Iai Nov 2014

[divyam sankharva]

1. This question is regarding broad money supply the question is
" The proportion of deposits held by public as cash is 0.75 and the proportion of deposits held by banks for reserves is 0.5 . The broad money supply is 1500 , what is narrow money supply?"
A. 1200
B. 1125
C. 1875
D. None

The problem is i am not getting what this 0.75 and 0.5 represents , and the solution of this question is 1200


2. This question is about government defecit the question is
"At the beginning of year 2013 the accumulated govt deficit is 120. The direct and indirect taxes in 2013 is 12 and 18 . The govt spending during the year 2013 is 45. What is the budget deficit at the end of the year 2013?"

A. 135
B. 105
C. 15
D. none
The solution states that the answer is C but shouldent the answer be A?
they are just considering current year deficit.

 

[Graham Aylott]

The first question (Q29 on the exam paper) appears to be based on the following formula for the money multiplier - the ratio of broad to narrow money - which was removed from the Institute and Faculty of Actuaries syllabus in 2009:

m = (1 + c)/(r + c)

where:

r = the bank’s reserve ratio (of cash held to total deposits)

c = the ratio of cash held by the public to their deposits (eg if this is 25%, it means that 20% of any extra money a person gets is held as cash and 80% is deposited in the bank.)

So, in this question, r = 0.5 and c = 0.75, giving a money mutliplier of:

m = (1 + 0.75)/(0.5 + 0.75) = 7/5

So, broad money should be equal to 7/5 * narrow money.

ie a broad money supply of 1500 should correspond to a narrow money supply of:

1500 * 5/7 = 1071

which implies that "none of the above" should be the answer.

So, unless there's something I'm missing (which is possible) there maybe an error in the solution.

Sorry I cannot help any further,

Graham

 

[Graham Aylott]

Hmm.

The budget deficit for / during 2013 is clearly:

45 - 12 - 18 =15

and the accumulated deficit at the end of 2013 (the national debt) is:

120 + 15 = 135

So, based on the ambiguous wording in the question (Q30 on the paper) which says "What is the budget deficit at the end of the year?", I think that either answer should probably be marked as correct. However, I'm not an examiner.

Really, the cquestion should either say "What is the accumualted deficit at the end of the year?" (135) or "What is the deficit for 2013?" (15)