CFA Practice Question

CFA Practice Question

Which will reduce the potential deposit expansion multiplier?

I. People hold some currency for emergency purposes.
II. Banks use all new excess reserves to extend loans.
III. The Fed increases reserve requirements.
A. I and II.
B. I and III.
C. III only.
Explanation: The potential deposit expansion multiplier is determined by reserver requirements. It is equal to the inverse of the required reserve ratio.

User Contributed Comments 10

User Comment
shasha choice 1 reduces "potential" multiplier as well, so why not I and III?
jason Shasha: it does not reduce potential but actual multiplier.
Franz tricky wording. we probably have to be real carful during the exam
Carol1 there is only one factor decide the deposit multiplier, whcih is reserved rate.
dbadidas8 Note: Potential not Actual (actual includes people holding cash)
Kashi2010 Holding currency = cash right? In which case the more physical cash that is held by individuals the less is placed on deposit, and therefore less available for the multiplier effect...?
jpducros But people holds some cash for emergency purpose only. They are not increasing the amount of cash held.
mary11 Tricky I thought it was B - which it would be if the word "potential" was not thrown in there ..
birdperson i thought about the same was as Kashi2010
merc5559 I followed the same thought process as kashi and bird
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