CFA Level I · CFA Level I Exam · Fiscal Policy
An economy is in a deep recession. The government adopts an expansionary fiscal policy financed by issuing bonds, while the central bank simultaneously keeps its policy rate unchanged. Which combination of policies is most likely to be described as fiscal expansion with a neutral monetary stance?
Higher government spending with an unchanged policy rate is the pairing of expansionary fiscal policy and neutral monetary policy. Spending increases aggregate demand, while the central bank leaves its rate alone. The other options involve tax increases or spending cuts, which are contractionary fiscal measures.
- AHigher government spending with an unchanged policy rateCorrect
- BHigher taxes with a lower policy rate
- CLower government spending with a higher policy rate
Explanation
Expansionary fiscal policy means higher spending or lower taxes. Holding the policy rate unchanged means monetary policy is neutral. Only the first option pairs fiscal expansion with an unchanged rate; the others involve fiscal contraction or a changed rate.
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