Economics and Finance Fundamentals
What to master
Expect questions on demand and supply, elasticity, market structures, inflation, GDP, monetary and fiscal policy, banking, and basic financial instruments. You should be able to define terms precisely and reason about cause and effect: what happens to price when supply falls, what a central bank does to curb inflation, what a bond's coupon is.
Typical traps
- Movement along vs shift of a curve. A price change moves along the demand curve; a change in income, taste or population shifts it.
- Confusing GDP with GNP. GDP is output within borders; GNP is output by a country's nationals, including income from abroad.
- Inflation winners and losers. Borrowers with fixed-rate debts gain; savers and fixed-income earners lose.
- Policy direction. To fight inflation, a central bank raises interest rates and sells securities - it tightens, not loosens.
- Elasticity intuition. Necessities are inelastic; luxuries with many substitutes are elastic.
Rule of thumb
When a question asks for the effect of a shock, trace it in one chain: shock → curve shifted → new equilibrium price and quantity. Write the chain rather than intuiting the answer.
Worked example
"A drought reduces the wheat harvest. What happens in the wheat market?" Supply shifts left; demand is unchanged. Equilibrium price rises and quantity falls. If demand is inelastic (wheat is a staple), the price rise is large relative to the quantity fall - a useful refinement that distinguishes strong answers.