CFA Level I · CFA Level I Exam · Fiscal Policy
A government wants to reduce income inequality through its fiscal policy. Which of the following tools is most likely to serve this objective directly?
Progressive income taxes combined with transfer payments most directly reduce inequality, because higher earners pay a larger share of income and low-income households receive transfers. A uniform sales tax tends to be regressive, and changing policy rates is a monetary policy tool rather than a fiscal one.
- AProgressive income taxes combined with transfer paymentsCorrect
- BA uniform sales tax applied to all goods
- CA cut in central bank policy rates
Explanation
Progressive income taxes take a larger share from high earners, and transfer payments channel funds to low-income households, so together they redistribute income. A uniform sales tax is regressive in effect. Policy rate changes are monetary policy, not fiscal policy.
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