Category: Level I Economics

Suppose that the spot exchange rate between USD and GBP is USD/GBP 1.5814; i.e., USD 1.5814 = GBP 1.0.  If the 1-year forward exchange rate is USD/GBP 1.5660 (so USD 1.5660 = GBP 1.0), then we say that the GBP is trading at a (one-year) forward discount (versus the USD): the forward price for GBP…

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.…

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…

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 (you are here) Combining the IS and LM Curves Because the IS curve and the LM curves each have real GDP (= real aggregate income) on the horizontal axis and…

There are four articles on IS/LM: Synopsis Part 1: the IS curve Part 2: the LM curve (you are here) Part 3: combining the IS and LM curves The LM Curve The key to understanding the Liquidity preference-Money supply (LM) curve is realizing that the underlying assumption is that financial markets are in equilibrium: demand…

There are four articles on IS/LM: Synopsis Part 1: the IS curve (you are here) Part 2: the LM curve Part 3: combining the IS and LM curves The IS Curve There are several steps in creating the Investment-Savings (IS) curve, which has real aggregate income on the horizontal axis and real interest rate on…

The Herfindahl-Hirschman Index (HHI) is a measure of the degree of concentration in an industry; it is defined as: \[HHI\ =\ \sum_{i=1}^n MS_i^2\] where: \(n\): number of firms in the industry \(MS_i\): market share of firm i (Technically, if there are more than 50 firms in the industry, the HHI sums over only the largest…