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Free CFA-Level-I Exam Braindumps (page: 360)

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Mr. Brown was in the habit of cashing his weekly paycheck and using this cash for his daily expenses. However, he now gets his paycheck direct deposited into his checking account and uses a debit card exclusively instead of cash. This represents an increase in which of the following types of money demand for Mr. Brown?

  1. transactions demand
  2. electronic demand
  3. speculative demand
  4. store-of-wealth demand
  5. all of these answers are correct
  6. none of these answers is correct

Answer(s): F

Explanation:

Mr. Brown money demand has not changed. He is still using his weekly paycheck to satisfy normal expenses, or transactions demand. Although he is "storing" his cash in a checking account until it is to be used, this does not represent store-of-wealth demand. Store-of-wealth implies money that is either invested or accumulated for some future need.
Note that although Mr. Brown's money spending habits have not changed, the way his money is measured by economists has changed. Previously his money was held entirely in currency, whereas now a portion of his money is held in reserve by his bank. Although effectively there has been no change in the use of money, certain monetary aggregates will change.



Inflation has been about 5% for the last several years. There is widespread fear that oil and natural gas prices are about to spike at the same time there is unusually high unemployment. If inflation were actually 6% next year, and this causes no change in real GDP, what can be said about the general expectation for inflation?

  1. producers were forming inflation forecasts based on rational expectations
  2. the general consensus inflation forecast must have been less than 6%
  3. producers were basing their inflation views on adaptive expectations
  4. consumers must have foreseen inflation of 6% and increased savings accordingly
  5. the oil scare held down GDP
  6. none of these answers is correct

Answer(s): D

Explanation:

If actual inflation were 6%, and this caused no change in real GDP, we know that inflation expectations were probably higher than 6%. There are two major theories as to how inflation expectations are formed. One is adaptive expectations theory. This states that economic participants will expect inflation to be about what it was in the past. The rational expectations hypothesis states that economic participants will consider all available information and make an estimation based on this knowledge.
In this case, we are told that inflation has been about 5% the last several years. Therefore if producers are generally following the adaptive expectations hypothesis, they would have expected 5% inflation. However, we are also told that there may be inflationary pressure from the commodities market.
Therefore under the rational expectations hypothesis, market participants would expect inflation to be something higher than 5%. Since we know that expectations must be higher than 6%, we also know that market participants must be forming their expectations rationally.



Which of the following correctly describes how expansionary fiscal policy through tax cuts eventually impacts employment?

  1. Tax cuts result in more income for consumers, which shifts the aggregate demand curve upward, which increases the price level. This inflationary effect encourages firms to use more flexible labor and less inflexible capital.
  2. A tax cut shifts the aggregate demand curve out. This causes upward movement along the aggregate supply curve, which increases resource utilization.
  3. Tax cuts result in more government debt which causes the interest rate to rise and therefore unemployment to fall.
  4. Tax cuts result in a multiplier effect, as politicians showing confidence in the economy encourages businesses to spend on expansions.
  5. The tax cut causes an increase in quantity demand. This causes an outward shift in the aggregate supply curve and hence more employment.

Answer(s): B

Explanation:

Consumers react to tax cuts as if it were an increase in income. This causes more demand for goods and services at every price level. The demand curve would therefore shift to the right. This causes movement along the supply curve, expanding output. This expansion in output should reduce slack resources, i.e.
unemployment.



If the money supply is held constant, an increase in nominal GDP leads to ________ in the velocity of money.

  1. all of these answers are possible.
  2. no change
  3. a decrease
  4. an increase

Answer(s): D

Explanation:

The velocity of money, V, satisfies the equation, MV = GDP, where M is the money supply. If M is held constant while GDP increases, then V must increases. Intuitively, this says that if the money supply is not changed, then for production and consumption of a higher GDP, each dollar must change hands more frequently.






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