CFA Level I · CFA Level I Exam · Monetary Policy
A central bank sets a reserve requirement of 8%. Assuming banks hold no excess reserves and there is no cash leakage, a new deposit of 500,000 in the banking system can most likely support a maximum total increase in deposits closest to:
The maximum deposit expansion is about 6,250,000. With an 8% reserve requirement the money multiplier is 1/0.08 = 12.5, and 500,000 times 12.5 gives 6,250,000. Multiplying by the reserve ratio instead would wrongly give 40,000.
- A40,000
- B4,000,000
- C6,250,000Correct
Explanation
Money multiplier = 1/0.08 = 12.5. Maximum total deposits = 500,000 × 12.5 = 6,250,000. The 40,000 figure wrongly multiplies by the reserve ratio, and 4,000,000 wrongly uses 8 as the multiplier.
Did you get it right without looking?
One question tells you little. A timed set on Monetary Policy shows your real accuracy, how long you take and where you lose marks.
More Monetary Policy questions
- Which function of money is best described by its use as a common unit for quoting prices of goods and services, so that relative prices can …
- A central bank has operational independence but its inflation target is set by the government. This arrangement is best described as an exam…
- A central bank has cut its policy rate to zero and inflation remains well below target. It then buys long-dated government bonds from banks …
- Compared with a fractional reserve banking system with a low reserve requirement, the money multiplier is most likely to be smaller when:
- Trend real growth is 1.5% and the inflation target is 2.5%. The central bank holds its policy rate at 4.0%, but inflation is forecast to fal…
- A central bank wants to raise short-term market interest rates in an economy where banks hold ample excess reserves. Which action would most…