- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 12. Monetary and Fiscal Policy
- Subject 1. What is Money?
CFA Practice Question
Suppose the banking system has $100,000 in outstanding deposits and actual reserves of $35,000. If the required reserve ratio is 25% and individuals hold no cash, the maximum amount the banking system can now add to the money supply is ______.
B. $25,000
C. $40,000
A. $10,000
B. $25,000
C. $40,000
Correct Answer: C
Excess reserves are $10,000 and the simple money multiplier is 4, so (10,000 x 4) = $40,000 can be added.
User Contributed Comments 10
| User | Comment |
|---|---|
| cbb1 | Key is that the question is not the amount it can lend, but rather the impact on the money supply. |
| Done | Would this work as well: (35,000/.25)- 100,000 = ? |
| danlan | Agree with Done, 35000 ==> 140000 (35000/0.25) money supply, thus add 40000 (140000-100000) |
| robB | Actual Reserve = 35,000 Required reserve (100,000 x 0.25)= $ 25,000 1/.25 = 4 4 x ( 35000-25000)= 40,000 |
| bundy | use the money multiplier form (1+a)/(a+b) individual hold no cash so numerator is 1 denominator is .25 = 4 4 times the excess reserve = 40,000 |
| YOUCANDOIT | nice question! just follow robB s explanation! |
| hoyleng | thank you so much. |
| 2014 | Why money is not multiplied on outstanding deposits. I mean why cash is just 10,000. Why not 100,000 minus 25,000 reserves = 75,000. can anyone pls explain |
| 2014 | or 10,000/.25 = 40,0000 |
| gill15 | Thanks ROb. Question if you havent taken economics in a long time you would be flipping through your notes wasting a half hour trying to figure it out. Thanks for letting me watch 30 rock tonite. |