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Free CFA-Level-I Exam Braindumps (page: 337)

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Mrs. Davis was in the habit of keeping $500 in currency in her jewelry chest in case she ever needed cash and the bank was closed. However, she recently got a combination debit/ATM card that gives her access to her checking account 24 hours a day. She deposits her $500 in cash into her checking account. How does this immediately impact the monetary base and the effective amount money available for transactions?

  1. decrease, increase
  2. increase, decrease
  3. no change, decrease
  4. both increase
  5. no change for either
  6. decrease, no change
  7. both decrease

Answer(s): F

Explanation:

Effectively, there is no difference in how Mrs. Davis is using money, simply a different vehicle for spending it.
Therefore the effective level of money in circulation has not changed. However, where the monetary base previously had including her $500 in currency, it would now only include the percentage of this money held in reserve by her bank. The monetary base equals currency plus bank reserves. Therefore the monetary base would decrease.
Innovations like debit cards have decreased the need to hold currency. Therefore certain measures of the money supply may decrease despite no real change in the money level in circulation.



The primary cause of frictional unemployment is

  1. the presence of legislated high minimum wages that price unskilled workers out of the market.
  2. discouraged workers who quit looking for a job after extended periods of unsuccessful job search.
  3. inaccurate and costly information about job opportunities.
  4. high unemployment benefits that reduce the incentive of unemployed workers to search for employment.

Answer(s): C

Explanation:

Frictional unemployment results from a scarcity of information and the search activities of both employers and employees for information that will help them make better employment choices.



The change in aggregate income/output for a given change in aggregate expenditure is known as the:

  1. demand multiplier.
  2. expenditure multiplier.
  3. marginal propensity to consume.
  4. income elasticity.

Answer(s): B

Explanation:

The expenditure multiplier is directly linked to the "marginal propensity to consume" (MPC), which reflects the amount of each additional dollar in income that is spent on current consumption. In particular, the ideal expenditure multiplier equals 1/(1-MPC).



Assuming that an expansionary fiscal policy package could be enacted and implemented immediately, approximately how far in advance would be problem of a lagging economy need to be recognized?

  1. 1-2 years
  2. 6 months to 1 year
  3. impossible to determine
  4. if policy could be enacted immediately, timing would not be a problem
  5. 1 year

Answer(s): C

Explanation:

One of the primary problems with fiscal policy is one of timing. Any stimulus package would take time to work its way through the economy. For example, if unemployment were high and the government passed fiscal policy legislation involving many new hires, it would take time for the new employees to be hired, then they would go through training, and probably not begin productive work for many months. Furthermore, the new income the employees now receive would be spent on goods, which would become income for other individuals, etc. This creates a multiplier effect over time. How long this will take to be fully realized is impossible to determine.






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