CFA Level 1 Study Notes – Economics

Study Session 4

Reading 12 – Topics in Demand and Supply Analysis

LOS 12a: calculate and interpret price, income, and cross-price elasticities of demand and describe factors that affect each measure
LOS 12b: compare substitution and income effects
LOS 12c: distinguish between normal goods and inferior goods
LOS 12d: describe the phenomenon of diminishing marginal returns
LOS 12e: determine and describe breakeven and shutdown points of production
LOS 12f: describe how economies of scale and diseconomies of scale affect costs

Reading 13 – The Firm and Market Structures

LOS 13a: describe characteristics of perfect competition, monopolistic competition, oligopoly, and pure monopoly
LOS 13b: explain relationships between price, marginal revenue, marginal cost, economic profit, and the elasticity of demand under each market structure
LOS 13c: describe a firm’s supply function under each market structure
LOS 13d: describe and determine the optimal price and output for firms under each market structure
LOS 13e: explain factors affecting long-run equilibrium under each market structure
LOS 13f: describe pricing strategy under each market structure
LOS 13g: describe the use and limitations of concentration measures in identifying market structure
LOS 13h: identify the type of market structure within which a firm operates

Reading 14 – Aggregate Output, Prices, And Economic Growth

LOS 14a: calculate and explain gross domestic product (GDP) using expenditure and income approaches
LOS 14b: compare the sum-of-value-added and value-of-final-output methods of calculating GDP
LOS 14c: compare nominal and real GDP and calculate and interpret the GDP deflator
LOS 14d: compare GDP, national income, personal income, and personal disposable income
LOS 14e: explain the fundamental relationship among saving, investment, the fiscal balance, and the trade balance
LOS 14f: explain the IS and LM curves and how they combine to generate the aggregate demand curve
LOS 14g: explain the aggregate supply curve in the short run and long run
LOS 14h: explain causes of movements along and shifts in aggregate demand and supply curves
LOS 14i: describe how fluctuations in aggregate demand and aggregate supply cause short-run changes in the economy and the business cycle
LOS 14j: distinguish between the following types of macroeconomic equilibria: long-run full employment, short-run recessionary gap, short-run inflationary gap, and short-run stagflation
LOS 14k: explain how a short-run macroeconomic equilibrium may occur at a level above or below full employment
LOS 14l: analyze the effect of combined changes in aggregate supply and demand on the economy
LOS 14m: describe sources, measurement, and sustainability of economic growth
LOS 14n: describe the production function approach to analyzing the sources of economic growth
LOS 14o: distinguish between input growth and growth of total factor productivity as components of economic growth

Reading 15 – Understanding Business Cycles

LOS 15a: describe the business cycle and its phases
LOS 15b: describe how resource use, housing sector activity, and external trade sector activity vary as an economy moves through the business cycle
LOS 15c: describe theories of the business cycle
LOS 15d: describe types of unemployment and compare measures of unemployment
LOS 15e: explain inflation, hyperinflation, disinflation, and deflation
LOS 15f: explain the construction of indices used to measure inflation
LOS 15g: compare inflation measures, including their uses and limitations
LOS 15h: distinguish between cost-push and demand-pull inflation
LOS 15i: interpret a set of economic indicators and describe their uses and limitations

Reading 16 – Monetary and Fiscal Policy

LOS 16a: compare monetary and fiscal policy
LOS 16b: describe functions and definitions of money
LOS 16c: explain the money creation process
LOS 16d: describe theories of the demand for and supply of money
LOS 16e: describe the Fisher effect
LOS 16f: describe roles and objectives of central banks
LOS 16g: contrast the costs of expected and unexpected inflation
LOS 16h: describe tools used to implement monetary policy
LOS 16i: describe the monetary transmission mechanism
LOS 16j: describe qualities of effective central banks
LOS 16k: explain the relationships between monetary policy and economic growth, inflation, interest, and exchange rates
LOS 16l: contrast the use of inflation, interest rate, and exchange rate targeting by central banks
LOS 16m: determine whether a monetary policy is expansionary or contractionary
LOS 16n: describe limitations of monetary policy
LOS 16o: describe roles and objectives of fiscal policy
LOS 16p: describe tools of fiscal policy, including their advantages and disadvantages
LOS 16q: describe the arguments about whether the size of a national debt relative to GDP matters
LOS 16r: explain the implementation of fiscal policy and difficulties of implementation
LOS 16s: determine whether a fiscal policy is expansionary or contractionary
LOS 16t: explain the interaction of monetary and fiscal policy

Reading 17 – International Trade and Capital Flows

LOS 17a: compare gross domestic product and gross national product
LOS 17b: describe benefits and costs of international trade
LOS 17c: distinguish between comparative advantage and absolute advantage
LOS 17d: explain the Ricardian and Heckscher–Ohlin models of trade and the source(s) of comparative advantage in each model
LOS 17e: compare types of trade and capital restrictions and their economic implications
LOS 17f: explain motivations for and advantages of trading blocs, common markets, and economic unions
LOS 17g: describe common objectives of capital restrictions imposed by governments
LOS 17h: describe the balance of payments accounts including their components
LOS 17i: explain how decisions by consumers, firms, and governments affect the balance of payments
LOS 17j: 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 – Currency Exchange Rates

LOS 18a: define an exchange rate and distinguish between nominal and real exchange rates and spot and forward exchange rates
LOS 18b: describe functions of and participants in the foreign exchange market
LOS 18c: calculate and interpret the percentage change in a currency relative to another currency
LOS 18d: calculate and interpret currency cross-rates
LOS 18e: convert forward quotations expressed on a points basis or in percentage terms into an outright forward quotation
LOS 18f: explain the arbitrage relationship between spot rates, forward rates, and interest rates
LOS 18g: calculate and interpret a forward discount or premium
LOS 18h: calculate and interpret the forward rate consistent with the spot rate and the interest rate in each currency
LOS 18i: describe exchange rate regimes
LOS 18j: explain the effects of exchange rates on countries’ international trade and capital flows

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