QUESTION: 1289

Which of the following best describes the relationship between the velocity of money and the demand for money?

When the demand for money increases, the velocity of money increases.
The demand for money is not related to the velocity of money.
The demand for money must be stable for the velocity of money to increase.
When the demand for money declines, the velocity of money increases.

Answer(s): D

Explanation:

When decision makers conduct a specific amount of business with a smaller amount of money, their demand for money balances is reduced. Each dollar, though, is now being used more often.
Therefore, the velocity of money is increasing. Thus, for a given income level, when the demand for money declines, the velocity of money increases.

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QUESTION: 1290

Which of the following lend support to supply-side economics?

High marginal tax rates discourage additional work effort and reduce productivity.
II. High tax rates increase the costs of supplier resources, leading to inflation.
III. High tax rates affect adversely the efficient channeling of capital.
IV. High marginal tax rates skew the demand preferences of consumers geared toward non-productive activities.
I, III & IV
I & III
I & IV
I, II, III & IV

Answer(s): C

Explanation:

Marginal tax rates are central to the effects postulated by Supply-side economists. According to this theory, an increase in marginal tax rates decreases the incentive to work. People to shift away from productive work and toward more leisure. Non-productive activities explicitly directed toward avoiding taxes increase and projects are selected at least partly due to their tax benefits and not necessarily due to their intrinsic merits. This leads to inefficient channeling of capital resources.

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QUESTION: 1291

Uncertainty may cause banks to hold larger excess reserves. Other things constant, this will

tend to reduce the money supply during a period of inflation and increase it during a recession.
tend to reduce the money supply.
tend to increase the money supply.
have no effect on the money supply.

Answer(s): B

Explanation:

The money supply is reduced when banks hold larger excess reserves through the work of the deposit expansion multiplier. Since banks extend fewer loans when they hold larger excess reserves, the money supply falls.

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QUESTION: 1292

Which of the following is a definition of inflation:

a pervasive increase in prices
II. too many dollars chasing too few goods
III. a general decline in the value of money
IV. a general increase in wages
II, IV
I, II, III, IV
I, II, III
II only
I, III
I, II

Answer(s): C

Explanation:

Inflation is a pervasive increase in prices which is caused by too many dollars chasing too few goods.
A price increase that has some other cause (such as an improvement in a product) is not inflationary.
Therefore these two ideas are inseparable from the definition of inflation. Since prices are increasing, each unit of currency can buy fewer goods. Hence, a general decline in the value of money.

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Free CFA-Level-I Exam Braindumps (page: 323)

QUESTION: 1289

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QUESTION: 1290

Explanation:

QUESTION: 1291

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QUESTION: 1292

Explanation: