CFA Level 1: CFA Level 1 Exam Answer

James Morrison - Profit-Seeking Banker

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Question

James Morrison is a profit-seeking banker. His bank has $25 million in excess reserves. Mr. Morrison

Answers

A. can probably increase his profits by increasing his excess reserves.

B. cannot affect his profits by changing the amount of excess reserves held by his bank.

C. cannot change excess reserves held by his bank because this level is set and strictly enforced by the Fed.

D. can probably increase his profits by reducing his excess reserves.

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Explanations

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A. B. C. D.

A bank holding excess reserves can increase its profits by extending more loans and holding fewer excess reserves. This is because the excess reserves held by the bank do not earn any interest.

However, excess reserves extended as loans earn a positive interest rate and therefore will allow the bank to make a positive profit. Excess reserves represent the portion of reserves held by the bank in excess of the required reserve ratio set by the Fed.

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