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Free CFA-Level-I Exam Braindumps (page: 368)

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A reserve requirement of 12.5 percent implies a potential money deposit expansion multiplier of ________.

  1. 8
  2. 12.5
  3. 25
  4. 5

Answer(s): A

Explanation:

The potential money deposit expansion multiplier is calculated by taking the inverse of the reserve requirement ratio. This is: 1/.125 = 8.



James Morrison is a profit-seeking banker. His bank has $25 million in excess reserves. Mr. Morrison

  1. can probably increase his profits by increasing his excess reserves.
  2. cannot affect his profits by changing the amount of excess reserves held by his bank.
  3. cannot change excess reserves held by his bank because this level is set and strictly enforced by the Fed.
  4. can probably increase his profits by reducing his excess reserves.

Answer(s): D

Explanation:

A bank holding excess reserves can increase its profits by extending more loans and holding fewer excess reserves. This is because the excess reserves held by the bank do not earn any interest.
However, excess reserves extended as loans earn a positive interest rate and therefore will allow the bank to make a positive profit. Excess reserves represent the portion of reserves held by the bank in excess of the required reserve ratio set by the Fed.



Inflation

  1. causes the purchasing power of a dollar to rise.
  2. generally benefits the poor at the expense of the rich.
  3. is measured by changes in the cost of a typical market basket of goods between time periods.
  4. almost always benefits creditors at the expense of debtors.

Answer(s): C

Explanation:

Inflation can be measured by using price indexes. In general, these indexes are constructed by calculating the difference between the price of a basket of consumer goods in earlier and later years and dividing by the price of the basket in the first year.



Which of the following is/are true about aggregate demand?

  1. An increase in the real rates of interest increases current demand.
    II. An increased optimism about the future direction of the economy will increase current demand.
    III. An increase in the expected future inflation rate increases current demand.
  2. II & III
  3. I & II
  4. I & III
  5. II only

Answer(s): A

Explanation:

An increase in real interest rates makes current consumption more expensive in terms of opportunity cost.
Hence, when real rates rise, current demand falls. On the other hand, if future inflation is expected to be high, then consumers want to buy goods in the current period, raising aggregate demand. Similarly, if they expect the future to be prosperous, they will spend some of that expected future income on current consumption. Hence, both higher expected future inflation and future wealth will increase current demand.






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