CFA Practice Question

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CFA Practice Question

When the U.S. dollar is used as a medium of exchange in other countries, the ______

I. U.S. money supply is unchanged, since it doesn't matter where U.S. currency is held.
II. money supply in the U.S. is reduced.
III. currency is still available for use as required reserves.
Correct Answer: II

The U.S. money supply is reduced when U.S. currency is used in other countries because the currency is not available to be used as either a medium of exchange or as reserves against checkable deposits. The U.S. central bank has no control over this.

User Contributed Comments 6

User Comment
cbb1 However, US money held abroad is counted in the M-1 measure. Thus, why isn't the money supply unchanged?
danlan Is US money held aboard counted in the M-1 measure? I think it's not counted in M-1, M-2 or M-3.
JP09 U.S. currency held outside the U.S. can not be measured accurately and is therefore not part of the money supply.
bobert I think the notion on this question is that it is not being held in checking or M1 or greater, but rather being spent on a good/service. Therefore, it is no longer in M1, and consequently neither M2 or M3.

I mean if you think about it, you pay someone $15 USD in England. The USD does have value, but they are pretty much free to just burn all of it if they so chose to. That money is no longer seen, and I imagine that because there is no way to know exactly what is happening to the money, it is reduced from the US money supply.
jassosahan Means of transactions,money held out side has been used as payment for goods and services bought in.So the money out side can't be counted.
CFALucille I can burn my US dollars here in the US too... that said I'm probably not going to, I think same applies to people in other countries
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