CFA Level 1 – Economics Study Guide
Price Elasticity of Demand Formula CORRECT ANSWER (% Change in Quantity
Demanded) / (%t Change in Price)
Cross Elasticity of Demand Formula CORRECT ANSWER (% Change in Quantity Demanded) / (% Change in Price of Substitute or Complement)
Income Elasticity of Demand Formula CORRECT ANSWER (% Change in Quantity Demanded) / (% Change in Income)
Price Elasticity of Supply Formula CORRECT ANSWER (% Change in Quantity Supplied) / (% Change in Price)
Elasticity of Demand Factors CORRECT ANSWER 1) Availability of Substitute; 2) Relative amount of income spent on the good; 3) Time SINCE price change
Elasticity of Supply Factors CORRECT ANSWER 1) Available substitutes for resources (inputs) used to produce the goods; (2) the time that has elapsed since the
price change
Income elasticity of an Inferior Good- Positive or Negative CORRECT ANSWER Negative
Total Cost Formula CORRECT ANSWER = Total Fixed Cost + Total Variable Cost
Average Fixed Cost Formula CORRECT ANSWER Average Fixed Cost = TFC/Q Average Variable Cost Formula CORRECT ANSWER Average Variable Cost= TVC/Q
Average Total Cost Formula CORRECT ANSWER = AFC + AVC
Unemployment Rate Formula CORRECT ANSWER (Number of Unemployed) / (Labor Force) x 100
Labor Force Participation Rate Formula CORRECT ANSWER (Labor Force) / (Working-Age Population(16 or older) ) x 100
Employment to Population Ratio Formula CORRECT ANSWER (Number of Employed) / (Working-Age Population) x 100
CPI Formula CORRECT ANSWER (Cost of Basket of Current Prices) / (Cost of Basket at Base Period Prices) x 100
Inflation Rate Formula CORRECT ANSWER % change in CPI
(Current CPI- Year Ago CPI)/ (Year Ago CPI) X 100
Potential Deposit Expansion Multiplier Formula CORRECT ANSWER = 1 / (required reserve ratio)
Potential Increase In Money Supply Formula CORRECT ANSWER = (Potential Deposit Expansion Multiplier) x (Increase in Excess Reserves)
Money Multiplier for a change in monetary base Formula CORRECT ANSWER (1+c) / (d+c) c = currency as a % of deposits
d = desired reserve ratio
Change in Quantity of Money Formula CORRECT ANSWER (Change in Quantity
of Money) = (Change in Monetary Base) x (Money Multiplier)
Equation of Exchange Formula CORRECT ANSWER = (Money supply) x (Velocity) = GDP = (Price) x (Real Output)
Quantity Theory of Money Formula CORRECT ANSWER Price = M (V/Y)
What does it mean if Cross elasticity is positive CORRECT ANSWER Two goods are reasonable substitutes for each other
What does it mean if Price Elasticity of Demand is less than one in absolute value?
CORRECT ANSWER Inelastic
What does it mean if Price Elasticity of Demand is greater than one in absolute value? CORRECT ANSWER Elastic
Normal Goods Elasticity CORRECT ANSWER Positive Income Elasticity (greater
than 1)
Total Revenue Test CORRECT ANSWER Estimate elasticity of demand: P Up-> R Up (Inelastic); P Up -> D Down (Elastic) Cross Elasticity of Substitutes- Positive or Negative CORRECT ANSWER Positive
Income Elasticity for normal goods- Positive or Negative CORRECT ANSWER Positive
Income Elasticity for inferior goods- Positive or Negative CORRECT ANSWER Negative
Command System CORRECT ANSWER A central authority determines resource allocation, is used in centrally planned economies and is also used within firms and
in the military
Majority Rule CORRECT ANSWER Government policies such as taxation and transfer payments are an example of this type of resource allocation
Efficient allocation of resources CORRECT ANSWER Marginal Benefit to society
(Demand) = Marginal Cost for the "last" unit of each good and service to be produced (Supply). (MC = MB)
Marginal Cost Formula CORRECT ANSWER (Change in Total Cost) / (Change in
Output)
Two Concepts of Robert Nozick's Anarchy, State, and Utopia (Symmetry) CORRECT ANSWER 1) Governments must recognize and protect private property; 2) Private property must be given from one party to another only when it is voluntarily done
When demand is less elastic than supply- consumers bear higher or lower burden CORRECT ANSWER HIGHER
Price Elasticity of Demand Formula CORRECT ANSWER (% Change in Quantity
Demanded) / (%t Change in Price)
Cross Elasticity of Demand Formula CORRECT ANSWER (% Change in Quantity Demanded) / (% Change in Price of Substitute or Complement)
Income Elasticity of Demand Formula CORRECT ANSWER (% Change in Quantity Demanded) / (% Change in Income)
Price Elasticity of Supply Formula CORRECT ANSWER (% Change in Quantity Supplied) / (% Change in Price)
Elasticity of Demand Factors CORRECT ANSWER 1) Availability of Substitute; 2) Relative amount of income spent on the good; 3) Time SINCE price change
Elasticity of Supply Factors CORRECT ANSWER 1) Available substitutes for resources (inputs) used to produce the goods; (2) the time that has elapsed since the
price change
Income elasticity of an Inferior Good- Positive or Negative CORRECT ANSWER Negative
Total Cost Formula CORRECT ANSWER = Total Fixed Cost + Total Variable Cost
Average Fixed Cost Formula CORRECT ANSWER Average Fixed Cost = TFC/Q Average Variable Cost Formula CORRECT ANSWER Average Variable Cost= TVC/Q
Average Total Cost Formula CORRECT ANSWER = AFC + AVC
Unemployment Rate Formula CORRECT ANSWER (Number of Unemployed) / (Labor Force) x 100
Labor Force Participation Rate Formula CORRECT ANSWER (Labor Force) / (Working-Age Population(16 or older) ) x 100
Employment to Population Ratio Formula CORRECT ANSWER (Number of Employed) / (Working-Age Population) x 100
CPI Formula CORRECT ANSWER (Cost of Basket of Current Prices) / (Cost of Basket at Base Period Prices) x 100
Inflation Rate Formula CORRECT ANSWER % change in CPI
(Current CPI- Year Ago CPI)/ (Year Ago CPI) X 100
Potential Deposit Expansion Multiplier Formula CORRECT ANSWER = 1 / (required reserve ratio)
Potential Increase In Money Supply Formula CORRECT ANSWER = (Potential Deposit Expansion Multiplier) x (Increase in Excess Reserves)
Money Multiplier for a change in monetary base Formula CORRECT ANSWER (1+c) / (d+c) c = currency as a % of deposits
d = desired reserve ratio
Change in Quantity of Money Formula CORRECT ANSWER (Change in Quantity
of Money) = (Change in Monetary Base) x (Money Multiplier)
Equation of Exchange Formula CORRECT ANSWER = (Money supply) x (Velocity) = GDP = (Price) x (Real Output)
Quantity Theory of Money Formula CORRECT ANSWER Price = M (V/Y)
What does it mean if Cross elasticity is positive CORRECT ANSWER Two goods are reasonable substitutes for each other
What does it mean if Price Elasticity of Demand is less than one in absolute value?
CORRECT ANSWER Inelastic
What does it mean if Price Elasticity of Demand is greater than one in absolute value? CORRECT ANSWER Elastic
Normal Goods Elasticity CORRECT ANSWER Positive Income Elasticity (greater
than 1)
Total Revenue Test CORRECT ANSWER Estimate elasticity of demand: P Up-> R Up (Inelastic); P Up -> D Down (Elastic) Cross Elasticity of Substitutes- Positive or Negative CORRECT ANSWER Positive
Income Elasticity for normal goods- Positive or Negative CORRECT ANSWER Positive
Income Elasticity for inferior goods- Positive or Negative CORRECT ANSWER Negative
Command System CORRECT ANSWER A central authority determines resource allocation, is used in centrally planned economies and is also used within firms and
in the military
Majority Rule CORRECT ANSWER Government policies such as taxation and transfer payments are an example of this type of resource allocation
Efficient allocation of resources CORRECT ANSWER Marginal Benefit to society
(Demand) = Marginal Cost for the "last" unit of each good and service to be produced (Supply). (MC = MB)
Marginal Cost Formula CORRECT ANSWER (Change in Total Cost) / (Change in
Output)
Two Concepts of Robert Nozick's Anarchy, State, and Utopia (Symmetry) CORRECT ANSWER 1) Governments must recognize and protect private property; 2) Private property must be given from one party to another only when it is voluntarily done
When demand is less elastic than supply- consumers bear higher or lower burden CORRECT ANSWER HIGHER
