This is from CFA 2003 morning exam Q13 to state correct or incorrect. Accrording to their ans it is correct but I just do not understand the sequence of it. “Forecasts of a near-term credit contraction with a decline in the money supply and a reduction in the aggregate liabilities of banks is likely to result in no expansion of bank loan activity and no increase in nominal disposable income.” credit contraction is good for ecnomy as whole and so is to the bank. moneysupply reduction will make interest rate to borrow higher. liabilities to bank reducing is good for health of bank. But I do not know why that would connect to no expansion of bank loan (bank lending activities ) and no increase in disposable income of individual. any thoughts appreciated.
in my rudimentary thinking I think that: 1. is bad : near-term credit contraction 2 is bad: decline in the money supply 3: is bad (reduces lending of banks): reduction in the aggregate liabilities of banks therefore won’t lead to the two positive outcomes of: 1. expansion of bank loan activity and 2. increase in nominal disposable income.” therefore it must be correct… what was in CFAI’s explanation?
Thanx. 3&L When it is correct, CFA usually do not explain anything;. So I had no idea… But credit contraction is same as credit crunch? ahhhhh I just somehow stupidly thought credit = spread = spread contraction = goood, some type of anchoring there, stupid me BANG MY HEAD ON THE WALL ! I think I got some clue from your reply. thaaaank you ! ! !
i was thinking in terms of expansion and contraction… but that word threw me off as well…
Is this even part of current year’s economic readings?