CFA Level I · CFA Level I Exam · Fiscal Policy
A government facing a recession with high unemployment decides to raise infrastructure spending and cut personal income tax rates. This combination is best described as:
Raising infrastructure spending while cutting income tax rates is an expansionary fiscal stance. Both measures lift aggregate demand and push the budget toward deficit, which suits a recession with high unemployment. A contractionary stance would do the opposite by cutting spending or raising taxes.
- Aa contractionary fiscal stance
- Ban expansionary fiscal stanceCorrect
- Ca neutral fiscal stance
Explanation
Higher government spending and lower taxes both increase aggregate demand and widen the budget deficit, which is an expansionary stance. A contractionary stance would cut spending or raise taxes. A neutral stance would leave the budget balance unchanged.
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