CFA Level I · CFA Level I Exam · Fiscal Policy
An economy is in a deep recession with high unemployment. The government increases spending and the central bank lowers its policy rate. The combined policy mix is best described as:
The mix is expansionary fiscal and expansionary monetary policy. Raising government spending adds to aggregate demand, and cutting the policy rate lowers borrowing costs and encourages spending. Both actions work in the same direction to lift output and employment during a recession.
- AExpansionary fiscal policy and expansionary monetary policyCorrect
- BContractionary fiscal policy and expansionary monetary policy
- CExpansionary fiscal policy and contractionary monetary policy
Explanation
Higher government spending is expansionary fiscal policy. A lower policy rate is expansionary monetary policy. Both push aggregate demand up, so the mix is expansionary on both fronts. The other options pair at least one contractionary stance with these actions, which is wrong.
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