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CFA Level 1 Study Notes – Economics

CFA Level 1 Study Notes – Economics

Study Session 4

Reading 12(8 for 2022) – Topics in Demand and Supply Analysis

-LOS a: calculate and interpret price, income, and cross-price elasticities of demand and describe factors that affect each measure;
-LOS b: compare substitution and income effects;
-LOS c: contrast normal goods with inferior goods;
-LOS d: describe the phenomenon of diminishing marginal returns;
-LOS e: determine and interpret breakeven and shutdown points of production;
-LOS f: describe how economies of scale and diseconomies of scale affect costs.

Reading 13 (9 for 2022) – The Firm and Market Structures

-LOS a: describe characteristics of perfect competition, monopolistic competition, oligopoly, and pure monopoly;
-LOS b: explain relationships between price, marginal revenue, marginal cost, economic profit, and the elasticity of demand under each market structure;
-LOS c: describe a firm’s supply function under each market structure;
-LOS d: describe and determine the optimal price and output for firms under each market structure;
-LOS e: explain factors affecting long-run equilibrium under each market structure;
-LOSf: describe pricing strategy under each market structure;
-LOS g: describe the use and limitations of concentration measures in identifying market structure;
-LOS h. identify the type of market structure within which a firm operates

Reading 14 (10 for 2022) – Aggregate Output, Prices, And Economic Growth

-LOS a. calculate and explain gross domestic product (GDP) using expenditure and income approaches;
-LOS b. compare the sum-of-value-added and value-of-inal-output methods of calculating GDP;
-LOS c. compare nominal and real GDP and calculate and interpret the GDP delator;
-LOS d. compare GDP, national income, personal income, and personal disposable income;
-LOS e. explain the fundamental relationship among saving, investment, the fiscal balance, and the trade balance;
LOS f: explain the IS and LM curves and how they combine to generate the aggregate demand curve
-LOS g. explain the aggregate supply curve in the short run and long run;
-LOS h. explain causes of movements along and shifts in aggregate demand and supply curves;
-LOS i. describe how luctuations in aggregate demand and aggregate supply cause short-run changes in the economy and the business cycle;
-LOS j. distinguish among the following types of macroeconomic equilibria: long-run full employment, short-run recessionary gap, short-run inlationary gap, and short-run staglation;
-LOS k. explain how a short-run macroeconomic equilibrium may occur at a level above or below full employment;
-LOS l. analyze the effect of combined changes in aggregate supply and demand on the economy;
-LOS m. describe sources, measurement, and sustainability of economic growth;
-LOS n. describe the production function approach to analyzing the sources of economic growth;
-LOS o. define and contrast input growth with growth of total factor productivity as components of economic growth;

New LOS for 2022 Curriculum

-LOS f. explain how the aggregate demand curve is generated;

Reading 15 (11 for 2022) – Understanding Business Cycles

-LOS a. describe the business cycle and its phases;
-LOS b describe how resource use, consumer and business activity, housing sector activity, and external trade sector activity vary as an economy moves through the business cycle (LOS c in 2022)
-LOS c. describe theories of the business cycle (LOS d in 2022)
-LOS d. describe types of unemployment, and compare measures of unemployment (LOS f in 2022)
-LOS e. explain inflation, hyperinlation, disinlation, and delation (LOS g in 2022)
-LOS f. explain the construction of indexes used to measu re inlation;(LOS h in 2022)
-LOS g. compare inflation measures, including their uses and limitations (LOS i in 2022)
-LOS h. contrast cost-push and demand-pull inlation (LOS j in 2022)

-LOS i. interpret a set of economic indicators, and describe their uses and limitations (LOS e in 2022)

New LOS for 2022 Curriculum

-LOS b. describe credit cycles;

Reading 16 (12 for 2022) – Monetary and Fiscal Policy

-LOS a: compare monetary and fiscal policy;
-LOS b: describe functions and deinitions of money;
-LOS c: explain the money creation process;
-LOS d: describe theories of the demand for and supply of money;
-LOS e: describe the Fisher effect;
-LOS f: describe roles and objectives of central banks;
-LOS g: contrast the costs of expected and unexpected inlation;
-LOS h: describe tools used to implement monetary policy;
-LOS i: describe the monetary transmission mechanism;
-LOS j: describe qualities of effective central banks;
-LOS k: explain the relationships between monetary policy and economic growth, inlation, interest, and exchange rates;
-LOS l: contrast the use of inlation, interest rate, and exchange rate targeting by central banks;
-LOS m: determine whether a monetary policy is expansionary or contractionary;
-LOS n: describe limitations of monetary policy;
-LOS o: describe roles and objectives of fiscal policy;
-LOS p: describe tools of fiscal policy, including their advantages and disadvantages;
-LOS q: describe the arguments about whether the size of a national debt relative to GDP matters;
-LOS r: explain the implementation of fiscal policy and dificulties of implementation;
-LOS s: determine whether a fiscal policy is expansionary or contractionary;
-LOS t: explain the interaction of monetary and fiscal policy.

Reading 17 (13 for 2022) – International Trade and Capital Flows

LOS a: compare gross domestic product and gross national product
LOS b: describe benefits and costs of international trade
LOS c: distinguish between comparative advantage and absolute advantage
LOS d: explain the Ricardian and Heckscher–Ohlin models of trade and the source(s) of comparative advantage in each model
LOS e: compare types of trade and capital restrictions and their economic implications
LOS f: explain motivations for and advantages of trading blocs, common markets, and economic unions
LOS g: describe common objectives of capital restrictions imposed by governments
LOS h: describe the balance of payments accounts including their components
LOS i: explain how decisions by consumers, firms, and governments affect the balance of payments
LOS j: describe functions and objectives of the international organizations that facilitate trade, including the World Bank, the International Monetary Fund, and the World Trade Organization

Reading 18 (14 for 2022) – Currency Exchange Rates

LOS a: define an exchange rate and distinguish between nominal and real exchange rates and spot and forward exchange rates
LOS b: describe functions of and participants in the foreign exchange market
LOS c: calculate and interpret the percentage change in a currency relative to another currency
LOS d: calculate and interpret currency cross-rates
LOS e: convert forward quotations expressed on a points basis or in percentage terms into an outright forward quotation
LOS f: explain the arbitrage relationship between spot rates, forward rates, and interest rates
LOS g: calculate and interpret a forward discount or premium
LOS h: calculate and interpret the forward rate consistent with the spot rate and the interest rate in each currency
LOS i: describe exchange rate regimes
LOS j: explain the effects of exchange rates on countries’ international trade and capital flows

New LOS for 2022 Curriculum (just change in wording, same content)

LOS e: calculate an outright forward quotation from forward quotations expressed on a points basis or in percentage terms

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