- CFA Exams
- CFA Level I Exam
- Study Session 5. Economics (2)
- Reading 16. Monetary and Fiscal Policy
- Subject 1. What is Money?
CFA Practice Question
Assuming there are no leakages out of the banking system, a money multiplier equal to 10 means that ______
A. an additional $10 of reserves creates one dollar of deposits.
B. each additional dollar of deposits creates $10 of reserves.
C. each additional dollar of reserves creates $10 of additional deposits.
Explanation: Additional reserves create additional deposits, not the other way around.
User Contributed Comments 3
User | Comment |
---|---|
Misah | How reserve can create a deposit? |
zeph | because deposits are bank assets, which as they increase also allow liabilities (deposits) to increase. And in this case, need 1 dollar reserve for each 10 deposits |
monteleone | The amount of reserves will always be less than the amount of deposits. |