Skip to content

IAI Actuarial Core Principles · Business Economics · Impact of macroeconomic policies on businesses

A government cuts corporate tax rates but leaves spending unchanged, so the budget deficit widens. Which outcome is the most plausible concern for businesses over the medium term?

Higher government borrowing may push up interest rates, raising firms' cost of capital and partly offsetting the tax benefit. Extra bond issuance to fund a wider deficit can raise yields, which is the crowding-out channel that dampens private investment.

  1. AHigher after-tax profits will always cause the deficit to shrink immediately
  2. BHigher government borrowing may push up interest rates, raising firms' cost of capital and partly offsetting the tax benefitCorrect
  3. CLower taxes reduce the incentive to invest, so capital spending falls
  4. DThe cut will reduce aggregate supply by raising firms' costs
  5. Government bond yields will automatically fall because supply of bonds rises

Explanation

A larger deficit means more bond issuance, which can raise yields and borrowing costs, partly crowding out private investment. Immediate shrinkage of the deficit is not assured, and a tax cut normally raises investment incentives. More bond supply tends to lower bond prices and raise yields.

Did you get it right without looking?

One question tells you little. A timed set on Impact of macroeconomic policies on businesses shows your real accuracy, how long you take and where you lose marks.

Practise Impact of macroeconomic policies on businessesFree diagnostic mock

More Impact of macroeconomic policies on businesses questions