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Free CFA-Level-I Exam Braindumps (page: 335)

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The goal of an ideal inflation policy would be

  1. focusing on unemployment first
  2. minimizing average inflation
  3. keeping inflation stable
  4. growing the money supply at a constant rate
  5. driving the price level higher

Answer(s): C

Explanation:

Anticipated inflation, even at relatively high levels, is generally not problematic. Therefore an ideal inflation policy would attempt to keep inflation as predictable and as stable as possible. Of course, theideal inflation rate would be zero, but minimizing average inflation, with no attention paid to the variability, would not be helpful. In the U.S., for example, the Federal Reserve and the Treasury department are careful to broadcast the money supply, so that market participants can make as accurate an estimate of inflation as possible.



Recent data reveal that the ratio of inventories to sales has risen sharply, suggesting that businesses are experiencing an unplanned build-up in inventories. According to the Keynesian model, these findings indicate that

  1. the economy is operating at full-employment equilibrium, which will probably be sustained in the foreseeable future.
  2. aggregate expenditures exceed output and, as a result, inflation is likely to accelerate.
  3. aggregate expenditures exceed output and, as a result, national income will rise.
  4. aggregate expenditures are less than output and, as a result, national income will decline.

Answer(s): D

Explanation:

Actual inventories exceed planned inventories only when actual expenditures fall short of expected expenditures. Thus, producers anticipated a certain level of expenditure and produced output accordingly.
Thus, output exceeded expenditure and national output (i.e., income) will decline.



The multiplier effect refers to the fact that an autonomous change in spending (aggregate demand) will

  1. cause prices to rise by some multiple of the initial increase in spending.
  2. reduce prices by some multiple of the increase in spending.
  3. increase the money supply.
  4. increase unemployment.
  5. cause nominal output to rise by some multiple of the initial increase in spending.

Answer(s): E

Explanation:

The multiplier explains why small changes in investment, government or consumption spending triggers much larger changes in output.



"Fractional Reserve Banking" refers to:

  1. The Federal Reserve System.
  2. All of these answers.
  3. The banking system where part of the reserves are derived in the form of loans from the Central Bank.
  4. The banking system where banks hold less than 100% reserves against deposits.

Answer(s): D

Explanation:

In a fractional reserve system, a bank can loan out almost all of the deposits it receives, maintaining only a small part as reserves to meet regular withdrawals and as a provision for loan defaults.






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