CFA Level I · CFA Level I Exam · Fiscal Policy
A government facing a deep recession decides to increase infrastructure spending and cut income tax rates. This stance is best described as:
The stance is expansionary fiscal policy. Raising spending and cutting income taxes both increase aggregate demand and usually enlarge the budget deficit, which is the standard response to a recession. Contractionary policy would do the opposite by cutting spending or raising taxes.
- AContractionary fiscal policy
- BExpansionary fiscal policyCorrect
- CA balanced-budget fiscal policy
Explanation
Higher government spending and lower taxes raise aggregate demand and typically widen the budget deficit. That is an expansionary stance. A contractionary stance would cut spending or raise taxes, and nothing here keeps the budget balanced.
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