CFA Level I · CFA Level I Exam · Fiscal Policy
An economy is operating above potential GDP and inflation is accelerating. Which fiscal action is most likely to be appropriate?
Reducing transfer payments and raising taxes is most appropriate. An economy above potential with accelerating inflation has excess demand, so a contractionary stance is needed to reduce aggregate demand. Higher public works spending or lower corporate taxes would add further demand and worsen inflation.
- AReduce government transfer payments and raise taxesCorrect
- BIncrease spending on public works projects
- CLower taxes on corporate profits to boost investment
Explanation
Excess demand and rising inflation call for a contractionary stance, which reduces aggregate demand. Cutting transfers and raising taxes does this. The other two options add to demand and would worsen inflation.
Did you get it right without looking?
One question tells you little. A timed set on Fiscal Policy shows your real accuracy, how long you take and where you lose marks.
More Fiscal Policy questions
- An economist argues that households will respond to a debt-financed tax cut by saving the extra income, because they expect higher taxes in …
- A government wants to reduce income inequality through its fiscal policy. Which of the following tools is most likely to serve this objectiv…
- A government increases spending financed by issuing bonds, pushing up interest rates and reducing private investment, which partly offsets t…
- Policymakers delay a stimulus package because data revealing the downturn were published only months after it started. This delay is best de…
- A government pursues tight fiscal policy (reducing the deficit) while the central bank pursues easy monetary policy. The mix is most likely …
- A government facing a deep recession decides to increase infrastructure spending and cut income tax rates. This stance is best described as: