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Dear CFA Level – I Candidate, we hope you have started using those six keys of fixed income from the last session while practicing questions.

In this session, let’s take a look at the Commandments and Sins of Economics. In your exam, it has a weight of 10%.

  1. Whenever you get a problem on income effect and substitution effect remember than both are positive in case of normal goods, income effect is positive and substitution effect is negative in case of Giffen goods however (Income effect > Negative substitution effect in case of Inferior goods and Income effect< Negative Substitution effect in case of Giffen goods)
  2. firm experiences economic losses when P < ATC. When P = AVC, the firm is operating at a shutdown point. A firm will minimize its losses in the short run by continuing to operate when AVC < P < ATC since it is covering some of its fixed costs from the difference between P and AVC.
  3. MRP (Marginal revenue product) – Profit maximization quantity of an input "a" is that quantity for which MRPa = Pricea.  By employing one more unit of an input the firm can increase profits as long as  MRPa >Pricea   as the revenue earned from this input is greater than the cost of the input
  4. Measure of money M2 = M1+ time deposits + saving deposit + money market mutual fund balances. Please notice it includes M1 and all its components (All currency except held at banks + traveler’s checks + checking a/c deposits of individuals and firms).
  5. While doing a problem on employment do not consider Frictional and Structural Unemployment while calculating full employment (Structural + Frictional = Natural Rate of Unemployment)
  6. Never assume that appreciation of currency is equal to depreciation of other. In order to calculate depreciation of foreign currency the indirect quote is needed to be converted to direct quote.

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