CFA® Level I Economics

The 8 learning modules

1. 01 The Firm and Market Structures

   How a firm chooses output to maximise profit, and when it should keep producing, break even or shut down. You compare the four market structures (perfect competition, monopolistic competition, oligopoly and monopoly) by number of sellers, product differentiation, barriers to entry and pricing power, and see how oligopolists react to each other, including the Cournot and Nash equilibrium ideas. The module also covers economies and diseconomies of scale and simple ways to measure how concentrated a market is.

   9 lessons · 4 videos in the Academy →

2. 02 Understanding Business Cycles

   What happens to output, hiring, capital spending and inventories as the economy moves through the cycle, and why some decisions lead the cycle while others lag it. Credit cycles, where lending loosens and tightens with asset prices, are covered along with how they amplify business cycles. The second half is about economic indicators: leading, coincident and lagging indicators, composite indexes, surveys and newer tools such as nowcasting.

   7 lessons · 2 videos in the Academy →

3. 03 Fiscal Policy

   What governments try to achieve with spending and taxes, the tools they use, and the arguments for and against deficits and a large national debt. You learn the fiscal multiplier, why a balanced-budget increase in spending can still raise output, how to judge whether policy is expansionary or contractionary, and why fiscal policy is hard to time (recognition, action and impact lags).

   6 lessons · 1 video in the Academy →

4. 04 Monetary Policy

   The roles of a central bank, its objectives, and its three main tools: open market operations, the policy rate and reserve requirements. The core of the module is the transmission mechanism, the chain from a policy-rate change to market rates, asset prices, the exchange rate, spending and inflation. It also covers inflation targeting, the importance of independence, credibility and transparency, the limits of monetary policy, and how monetary and fiscal policy combine.

   8 lessons · 2 videos in the Academy →

5. 05 Introduction to Geopolitics

   A framework for thinking about how countries and non-state actors cooperate or compete, and how that affects investments. It covers the forces behind globalisation and the risk of it being rolled back, the roles of the IMF, the World Bank and the WTO, and a classification of countries by how cooperative and how globalised they are. You then look at the tools of geopolitics (national security, economic and financial) and at how to assess geopolitical risk by its likelihood, speed and size of impact.

   9 lessons · 1 video in the Academy →

6. 06 International Trade

   Why countries trade, who gains and who loses, and what happens when trade is restricted. Expect questions on the effects of tariffs, import quotas and export subsidies on prices, domestic producers, consumers and government revenue, and on the different levels of regional integration, from free trade areas to economic and monetary unions.

   6 lessons · 2 videos in the Academy →

7. 07 Capital Flows and the FX Market

   How the foreign exchange market works: who trades in it, the difference between spot, forward and swap transactions, and how exchange rates are quoted. You learn the range of exchange rate regimes, from using another country's currency through currency boards and pegs to a free float, how exchange-rate moves feed through to the trade balance, and why governments sometimes restrict capital flows.

   9 lessons · 1 video in the Academy →

8. 08 Exchange Rate Calculations

   The numerical core of the topic. You calculate cross rates from two quotes that share a currency, forward rates from the spot rate and the two interest rates, and forward points. You also need to say whether a currency trades at a forward premium or discount, and by how much a currency has appreciated or depreciated.

   6 lessons · 2 videos in the Academy →

What the questions cover

• Perfect competition, monopolistic competition, oligopoly and monopoly
• Breakeven and shutdown decisions, and economies of scale
• Business cycles, credit cycles and economic indicators
• Fiscal and monetary policy tools, and how they interact
• Geopolitical risk, international trade and capital flows
• Exchange-rate quotes, cross rates and forward rates

Key formulas

Breakeven and shutdown (short run)

$\displaystyle P = \text{ATC}_{\min} \text{ (breakeven)}, \quad P < \text{AVC}_{\min} \text{ (shut down)}$Between the two, keep producing in the short run: revenue still covers variable cost and part of fixed cost.

Herfindahl–Hirschman index

$\displaystyle \text{HHI} = \sum_{i=1}^{N} s_i^2$s is each firm's market share. Use the same units throughout, decimals or percentages.Learn it: Identifying market structure: elasticity, concentration ratios and HHI →

Fiscal multiplier

$\displaystyle \frac{1}{1 - c(1 - t)}$c is the marginal propensity to consume and t the tax rate.Learn it: Integrated cases: costing a fiscal package →

Cross rate

$\displaystyle S_{A/C} = S_{A/B} \times S_{B/C}$The common currency B cancels. If it doesn't, invert one quote first.

Forward rate

$\displaystyle F_{P/B} = S_{P/B} \times \frac{1 + i_P \times \frac{\text{days}}{360}}{1 + i_B \times \frac{\text{days}}{360}}$P is the price currency, B the base currency. The base currency trades at a forward premium when its interest rate is the lower one.Learn it: The no-arbitrage link between spot, forward and interest rates →

Forward points

$\displaystyle (F - S) \times 10{,}000$Most currency pairs are quoted to four decimals. Yen quotes, which use two decimals, use 100.Learn it: Forward points, premiums and discounts →

Real exchange rate

$\displaystyle \text{real } S_{d/f} = S_{d/f} \times \frac{P_f}{P_d}$d is the domestic currency, f the foreign. A rise means domestic goods have become cheaper in real terms.Learn it: Nominal and real exchange rates →

Change in a currency's value

$\displaystyle \frac{S_1}{S_0} - 1 \text{ for the base}, \quad \frac{S_0}{S_1} - 1 \text{ for the price currency}$The two percentages are not equal and opposite.

The Economics formula sheet: the key formulas explained

Common mistakes

• Mixing up the quote direction. The curriculum writes the price currency first: USD/EUR means USD per one EUR, so the euro is the base currency and a rise means the euro has strengthened. Dealers and news sites often write the same rate as EUR/USD, the other way round.
• Multiplying two quotes when one of them first has to be inverted, so the common currency doesn't cancel in the cross rate.
• Shutting a firm down as soon as price falls below average total cost. In the short run it should keep producing while price covers average variable cost.
• Reporting a depreciation as the negative of the other currency's appreciation. If the base currency rises 5%, the price currency falls by 1 − 1/1.05, about 4.76%.
• Assuming a higher-interest currency trades at a forward premium. It is the other way round: it trades at a forward discount.
• Confusing the fiscal stance with the size of the deficit. A deficit can grow in a recession simply because tax revenue falls, without any change in policy.
• Treating every restriction on trade as a loss for everyone. Questions ask who gains (domestic producers, the government from tariff revenue) and who loses (consumers and, in most cases, the economy as a whole).

How to study it

• Be careful with currency quotes: know which currency is the price and which is the base.
• Link each policy action to its direction of effect before choosing an answer.
• Do the exchange-rate calculations until they are automatic. They are the most reliable marks in the topic, and the same few steps come up again in Level II.
• For the descriptive modules, learn the frameworks as lists: the four country archetypes, the three tools of geopolitics, the types of currency regime. Questions often ask you to classify an example.
• Draw the cost curves once by hand. Seeing where price meets average variable cost and average total cost makes the shutdown questions quick.

Try 3 Economics questions

Practise and prove Economics

The question bank and the mock exams are the practice half of CheapMocks Academy. Try the free sample questions, see the topic weights for the whole exam and the latest Level I pass rates.

Economics FAQ