Course Content
TOPICS IN DEMAND AND SUPPLY ANALYSIS
This chapter is covered under Reading 12 of Study Session 4. After reading this chapter, a student shall be able to: a. calculate and interpret price, income, and cross-price elasticities of demand and describe factors that affect each measure; b. compare substitution and income effects; c. distinguish between normal goods and inferior goods; d. describe the phenomenon of diminishing marginal returns; e. determine and describe break-even and shutdown points of production; f. describe how economies of scale and diseconomies of scale affect costs.
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Demand Concept
Supply Concepts
Market Equilibrium
THE FIRM AND MARKET STRUCTURES
This chapter is covered in reading 13 of study session 4 of the material provided by the Institute. After reading this chapter, a student shall be able to: a. describe characteristics of perfect competition, monopolistic competition, oligopoly, and pure monopoly; b. explain relationships between price, marginal revenue, marginal cost, economic profit, and the elasticity of demand under each market structure; c. describe a firm’s supply function under each market structure; d. describe and determine the optimal price and output for firms under each market structure; e. explain factors affecting long-run equilibrium under each market structure; f. describe pricing strategy under each market structure; g. describe the use and limitations of concentration measures in identifying market structure; h. identify the type of market structure within which a firm operates.
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LOS A to G: Types of Market Structure
LOS H: Identification of Market Structure
AGGREGATE OUTPUT, PRICES, AND ECONOMIC GROWTH
This chapter is covered in reading 14 of study session 4 of the material provided by the Institute. After reading this chapter, a student shall be able to: a. calculate and explain gross domestic product (GDP) using expenditure and income approaches; b. compare the sum-of-value-added and value-of-final-output methods of calculating GDP; c. compare nominal and real GDP and calculate and interpret the GDP deflator; d. compare GDP, national income, personal income, and personal disposable income; e. explain the fundamental relationship among saving, investment, the fiscal balance, and the trade balance; f. explain the IS and LM curves and how they combine to generate the aggregate demand curve; g. explain the aggregate supply curve in the short run and long run; h. explain causes of movements along and shifts in aggregate demand and supply curves; i. describe how fluctuations in aggregate demand and aggregate supply cause short-run changes in the economy and the business cycle; j. distinguish between the following types of macroeconomic equilibria: long-run full employment, short-run recessionary gap, short-run inflationary gap, and short-run stagflation; k. explain how a short-run macroeconomic equilibrium may occur at a level above or below full employment; l. analyze the effect of combined changes in aggregate supply and demand on the economy; m. describe sources, measurement, and sustainability of economic growth; n. describe the production function approach to analyzing the sources of economic growth; o. distinguish between input growth and growth of total factor productivity as components of economic growth.
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Introduction
LOS A: Aggregate Output and Income
LOS B to E: Gross Domestic Product
LOS F to L: Aggregate Demand, Aggregate Supply & Equilibrium
LOS M, N, and O: Economic Growth and Sustainability
UNDERSTANDING BUSINESS CYCLES
This chapter is covered in reading 15 of study session 4 of the material provided by the Institute. After reading this chapter, a student shall be able to: a. describe the business cycle and its phases; b. describe how resource use, housing sector activity, and external trade sector activity vary as an economy moves through the business cycle; c. describe theories of the business cycle; d. describe types of unemployment and compare measures of unemployment; e. explain inflation, hyperinflation, disinflation, and deflation; f. explain the construction of indexes used to measure inflation; g. compare inflation measures, including their uses and limitations; h. distinguish between cost-push and demand-pull inflation; i. interpret a set of economic indicators and describe their uses and limitations.
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LOS A and B: Overview of Business Cycle
LOS C: Theories of Business Cycle
LOS D: Unemployement
LOS E: Inflation
LOS I: Economic Indicators
MONETARY AND FISCAL POLICY
This chapter is covered in reading 16 of study session 5 of the material provided by the Institute. After reading this chapter, a student shall be able to: a. compare monetary and fiscal policy; b. describe functions and definitions of money; c. explain the money creation process; d. describe theories of the demand for and supply of money; e. describe the Fisher effect; f. describe roles and objectives of central banks; g. contrast the costs of expected and unexpected inflation; h. describe tools used to implement monetary policy; i. describe the monetary transmission mechanism; j. describe qualities of effective central banks; k. explain the relationships between monetary policy and economic growth, inflation, interest, and exchange rates; l. contrast the use of inflation, interest rate, and exchange rate targeting by central banks; m. determine whether a monetary policy is expansionary or contractionary; n. describe limitations of monetary policy; o. describe roles and objectives of fiscal policy; p. describe tools of fiscal policy, including their advantages and disadvantages; q. describe the arguments about whether the size of a national debt relative to GDP matters; r. explain the implementation of fiscal policy and difficulties of implementation; s. determine whether a fiscal policy is expansionary or contractionary; t. explain the interaction of monetary and fiscal policy.
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LOS A: Monetary Vs. Fiscal Policies
LOS B: Money
LOS C: Money Creation Process
LOS D: The Demand and Supply of Money
LOS E: Fisher Effect
LOS F: Role of Central Bank
LOS G: Cost of Inflation
LOS H: Policy Tools
LOS I, J, K, L, M, and N: Policies of The Central Bank
LOS O to S: Fiscal Policies
LOS T: Interaction of Fiscal and Monetary Policy
INTERNATIONAL TRADE AND CAPITAL FLOWS
This topic is covered under Reading 17 of the study session 5 provided by the institute. The candidate should be able to: a compare gross domestic product and gross national product; b describe benefits and costs of international trade; c distinguish between comparative advantage and absolute advantage; d compare the Ricardian and Heckscher–Ohlin models of trade and the source(s) of comparative advantage in each model; e compare types of trade and capital restrictions and their economic implications; f explain motivations for and advantages of trading blocs, common markets, and economic unions; g describe common objectives of capital restrictions imposed by governments; h describe the balance of payments accounts including their components; i explain how decisions by consumers, firms, and governments affect the balance of payments; 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.
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Introduction
LOS A: Some Basic Terminologies for International Trade and GDP, GNP
LOS B: Cost and Benefits of International Trade
LOS C: Comparative and Absolute Advantage
LOS D: Ricardian and Heckscher–Ohlin models
LOS E, F, and G: Trade and Capital Flow
LOS H and I: Balance of Payment
LOS J: Trade Organizations
CURRENCY EXCHANGE RATES
This chapter is covered in Reading 18 of the study material provided by the institute. After reading this chapter, the student should be able to: a. define an exchange rate and distinguish between nominal and real exchange rates and spot and forward exchange rates; b. describe functions of and participants in the foreign exchange market; c. calculate and interpret the percentage change in a currency relative to another currency; d. calculate and interpret currency cross-rates; e. convert forward quotations expressed on a points basis or in percentage terms into an outright forward quotation; f. explain the arbitrage relationship between spot rates, forward rates, and interest rates; g. calculate and interpret a forward discount or premium; h. calculate and interpret the forward rate consistent with the spot rate and the interest rate in each currency; i. describe exchange rate regimes; j. explain the effects of exchange rates on countries’ international trade and capital flows.
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Introduction
LOS A: Real Exchange Rate Vs. Nominal Exchange Rate
LOS B: The Foriegn Exchange Market
LOS C: Appreciating or Depreciating Currency
LOS D: Currency Cross-Rates
LOS E to G: Forward Rate Quotations
LOS H: Exchange Rate Regimes
LOS J: Exchange Rate, International Trade, and Capital Flows
Economics
About Lesson

1.1.         The demand for Money

a.  There are mainly three reasons/motives behind, why people would want to hold money:

     i.  Transactions-related motives: Transactions money balances are related to the need for liquidity for transactions and are positively related to GDP.
The transaction-related demand for money is pro-cyclical. However, the ratio of transactional balance to GDP is fairly stable.

    ii.  Precautionary motives: Precautionary money balances provide a buffer for unexpected events. These funds are also called the rainy day funds.

   iii.  Speculative motives: Portfolio demand for money, in which money is held in anticipation that other assets will decline in value.
The speculative demand for money is countercyclical, or inversely related to the asset yield. Speculative balances are lower when returns on other financial assets increase.
This demand is, however, positively related to the perceived risk.

b.  The value of the transactional demand and precautionary demand for money forms a part of M1, i.e. the narrow definition of money. Whereas the speculative demand for money forms a part of M2, i.e. the broader definition of money.

c.  The demand curve for the money supply is generally downward sloping.

Demand for Money CFA Level 1 Economics Study Notes

On the x-axis, we take the money supply’s quantity, and on the y-axis, we take the interest rate because that is the price for the money. So when there is a fall in the interest rates there is an increase in the demand for money and vice-versa.

1.2.         The Supply of Money

The supply of money is assumed to be fixed, but any change in the supply will affect the price level.

Supply of Money CFA Level 1 Economics Study Notes

The supply curve is vertical (Nominal rate – Quantity of money), hence any changes in the demand for money will affect price levels and nominal interest rates.

1.3.         Demand and Supply of Money

a.  The money market equilibrium occurs at the point where the demand for money equals its supply.

Money Market Equilibrium CFA Level 1 Economics Study Notes

b.  If the interest rates in the economy are at level I”, the demand Money Market Equilibrium CFA Level 1 Economics Study Notesfor money is less than its supply. Due to excess supply, the interest rates start falling, up to the point where the demand equals the supply.

c. On the other hand, if the interest rate in the economy is at the level I’, the demand for money is more than its supply. Excess demand pushes the interest rates upwards. This movement continues till the time the demand is not equal to the supply.

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