for each content area before sitting for the exam.
Are you ready for the real thing?

Space is available to sit for the CBE Exam.
Need more preparation? Check out upcoming courses and additional resources at
www.nabe.com\CBE.
For more information visit, www.nabe.com\CBE

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Page 1 of 15

Section 1: Macroeconomics and Economic Measurement

Question 1
Which of the following would be most consistent with a strong expansion forecast? The term spread
between the U.S. 10‐year Treasury note and U.S. 3‐month Treasury bill is:

A. 60 basis points
B. 120 basis points
C. ‐60 basis points
D. ‐120 basis points

Answer: B
Content Area: Macroeconomics, Interpret indicators as relate to forecast
Rationale: An expansion is more likely to be predicted when the yield curve is upward sloping. A greater
upward slope is a stronger indication of an expansion. Bills are shorter‐term instruments while notes are
longer‐term instruments.

Question 2
In the aggregate demand/aggregate supply model which of the following is an explanation why demand
for goods would be negatively affected by an increase in the general price level?

A. Consumers demand for money falls.
B. People’s real wealth declines.
C. Relative price changes lead to consumption changes.
D. Imported goods become relatively more expensive.

Answer: B
Content Area: Macroeconomics, Aggregate Demand and Aggregate Supply
Rationale: In the AS/AD model, the slope of the aggregate demand curve is based on the interest rate
effect, the wealth effect and the international effect. Relative prices have not changed.

Question 3
Which of the following liabilities is a source of funds for households in the financial accounts (flow of
funds)?

A. SDR certificates
B. Pension entitlements
C. Credit market instruments
D. Mutual fund shares

Answer: C
Content Area: Economic Measurement, Flow of funds; flow matrix; households
Rationale: See the summary table in of the Financial Accounts.


Page 2 of 15

Question 4
Refer to the table below to respond to the following question:

Capital account transactions 45
Change in private inventories 80
Consumption fixed capital, government 250
Consumption fixed capital, private 1,350
Government fixed investment 500
Net government saving ‐200
Net lending/borrowing ‐800
Personal saving 40
Private fixed investment 2,360
Undistributed profits with inventory valuation and capital
consumption adjustments 400
Wage accruals less disbursements 8
Figures are in billions of dollars.

What is gross domestic investment?

A. $1,845 billion
B. $2,940 billion
C. $2,860 billion
D. $4,540 billion

Answer: B
Content Area: Economic Measurement, GDP and the National Income and Product Accounts; capital
account (Accounts 6 and 7); domestic saving and investment
Rationale: Gross domestic investment is the sum of private fixed investment, government fixed
investment, and the change in private inventories.

Question 5
To estimate the natural rate of unemployment, an economist would look at the:

A. federal funds rate, actual unemployment rate and supply shocks.
B. inflation rate, actual unemployment rate and supply shocks.
C. exchange rate, money growth and inflation expectations
D. government deficit, money growth and inflation expectations.

Answer: B
Content Area: Macroeconomics, Natural Rate Hypothesis
Rationale: The natural rate of unemployment is often considered the rate at which inflation is stable.
Therefore, the inflation rate is often used, along with other variables, to estimate the natural rate of
unemployment.


Page 3 of 15

Question 6
Which of the following accounts can be used to calculate the percent of U.S. owned assets abroad held
as official reserves?

A. International investment position accounts
B. National income and product accounts
C. Capital and financial accounts
D. Balance of payments accounts

Answer: A
Content Area: Economic Measurement, International statistics and balance of payments; international
investment position; what the data tell us
Rationale: The international investment position accounts show the value of accumulated stocks of U.S.‐
owned foreign assets and foreign‐owned U.S. assets. It is disaggregated into type of asset and is,
therefore, a source for determining the composition of U.S.‐owned assets abroad. See International
Transactions and International Investment Position
Table 1.2. U.S. Net International Investment Position at the End of the Period, Expanded Detail.

Question 7
A tool to temporarily reduce excess reserves in the banking system without changing the size of the
Federal Reserve balance sheet would be for the Federal Reserve to sell:

A. long‐term Treasury bonds and buy short‐term Treasury notes.
B. reserves on the federal funds market one night and repurchase them the next.
C. Treasuries to securities dealers with an agreement to repurchase them later.
D. mortgage‐backed securities to banks at highly discounted rates.

Answer: C
Content Area: Macroeconomics, Traditional vs. Non‐traditional Monetary Tools
Rationale: Selling a Treasury to a bank would reduce aggregate reserves. The promise to repurchase
them means the overall size of the Fed balance sheet will not change.

Question 8
A primary Bureau of Labor Statistic’s payroll survey statistic that is helpful in studying inflation is:

A. the number of minimum wage earners.
B. producer price index inflation.
C. average hourly earnings.
D. the labor force participation rate.

Answer: C
Content Area: Economic Measurement, Measuring employment (2); payroll survey; major uses of CES
data
Rationale: Average hourly earnings can be an early indication of cost‐push pressures. It’s also the only
statistic listed among the options that is collected as part of the payroll survey.


Page 4 of 15

Question 9
According to the permanent income hypothesis, if the government wants to reduce current
consumption by changing income tax rates, it will be most effective if it:

A. raises tax rates and announces that the change is temporary.
B. lowers tax rates and announces that the change is permanent.
C. raises tax rates and announces that the change is permanent.
D. lowers tax rates and announces that the change is temporary.

Answer: C
Content Area: Macroeconomics, Consumption and Saving Theories
Rationale: According to the permanent income hypothesis, individuals seek to smooth consumption and
therefore base consumption on permanent income. If they believe the tax is temporary, individuals will
dip into savings to maintain their level of consumption.

Question 10
Which of the following does the Bureau of Labor Statistics often use when calculating quality
adjustments to products?

A. Budget share
B. Calendar years
C. Price changes
D. Input costs

Answer: D
Content Area: Economic Measurement, Measuring inflation; building blocks of the BLS CPI; estimating
CPI; quality adjustment
Rationale: See “The Consumer Price Index,” BLS Handbook of Methods, Bureau of Labor Statistics.
www.bls.gov/opub/hom/pdf/homch17.pdf

Question 11
The output concept used to calculate nonfarm business productivity is:

A. value added.
B. final sales.
C. sum of total sales by all sectors.
D. value of inputs to production.

Answer: A
Content Area: Economic Measurement, Productivity; productivity concepts of output
Rationale: While final sales is a measure of total output, value added is the measure of total output used
to calculate productivity. The sum of total sales double counts production because production of some
sectors is inputs to others.


Page 5 of 15

Section 2: Statistics and Data Analytics and Applied Econometrics

Question 12
The following multi‐equation specification corresponds to a supply and demand model for a food
product in the United States.

Demand: Υ1t = β12Υ2t + γ11Z1t + γ12 Z2t + γ10 + u1t

Supply: Υ2t = β21Υ1t + γ22Z3t + γ23Z4t + γ20 + u2t

Y1t and Y2t are endogenous variables and Z1t, Z2t, Z3t, and Z4t are predetermined variables.

u1t and u2t are correlated random disturbance terms.

β’s are parameters of endogenous variables.

γ’s are parameters of predetermined variables.

If β12 and β21 were jointly equal to zero, the most appropriate method to estimate the structural
parameters of this system is:

A. OLS.
B. SUR.
C. 2SLS.
D. 3SLS.

Answer: B
Content Area: Applied Econometrics, Components of the Models, Disturbance (Error) Terms
Rationale: For simultaneous‐equation models, 3SLS is the most appropriate technique. 3SLS is a full‐
information estimation method. SUR applies to seemingly unrelated regression models. If β12 and β21
were jointly equal to zero, then this system of equations corresponds to a seemingly unrelated system.

Question 13
Using the Empirical Rule, approximately what proportion of the observations should lie between ‐2 and
+1 standard deviations?

A. 34.0%.
B. 49.5%.
C. 68.0%.
D. 81.5%.

Answer: D
Section: Statistics and Data Analytics, The Normal Distribution
Rational: Approximately 95% of the observations lie between +/‐ 2 standard deviations and 68% lie
between +/‐1 standard deviations. Therefore, 47.5+34 = 81.5.


Page 6 of 15

Question 14
, , , , ,
Assume that: 45 0.26 0.42 0.49 0.32

In addition, an F‐test of the joint significance of the coefficients associated with EXPV2t‐1 and EXPV2t‐2
reveals a p‐value of 0.84.

Which of the following conclusions can be made about the relationship between EXPV1 and EXPV2 on
the basis of this evidence?

A. EXPV1 Granger causes EXPV2.
B. EXPV2 Granger causes EXPV1.
C. EXPV1 does not Granger cause EXPV2
D. EXPV2 does not Granger cause EXPV1.

Answer: D
Content Area: Applied Econometrics, Granger Causality Tests
Rationale: EXPV2 Granger causes (precedes) EXPV1 only if the F‐statistic is significantly different from
zero. Additionally, there is no evidence to support the conclusion that EXPV1 either precedes or does
not precede EXPV2.

Question 15
The estimation of a model is as follows:

CEDt=5‐0.1*Ft+0.3*Gt+0.2*CEDt‐1.

The most appropriate test for first‐order serial correlation in this instance is the:

A. Non‐parametric runs test.
B. The Durbin‐Watson test.
C. The Durbin h‐test.
D. Lagrange Multiplier test.

Answer: C
Content Area: Applied Econometrics, Formal Tests of Serial Correlation
Rationale: The Durbin h‐test is designed to test for first‐order serial correlation in single‐equation
models with a lag of the dependent variable.


Page 7 of 15

Question 16
The price of a pound of apples in the base year is $1.45. The price of a pound of apples in the following
year is $1.63 per pound. What is the approximate price index in the year in which the price is $1.63 per
pound?

A. 112.
B. 100.
C. 89.
D. 80.

Answer: A
Content Area: Statistics and Data Analytics, Creating an Index
Rational: The price index is equal to 112.41, found by: (1.63/1.45) * 100.

Question 17
Interviewers survey 400 college students and find 89% of students receive financial aid to attend
college. Which of the following is an approximate 95% confidence interval for the estimate of the
population proportion?

A. (82% < p < 96%)
B. (84% < p < 90%)
C. (84% < p < 94%)
D. (86% < p < 92%)

Answer: D
Content Area: Statistics and Data Analytics, Confidence Intervals
Rationale: The formula for a confidence interval for a population proportion is:
. .
= 0.89 1.96


Page 8 of 15

Question 18
An analyst estimates a model for sales as follows:

lnSalest=4‐0.8*lnPt+0.4*lnIt+0.02*lnAt+0.08*lnAt‐1+0.12*lnAt‐2+0.07*lnAt‐3+0.04*lnAt‐4

Salest = dollar sales of a product at time period t
Pt= price of the product at time period t
It = income at time period t
At = advertising expenditures associated with the product at time period t.
The frequency of the data is monthly.

The average length of time for a change in advertising to be transferred to sales is closest to?

A. 1 month
B. 2 months
C. 3 months
D. 4 months

Answer: B
Content Area: Applied Econometrics, Distributed Lag Models
Rationale: The average length of time for a change in advertising to be transferred to sales is given by
the mean lag. The mean lag is the ratio of the sum of the products of the time subscripts times the
estimated coefficients (0.69 in this case) to the long‐run advertising elasticity (0.33 in this case).
Consequently, the mean lag is 2.09 months.

Question 19
Refer to the formula and correlation coefficient matrix below to respond to the following question:

∝

Correlation Coefficient Matrix:
Units of Output Hours Worked
Units of Output 1

Hours Worked 0.71 1

Which of the following is a CORRECT interpretation of the correlation coefficient between Units of
Output and Hours Worked?

A. Hours Worked accounts for 71% of the fluctuation in Units of Output.
B. The variable Hours Worked causes Units of Output to increase 71 % of the time.
C. The variables Hours Worked and the Units of Output have a high, positive correlation.
D. Higher Hours Worked is associated with lower Units of Output.

Answer: C
Content Area: Statistics and Data Analytics, Causality vs. Correlation


Page 9 of 15

Rationale: The correlation coefficient will be in the range of ‐1 to +1. Positive values indicate positive
relationships (variables move in the same direction), and negative values indicate negative relationships
(variables move in opposite directions). It does not imply causality, only correlation.

Question 20
Compare the following regression output.

Regression Output for Model A: ∝ (where i=individual)
Standard
Coefficients Error t Stat P‐value
Intercept 57.575 3.759 15.315 0.000
X ‐27.375 4.853 ‐5.640 0.000

Regression Output for Model B: ∝ (where i=individual)
Standard
Coefficients Error t Stat P‐value
Intercept 7.203 44.432 0.162 0.877
X 0.695 2.701 0.257 0.806
M ‐11.281 6.785 ‐1.663 0.147
Z 0.846 0.296 2.858 0.029

Which of the following is true regarding Output A and Output B?

A. The coefficient estimate for M is statistically significant in both models.
B. The coefficient estimate for X is statistically significant in both models.
C. The coefficient estimate for X is statistically significant in Model B but not in Model A.
D. The coefficient estimate for X is statistically significant in Model A but not in Model B.

Answer: D
Content Area: Statistics and Data Analytics, Model Sensitivity and Full Disclosure
Rationale: The p‐value for X in output A is less than 0.10 so it is statistically significant. However, it is
much higher in output B, indicating the coefficient estimate is no longer statistically significant.


Page 10 of 15

Question 21
An analyst in interested in the determination of predicted probabilities conditional on a set of
explanatory factors concerning choices made by individuals. What is the most appropriate model to use
in this determination?

A. Censored response model.
B. Distributed lag model.
C. Error components model.
D. Probit/logit model.

Answer: D
Content Area: Applied Econometrics, Qualitative Choice Models, Overview of Qualitative Choice Models
Rationale: To obtain probabilities conditional on a set of explanatory factors concerning choices made
by individuals, the most appropriate model to use are qualitative choice models (probit models or logit
models).

Section 3: Microeconomics and Strategy and Managerial Decision Making
Question: 22
A hairdresser who currently makes $50,000 per year at a local salon is considering opening up her own
business. She anticipates that she will use $100,000 of her savings (currently earning a return of 5%),
and will forego paying herself a salary in the first year. She forecasts that the cost of supplies, utilities,
taxes, and wages for hired workers will amount to $200,000 and revenues will amount to $250,000.
From an economic standpoint, her profit or loss in the first year will be:

A. ‐$5,000
B. 0
C. +$5,000
D. +$50,000

Answer: A
Content Area: Managerial Economics, Accounting profit vs. economic profit
Rationale: Total Revenue – (Explicit Costs + Implicit Costs) = $250,000 – (200,000 + 50,000 + 5,000) = ‐
$5,000


Page 11 of 15

Question 23
The federal government has required that coal‐fired power plants improve their sulfur dioxide
abatement programs which increases the per unit cost of production. The direct effect of this regulation
is illustrated by a:

A. movement along the demand curve for coal‐fired power.
B. shift in the demand curve for coal‐fired power.
C. movement along the supply curve for coal‐fired power.
D. shift in the supply curve for coal‐fired power.

Answer: D
Content Area: Microeconomics, Change in supply vs change in quantity supplied
Rationale: The regulation likely adds cost at every level of output, which shifts the supply curve to the
left.

Question 24
Production is represented by the following equation:

Q = 50K0.5L0.3,

where Q = quantity produced,
K = capital,
L = labor.

If capital increases by 10% and labor increases by 20%, total output increases by:

A. 3%
B. 6%
C. 8%
D. 11%

Answer: D
Content Area: Microeconomics, Returns to Scale
Rationale: The increase in output due to capital is 5% and the increase in output due to labor is 6%. The
sum of the two is 11%.


Page 12 of 15

Question 25
Assuming that two segments of customers can be identified and separated, charging a different price to
each of those two segments for a product can enhance profitability only if the two segments have:

A. Equal income elasticity of demand.
B. Unequal income elasticity of demand.
C. Equal price elasticity of demand.
D. Unequal price elasticity of demand.

Answer: D
Content Area: Managerial Economics, Efficient Pricing, Fundamentals
Rationale: Pricing differentials are based on differences in price elasticity of demand.

Question 26
Demand and supply are specified by the following equations:

Qd = 12‐P
Qs = ½P +6

If the government were to remove a price floor for milk of $3.50, the quantity demanded of milk will:

A. rise and the quantity supplied falls.
B. fall and the quantity supplied rises.
C. remain the same and the quantity supplied will fall.
D. remain the same as will the quantity supplied.

Answer: D
Content Area: Microeconomics, Changes in Quantity Supplied
Rationale: Since equilibrium price ($4) is higher than the price floor, removing the floor has no impact on
the market.

Question 27
The likelihood that one or both parties to a contract will engage in opportunistic behavior increases
with:

A. greater transparency.
B. greater asset specificity.
C. less uncertainty.
D. less frequency in orders.

Answer: B
Content Area: Managerial Economics, Boundaries of the Firm and Transaction Costs
Rationale: When an asset has little value in alternative uses, a firm can hold up the transaction more
easily.


Page 13 of 15

Question 28
Which of the following is true of a perfectly competitive firm?

A. Economic profit is positive.
B. Fixed costs are zero.
C. Marginal revenue is increasing.
D. Marginal revenue is constant.

Answer: D
Content Area: Microeconomics, Perfect Competition, short‐run output and price decision
Rationale: For a perfectly competitive firm, the price of the product is determined by the market. Since
it receives the same price no matter the level of production, its marginal revenue equals the market
price and is constant. While perfectly competitive firms earn accounting profit they do not earn
economic profit.

Question 29
Which of the following is the best example of free riding?

A. Redeeming consumer discount coupons at retail stores.
B. Utilizing public parks without paying for it.
C. Search engines collecting personal data to sell.
D. Greater benefits of social media as social media use increases.

Answer: B
Content Area: Microeconomics, Free‐rider problem
Rationale: The free‐rider problem exists when people can use a good or service without paying for it.

Question 30
The demand for a firm’s bottled spring water service is estimated to be: Q = 100 – 4P. Demand for this
spring water is moderately high price elastic when price equals:

A. $1.50.
B. $7.50.
C. $12.50.
D. $15.00.

Answer: D
Content Area: Managerial Economics, Analysis of Demand – Price Elasticity of Demand, Using a linear
demand function
Rationale: Elasticity can be computed as (dQ/dP)*(P/Q). For this linear function, elasticity becomes P/(P‐
25). Math, $1.50. = ‐.06, $7.50.= ‐.43, $12.50. = ‐1.0, $15.00. = ‐1.5


Page 14 of 15

Question 31

Refer to the figure below to respond to the following question:
The figure below shows the tree diagram illustrating the decisions for two firms to enter a new market.

A = $200, B = $200
B Enters

A Enters B Stays A = $600, B = $0
Out

B Enters A = $0, B = $600
A Stays
Out
B Stays
A = $0, B = $0
Out

If played sequentially, and firm A moves first, then

A. firm A possesses a first mover advantage.
B. firm B possesses a second mover advantage.
C. it is not possible to determine an equilibrium outcome.
D. the equilibrium is the same as if played simultaneously.

Answer: D
Content Area: Managerial Economics, Analyzing choices through decision trees
Rationale: A first mover advantage would be a situation where A improves its outcome by going first. In
this game, whether sequential or simultaneous, the outcome is the same – both firms enter.


Page 15 of 15

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CBE Practice Exam and Answer Key Version II 1.23

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The CBE Exam has been grouped into three sections:

Section 1: Macroeconomics and Economic Measurement

Are you ready for the real thing?

For more information visit, www.nabe.com\CBE

Section 1: Macroeconomics and Economic Measurement

Section 2: Statistics and Data Analytics and Applied Econometrics

Intercept 57.575 3.759 15.315 0.000

X ‐27.375 4.853 ‐5.640 0.000

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