CFA Level I · CFA Level I Exam · Fiscal Policy
A government pursues tight fiscal policy (reducing the deficit) while the central bank pursues easy monetary policy. The mix is most likely to result in:
Tight fiscal and easy monetary policy most likely produces lower interest rates and a higher private-sector share of output. Deficit reduction shrinks government demand, while low rates stimulate private investment and interest-sensitive spending, shifting the composition of output toward the private sector.
- Ahigher interest rates and higher private investment
- Blower interest rates and a larger government share of output
- Clower interest rates and higher private-sector share of outputCorrect
Explanation
Tight fiscal policy reduces the government's share of output and lowers borrowing needs. Easy monetary policy lowers interest rates. Lower rates encourage private investment, so the private sector's share rises. Option A has rates rising, which fits easy fiscal and tight monetary policy.
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