CIMA BA1 Practice Questions: Test Your Knowledge
About CIMA BA1
CIMA BA1, Fundamentals of Business Economics, is the first subject many candidates tackle in the CIMA Certificate in Business Accounting. It covers three broad areas: microeconomics, macroeconomics, and the global economy.
The objective test consists of 60 questions to be completed in 90 minutes. Questions cover topics including supply and demand, market structures, national income, inflation, monetary and fiscal policy, exchange rates, and international trade.
BA1 is a conceptual subject. Success depends on understanding economic principles and being able to apply them to business scenarios, not on memorising definitions. Use these sample questions to test your knowledge and identify areas that need further revision.
Sample Practice Questions
Question 1: Demand and Price
If the price of a product increases and all other factors remain constant, what is the most likely effect on the quantity demanded?
- A) Quantity demanded will increase
- B) Quantity demanded will decrease
- C) Quantity demanded will remain unchanged
- D) The demand curve will shift to the right
Answer: B — The law of demand states that, ceteris paribus, as price increases the quantity demanded falls. A price change causes a movement along the demand curve, not a shift of the curve itself.
Question 2: Price Elasticity of Demand
A company reduces the price of its product by 10%, and the quantity demanded increases by 25%. The price elasticity of demand (PED) is:
- A) 0.4
- B) 1.0
- C) 2.5
- D) 25
Answer: C — PED is calculated as the percentage change in quantity demanded divided by the percentage change in price: 25% / 10% = 2.5. A PED greater than 1 indicates demand is price elastic.
Question 3: Market Structures
Which of the following is a characteristic of a perfectly competitive market?
- A) A small number of large firms dominate the market
- B) Products are differentiated through branding
- C) Individual firms are price takers
- D) There are significant barriers to entry
Answer: C — In perfect competition, there are many firms selling identical (homogeneous) products. No single firm has enough market power to influence the price, so all firms are price takers. Options A, B, and D describe features of oligopoly or monopolistic competition.
Question 4: Monopoly
In a monopoly market structure, the firm can earn supernormal profits in the long run because:
- A) It produces at the lowest possible cost
- B) There are high barriers to entry preventing new competitors
- C) Demand for its product is perfectly inelastic
- D) The government sets its prices
Answer: B — A monopolist can sustain supernormal profits over time because barriers to entry (such as patents, economies of scale, or legal protections) prevent other firms from entering the market and competing away those profits.
Question 5: Gross Domestic Product
Which of the following would NOT be included in a country's Gross Domestic Product (GDP)?
- A) Government spending on public services
- B) Consumer expenditure on goods and services
- C) Transfer payments such as state pensions
- D) Business investment in new machinery
Answer: C — GDP measures the total value of goods and services produced. Transfer payments such as pensions and benefits are not payments for goods or services produced; they are redistributions of income. The expenditure method of calculating GDP includes consumer spending, investment, government spending on goods and services, and net exports.
Question 6: Inflation
Cost-push inflation is most likely caused by:
- A) An increase in consumer spending
- B) A rise in raw material prices
- C) A reduction in income tax rates
- D) An increase in the money supply
Answer: B — Cost-push inflation occurs when the costs of production rise, forcing businesses to increase prices. Rising raw material prices are a classic cause. Options A, C, and D are more associated with demand-pull inflation, where increased demand pushes prices upward.
Question 7: Monetary Policy
If a central bank raises interest rates, the most likely immediate effect is:
- A) An increase in consumer borrowing
- B) A depreciation of the domestic currency
- C) An increase in the cost of borrowing for businesses and consumers
- D) An increase in aggregate demand
Answer: C — Higher interest rates directly increase the cost of borrowing. This tends to reduce consumer spending and business investment, which in turn reduces aggregate demand. Higher rates also tend to attract foreign capital, which can cause the currency to appreciate, not depreciate.
Question 8: Exchange Rates
Under a floating exchange rate system, if demand for a country's exports increases significantly, the most likely effect on its currency is:
- A) The currency will depreciate
- B) The currency will appreciate
- C) The exchange rate will remain fixed
- D) The central bank will devalue the currency
Answer: B — Increased demand for exports means foreign buyers need to purchase the domestic currency to pay for those goods. This increased demand for the currency causes it to appreciate. Devaluation (option D) is a deliberate government action that applies to fixed exchange rate systems.
Question 9: International Trade
The principle of comparative advantage states that countries should:
- A) Produce all goods domestically to avoid dependence on imports
- B) Specialise in producing goods where they have the lowest opportunity cost
- C) Only export goods that they can produce more cheaply in absolute terms
- D) Impose tariffs on all imported goods to protect domestic industries
Answer: B — Comparative advantage, developed by David Ricardo, argues that even if one country can produce everything more efficiently than another (absolute advantage), both countries benefit from trade if each specialises in goods where their opportunity cost is lowest.
Question 10: Fiscal Policy
An expansionary fiscal policy typically involves:
- A) Increasing interest rates and reducing the money supply
- B) Increasing government spending and reducing taxation
- C) Reducing government spending and increasing taxation
- D) Selling government bonds to reduce liquidity
Answer: B — Expansionary fiscal policy aims to stimulate economic activity. Governments achieve this by increasing spending (which directly boosts demand) and reducing taxes (which increases disposable income for consumers and businesses). Options A and D describe contractionary monetary policy, while option C describes contractionary fiscal policy.
Question 11: Supply Curve Shifts
Which of the following would cause the supply curve for a product to shift to the left?
- A) A fall in the price of raw materials used in production
- B) An improvement in production technology
- C) The introduction of a new tax on producers
- D) An increase in the number of firms in the market
Answer: C — A leftward shift of the supply curve indicates a decrease in supply at every price level. A tax on producers increases their costs, reducing the quantity they are willing to supply at any given price. Options A, B, and D would all cause the supply curve to shift to the right.
Question 12: Economic Growth
Which of the following is most likely to be a consequence of sustained economic growth?
- A) Rising unemployment
- B) A reduction in government tax revenue
- C) Increased pressure on the environment
- D) A fall in living standards
Answer: C — While economic growth brings many benefits such as higher incomes and lower unemployment, it also creates pressures including environmental degradation through increased resource consumption and pollution. This is why sustainable development has become a key policy concern.
Study Tips for BA1
Think in economic terms. BA1 requires you to understand how economic forces affect business decisions. When you study a concept like elasticity or monetary policy, think about how it would apply to a real company or industry. This application-focused thinking is exactly what the exam tests.
Use diagrams. Many economic concepts are best understood visually. Draw supply and demand diagrams, cost curves, and circular flow models. Being able to sketch these from memory helps reinforce your understanding and can make complex scenarios much clearer.
Read beyond the textbook. Follow economic news and consider how current events relate to your BA1 studies. When you read about a central bank changing interest rates or a government announcing tax changes, think about the economic theory behind those decisions.
Practise under timed conditions. Once you are comfortable with the material, attempt full sets of practice questions within the 90-minute time limit. This builds your speed and confidence for the real exam.
Ready for More?
These sample questions cover core BA1 topics, but the real exam draws from across the entire syllabus. Sign up for full access to our CIMA BA1 practice question bank, with hundreds of questions, detailed explanations, and performance tracking to help you identify and strengthen your weak areas.