CFA Program Curriculum 2017 Level 1 - Vol 2.pdf - Contents 1 Table of Contents 2 How to Use the CFA Program Curriculum 3 Economics a STUDY SESSION 4

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Unformatted text preview: Contents 1. Table of Contents 2. How to Use the CFA Program Curriculum 3. Economics a. STUDY SESSION 4 Economics: Microeconomics and Macroeconomics i. READING 14 Topics in Demand and Supply Analysis ii. READING 15 The Firm and Market Structures iii. READING 16 Aggregate Output, Prices, and Economic Growth iv. READING 17 Understanding Business Cycles b. STUDY SESSION 5 Economics: Monetary and Fiscal Policy, International Trade, and Currency Exchange Rates i. READING 18 Monetary and Fiscal Policy ii. READING 19 International Trade and Capital Flows iii. READING 20 Currency Exchange Rates 4. Glossary 5. Index 6. Pages List Book Version ECONOMICS CFA® Program Curriculum 2017 • LEVEL I • VOLUME 2 Photography courtesy of Hector Emanuel. © 201 6, 201 5, 201 4, 201 3, 201 2, 201 1 , 201 0, 2009, 2008, 2007 , 2006 by CFA Institute. All rights reserv ed. This copy right cov ers material written ex pressly for this v olume by the editor/s as well as the compilation itself. It does not cov er the indiv idual selections herein that first appeared elsewhere. Permission to reprint these has been obtained by CFA Institute for this edition only . Further reproductions by any means, electronic or mechanical, including photocopy ing and recording, or by any information storage or retriev al sy stems, must be arranged with the indiv idual copy right holders noted. CFA®, Chartered Financial Analy st®, AIMR-PPS®, and GIPS® are just a few of the trademarks owned by CFA Institute. To v iew a list of CFA Institute trademarks and the Guide for Use of CFA Institute Marks, please v isit our website at . This publication is designed to prov ide accurate and authoritativ e information in regard to the subject matter cov ered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional serv ice. If legal adv ice or other ex pert assistance is required, the serv ices of a competent professional should be sought. All trademarks, serv ice marks, registered trademarks, and registered serv ice marks are the property of their respectiv e owners and are used herein for identification purposes only . ISBN 97 8-1 -94247 1 -68-4 (paper) ISBN 97 8-1 -94247 1 -89-9 (ebk) Please v isit our website at GlobalFinance.com. TABLE OF CONTENTS HOW TO USE THE CFA PROGRAM CURRICULUM CURRICULUM DEVELOPMENT PROCESS ORGANIZATION OF THE CURRICULUM FEATURES OF THE CURRICULUM DESIGNING YOUR PERSONAL STUDY PROGRAM FEEDBACK ECONOMICS STUDY SESSION 4 ECONOMICS MICROECONOMICS AND MACROECONOMICS READING 14 TOPICS IN DEMAND AND SUPPLY ANALYSIS 1 INTRODUCTION 2 DEMAND ANALYSIS: THE CONSUMER 3 SUPPLY ANALYSIS: THE FIRM SUMMARY PRACTICE PROBLEMS SOLUTIONS READING 15 THE FIRM AND MARKET STRUCTURES 1 INTRODUCTION 2 ANALYSIS OF MARKET STRUCTURES 3 PERFECT COMPETITION 4 MONOPOLISTIC COMPETITION 5 OLIGOPOLY 6 MONOPOLY 7 IDENTIFICATION OF MARKET STRUCTURE SUMMARY REFERENCES PRACTICE PROBLEMS SOLUTIONS READING 16 AGGREGATE OUTPUT, PRICES, AND ECONOMIC GROWTH 1 INTRODUCTION 2 AGGREGATE OUTPUT AND INCOME 3 AGGREGATE DEMAND, AGGREGATE SUPPLY, AND EQUILIBRIUM 4 ECONOMIC GROWTH AND SUSTAINABILITY SUMMARY REFERENCES PRACTICE PROBLEMS SOLUTIONS READING 17 UNDERSTANDING BUSINESS CYCLES 1 INTRODUCTION 2 OVERVIEW OF THE BUSINESS CYCLE 3 THEORIES OF THE BUSINESS CYCLE 4 UNEMPLOYMENT AND INFLATION 5 ECONOMIC INDICATORS SUMMARY REFERENCES PRACTICE PROBLEMS SOLUTIONS STUDY SESSION 5 ECONOMICS MONETARY AND FISCAL POLICY, INTERNATIONAL TRADE, AND CURRENCY EXCHANGE RATES READING 18 MONETARY AND FISCAL POLICY 1 INTRODUCTION 2 MONETARY POLICY 3 FISCAL POLICY 4 THE RELATIONSHIP BETWEEN MONETARY AND FISCAL POLICY SUMMARY REFERENCES PRACTICE PROBLEMS SOLUTIONS READING 19 INTERNATIONAL TRADE AND CAPITAL FLOWS 1 INTRODUCTION 2 INTERNATIONAL TRADE 3 TRADE AND CAPITAL FLOWS: RESTRICTIONS AND AGREEMENTS 4 THE BALANCE OF PAYMENTS 5 TRADE ORGANIZATIONS SUMMARY REFERENCES PRACTICE PROBLEMS SOLUTIONS READING 20 CURRENCY EXCHANGE RATES 1 INTRODUCTION 2 THE FOREIGN EXCHANGE MARKET 3 CURRENCY EXCHANGE RATE CALCULATIONS 4 EXCHANGE RATE REGIMES 5 EXCHANGE RATES, INTERNATIONAL TRADE, AND CAPITAL FLOWS SUMMARY REFERENCES PRACTICE PROBLEMS SOLUTIONS GLOSSARY INDEX List of Illustrations READING 14 Exhibit 1 Household Demand Curve for Gasoline Exhibit 2 The Elasticity of a Linear Demand Curve Exhibit 3 The Extremes of Price Elasticity Exhibit 4 Elasticity and Total Expenditure Exhibit 5 A Negatively Sloped Demand Curve—The Law of Demand Exhibit 6 The Substitution and Income Effects of a Price Decrease on Normal and Inferior Goods Exhibit 7 Definitions and Calculations for Total, Marginal, and Average Product of Labor Exhibit 8 Comparing Productivity Exhibit 9 Total, Average, and Marginal Product of Labor Exhibit 10 Exhibit 11 Total Cost, Total Variable Cost, and Total Fixed Cost Exhibit 12 Average Total Cost, Average Variable Cost, Average Fixed Cost, and Marginal Cost Exhibit 13 Total, Average, Marginal, Fixed, and Variable Costs Exhibit 14 Average Total Cost, Average Variable Cost, Average Fixed Cost, and Marginal Cost for Exhibit 13 Data Exhibit 15 Exhibit 16 Demand and Total Revenue Functions for Firms under Conditions of Perfect and Imperfect Competition Exhibit 17 Demand and Average and Marginal Cost Curves for the Firm under Conditions of Perfect Competition Exhibit 18 Demand and Average and Marginal Cost Curves for the Monopolistic Firm Exhibit 19 Examples of Firms under Perfect Competition and Monopolistic Firms That Can, at Best, Break Even Exhibit 20 A Firm under Conditions of Perfect Competition Will Choose to Shut Down If Market Price Is Less Than Minimum AVC Exhibit 21 Exhibit 22 Short Run and Long Run Decisions to Operate or Not Exhibit 23 Short-Run Total Cost Curves for Various Plant Sizes Exhibit 24 Short-run Average Total Cost Curves for Various Plant Sizes and Their Envelope Curve, LRAC: Economies of Scale Exhibit 25 Short-run Average Total Cost Curves for Various Plant Sizes and Their Envelope Curve, LRAC: Diseconomies of Scale Exhibit 26 LRAC Can Exhibit Economies and Diseconomies of Scale Exhibit 27 Exhibit 1 Exhibit 2 READING 15 Exhibit 1 Characteristics of Market Structure Exhibit 2 Market Demand in Perfect Competition Exhibit 3 Empirical Price Elasticities3 Exhibit 4 Consumer Surplus Exhibit 5 Firm and Market Supply in Perfect Competition Exhibit 6 Individual Firm's Demand in Perfect Competition Exhibit 7 Individual Firm's Short-Run Cost Schedules Exhibit 8 Perfectly Competitive Firm's Short-Run Equilibrium Exhibit 9 Perfectly Competitive Market with Increased Supply Exhibit 10 Perfectly Competitive Firm's Long-Run Equilibrium Exhibit 11 Short-Run Equilibrium in Monopolistic Competition Exhibit 12 Long-Run Equilibrium in Monopolistic Competition Exhibit 13(A) Kinked Demand Curve in Oligopoly Market Exhibit 13(B) Kinked Demand Curve in Oligopoly Market Exhibit 14 Cournot Equilibrium in Duopoly Market Exhibit 15 Nash Equilibrium in Duopoly Market Exhibit 16 Dominant Oligopolist's Price Leadership Exhibit 17 Monopolist's Demand and Marginal Revenue Exhibit 18 Monopolist's Demand, Marginal Revenue, and Cost Structures Exhibit 19 Natural Monopoly in a Regulated Pricing Environment READING 16 Exhibit 1 Output, Income, and Expenditure in a Simple Economy: The Circular Flow Exhibit 2 Value of Final Product Equals Income Created Exhibit 3 Cost of Producing Automobiles Exhibit 4 Underground Economy as a Percentage of Nominal GDP (2006) Exhibit 5 Real and Nominal GDP for Canada Exhibit 6 Output, Income, and Expenditure Flows Exhibit 7 General Government Spending and Taxes as a Percentage of GDP (2007) Exhibit 8 US International Trade in Goods—Selected Countries, 2008 (millions of US dollars) Exhibit 9 GDP Release for the Canadian Economy (millions of C$ at market prices, seasonally adjusted at annual rates) Exhibit 10 Household Final Consumption Expenditures as a Percentage of GDP, 20077 Exhibit 11 Balancing Aggregate Income and Expenditure Exhibit 12 The IS and LM Curves Exhibit 13 The Aggregate Demand Curve Exhibit 14 Aggregate Supply Curve Exhibit 15 Shifts in the Aggregate Demand Curve Exhibit 16 Housing Prices and the Saving Rate in the United Kingdom Exhibit 17 Short-Run and Long-Run Effect of Monetary Expansion Exhibit 18 Impact of Factors Shifting Aggregate Demand Exhibit 19 Shift in Long-Run Aggregate Supply (LRAS) Curve Exhibit 20 Impact of Factors Shifting Aggregate Supply Exhibit 21 Long-Run Macroeconomic Equilibrium Exhibit 22 Recessionary Gap Exhibit 23 Exports as a Share of GDP, 2007 Exhibit 24 Inflationary Gap Exhibit 25 Stagflation Exhibit 26 Effect of Combined Changes in AS and AD Exhibit 27 Business Investment as a Percentage of GDP Exhibit 28 Labor Productivity: Level vs. Growth Rate in Select Countries Exhibit 29 Sources of Growth: Average Annual Growth Rate Exhibit 30 OECD GDP Forecast Exhibit 31 Actual vs. Potential GDP READING 17 Exhibit 1 Exhibit 2 Two Episodes of Disinflation around the World Annual Inflation Rates Exhibit 3 Consumption Basket and Prices over Two Months Exhibit 4 The Consumption Basket of Different Consumer Price Indexes Exhibit 5 Leading, Coincident, and Lagging Indicators—United States Exhibit 6 The Growth Rates of Germany GDP and Number of Building Permits Exhibit 1 Consumption Baskets and Prices Over Two Months READING 18 Exhibit 1 Exhibit 2 Money Creation via Fractional Reserve Banking Exhibit 3 Definitions of Money Exhibit 4 The Supply and Demand for Money Exhibit 5 Banking Supervision in the G10 Exhibit 6 The Objectives of Central Banks Exhibit 7 A Stylized Representation of the Monetary Transmission Mechanism Exhibit 8 The Progressive Adoption of Inflation Targeting by Central Banks Exhibit 9 A Range of Inflation Targets Exhibit 10 New Zealand's Policy Targets Agreement Exhibit 11 Some Markets that Peg Currencies to the US Dollar, as of December 2009 Exhibit 12 Inflation and Deflation in Japan Exhibit 13 General Government Revenues as Percent of GDP Exhibit 14 General Government Expenditures as Percent of GDP Exhibit 15 General Government Net Borrowing or Lending as Percent of GDP Exhibit 16 Where Does the Money Go? The United Kingdom, 2010–2011 Exhibit 17 Where Does the Money Come From? The United Kingdom, 2010–2011 Exhibit 18 UK National Debt as Percent of GDP (1692–2010) Exhibit 19 General Government Gross Financial Liabilities as Percent of GDP Exhibit 20 General Government Net Debt Interest Payments as Percent of GDP Exhibit 21 Disposable Income, Saving, and the MPC Exhibit 22 General Government Net Cyclically Adjusted Borrowing or Lending as Percent of GDP READING 19 Exhibit 1 Data on the Terms of Trade for Industrial and Developing Countries (Unit Export Value/Unit Import Value) Exhibit 2 Excess Demand, Excess Supply, Imports and Exports Exhibit 3 Trade in Goods and Services (Percent of Regional GDP) Exhibit 4 Trade Openness and GDP Growth Exhibit 5 Increasing Global Interdependence FDI and Trade as a percentage of GDP Exhibit 6 Employment in Textile, Textile Product, and Apparel Manufacturing by Industry Segment Exhibit 7 Output per Worker per Day Exhibit 8 Production and Consumption in Autarky Exhibit 9 Gains from Trade Exhibit 10 Graphical Depiction of Gains from Trade with Increasing Costs Exhibit 11 Changes in Structure of Taiwan's Merchandise Exports, 1963–2003 (Percentage Shares) Exhibit 12 Welfare Effects of Tariff and Import Quota Exhibit 13 Exhibit 14 Basic Entries in a BOP Context Exhibit 15 US International Transactions Accounts Data Exhibit 16 Hypothetical Transactions between German Residents and Foreigners Exhibit 17 Global Imbalances (Current Account Balance in Percent of World GDP) Exhibit 18 United States: Sectorial Saving–Investment Balance since 1996 (Net Savings in Percent of GDP) READING 20 Exhibit 1 Standard Currency Codes Exhibit 2 Currency Composition of Official Foreign Exchange Reserves, as of 2nd Quarter 2010 (USD billion) Exhibit 3 FX Turnover by Instrument Exhibit 4 FX Flows by Counterparty Exhibit 5 FX Turnover by Currency Pair Exhibit 6 Exchange Rate Quote Conventions Exhibit 7 Sample Spot and Forward Quotes Exhibit 8 Exchange Rate Regimes for Selected Markets15 As of 30 April 2008 Exhibit 9 Marshall–Lerner Condition with a 10 Percent Depreciation of Domestic Currency (€) Exhibit 10 Estimates of Demand Elasticities Exhibit 11 Trade Balance Dynamics: The J-Curve How to Use the CFA Program Curriculum Congratulations on your decision to enter the Chartered Financial Analyst (CFA®) Program. This exciting and rewarding program of study reflects your desire to become a serious investment professional. You are embarking on a program noted for its high ethical standards and the breadth of knowledge, skills, and abilities it develops. Your commitment to the CFA Program should be educationally and professionally rewarding. The credential you seek is respected around the world as a mark of accomplishment and dedication. Each level of the program represents a distinct achievement in professional development. Successful completion of the program is rewarded with membership in a prestigious global community of investment professionals. CFA charterholders are dedicated to life-long learning and maintaining currency with the ever-changing dynamics of a challenging profession. The CFA Program represents the first step toward a career-long commitment to professional education. The CFA examination measures your mastery of the core skills required to succeed as an investment professional. These core skills are the basis for the Candidate Body of Knowledge (CBOK™). The CBOK consists of four components: A broad outline that lists the major topic areas covered in the CFA Program ( ); Topic area weights that indicate the relative exam weightings of the top-level topic areas ( ); Learning outcome statements (LOS) that advise candidates about the specific knowledge, skills, and abilities they should acquire from readings covering a topic area (LOS are provided in candidate study sessions and at the beginning of each reading); and The CFA Program curriculum, which contains the readings and end-of-reading questions, that candidates receive upon exam registration. Therefore, the key to your success on the CFA examinations is studying and understanding the CBOK. The following sections provide background on the CBOK, the organization of the curriculum, and tips for developing an effective study program. CURRICULUM DEVELOPMENT PROCESS The CFA Program is grounded in the practice of the investment profession. Beginning with the Global Body of Investment Knowledge (GBIK), CFA Institute performs a continuous practice analysis with investment professionals around the world to determine the knowledge, skills, and abilities (competencies) that are relevant to the profession. Regional expert panels and targeted surveys are conducted annually to verify and reinforce the continuous feedback from the GBIK collaborative website. The practice analysis process ultimately defines the CBOK. The CBOK reflects the competencies that are generally accepted and applied by investment professionals. These competencies are used in practice in a generalist context and are expected to be demonstrated by a recently qualified CFA charterholder. The Education Advisory Committee, consisting of practicing charterholders, in conjunction with CFA Institute staff, designs the CFA Program curriculum in order to deliver the CBOK to candidates. The examinations, also written by charterholders, are designed to allow you to demonstrate your mastery of the CBOK as set forth in the CFA Program curriculum. As you structure your personal study program, you should emphasize mastery of the CBOK and the practical application of that knowledge. For more information on the practice analysis, CBOK, and development of the CFA Program curriculum, please visit . ORGANIZATION OF THE CURRICULUM The Level I CFA Program curriculum is organized into 10 topic areas. Each topic area begins with a brief statement of the material and the depth of knowledge expected. Each topic area is then divided into one or more study sessions. These study sessions—18 sessions in the Level I curriculum—should form the basic structure of your reading and preparation. Each study session includes a statement of its structure and objective and is further divided into specific reading assignments. An outline illustrating the organization of these 18 study sessions can be found at the front of each volume of the curriculum. The readings and end-of-reading questions are the basis for all examination questions and are selected or developed specifically to teach the knowledge, skills, and abilities reflected in the CBOK. These readings are drawn from content commissioned by CFA Institute, textbook chapters, professional journal articles, research analyst reports, and cases. All readings include problems and solutions to help you understand and master the topic areas. Reading-specific Learning Outcome Statements (LOS) are listed at the beginning of each reading. These LOS indicate what you should be able to accomplish after studying the reading. The LOS, the reading, and the end-of-reading questions are dependent on each other, with the reading and questions providing context for understanding the scope of the LOS. You should use the LOS to guide and focus your study because each examination question is based on the assigned readings and one or more LOS. The readings provide context for the LOS and enable you to apply a principle or concept in a variety of scenarios. The candidate is responsible for the entirety of the required material in a study session, which includes the assigned readings as well as the end-of-reading questions and problems. We encourage you to review the information about the LOS on our website ( ), including the descriptions of LOS “command words” ( ). FEATURES OF THE CURRICULUM Required vs. Optional Segments You should read all of an assigned reading. In some cases, though, we have reprinted an entire chapter or article and marked certain parts of the reading as “optional.” The CFA examination is based only on the required segments, and the optional segments are included only when it is determined that they might help you to better understand the required segments (by seeing the required material in its full context). When an optional segment begins, you will see an icon and a dashed vertical bar in the outside margin that will continue until the optional segment ends, accompanied by another icon. Unless the material is specifically marked as optional, you should assume it is required. You should rely on the required segments and the reading-specific LOS in preparing for the examination. End-of-Reading Problems/Solutions All problems in the readings as well as their solutions (which are provided directly following the problems) are part of the curriculum and are required material for the exam. When appropriate, we have included problems within and after the readings to demonstrate practical application and reinforce your understanding of the concepts presented. The problems are designed to help you learn these concepts and may serve as a basis for exam questions. Many of these questions are adapted from past CFA examinations. Glossary and Index For your convenience, we have printed a comprehensive glossary in each volume. Throughout the curriculum, a bolded word in a reading denotes a term defined in the glossary. The curriculum eBook is searchable, but we also publish an index that can be found on the CFA Institute website with the Level I study sessions. Source Material The authorship, publisher, and copyright owners are given for each reading for your reference. We recommend that you use the CFA Institute curriculum rather than the original source materials because the curriculum may include only selected pages from outside readings, updated sections within the readings, and problems and solutions tailored to the CFA Program. Note that some reading...
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