Level I Economics

Access to all Level I economics articles until the next Level I exam date

This is a very short article, but one that you should read before reading any other article that deals with supply and demand. In a nutshell, economists’ supply and demand graphs – price vs. quantity – are weird.  (By “weird” I mean “stupid”.)  For whatever reason, some economist a bazillion years ago decided that these […]

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The idea of interest rate parity (IRP) is pretty simple.  In a nutshell, it says that if you hold a particular currency – say, GBP – and you want to to make a risk-free investment of that currency, you should earn the risk-free interest rate for that currency for the length of time of your […]

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Absolute Advantage Absolute advantage is quite easy to understand: if it costs less in country A to make a product than it costs in country B, then country A has an absolute advantage over country B in the production of that product. Easy-peasy. Comparative Advantage Comparative advantage is a bit more complicated.  It depends not […]

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When I was an undergraduate student in university, I was fortunate enough to have to have written only two term papers.  One was in the capstone business management class I took my last semester, and the other was in a class in mathematical modeling.  The term paper I wrote for the latter class was on […]

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When the price of a good changes, there are two effects on the demand for that good: The substitution effect, which is a relative effect (i.e., how the demand for that good, by itself, changes relative to the demand for other goods) The income effect, which is an absolute effect (i.e., how the demand for […]

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In economics, as in physics, an equilibrium is a point at which all opposing forces net to zero: once you’re there, there’s nothing that will drive you away. Do not assume that this means that all equilibria are created equal.  Far from it.  What matters is not what the forces do when you’re at an […]

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Suppose that the spot exchange rate between USD and GBP is USD/GBP 1.5814; i.e., USD1.5814 = GBP1.0.  If the 1-year forward exchange rate is USD/GBP 1.5660 (so USD1.5660 = GBP1.0), then we say that the GBP is trading at a (one-year) forward discount (versus the USD): the forward price for GBP1.0 is lower than the […]

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Many candidates find currency exchange rates to be confusing, and for good reason: the notation used is not intuitive at all (and, to boot, contradictory).  We’ll discuss the notation, how to use exchange rates in calculations to convert from one currency to another, how to invert exchange rates, and how to derive cross exchange rates. […]

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There are four articles on IS/LM: Synopsis Part 1: the IS curve Part 2: the LM curve Part 3: combining the IS and LM curves

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One of the more complicated ideas in economics is the development of the aggregate demand curve via two other curves: the IS (Investment-Savings) curve and the LM (Liquidity preference-Money supply) curve.  I’ll break it down into four articles: Synopsis (you are here) Part 1: the IS curve Part 2: the LM curve Part 3: combining […]

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