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IAI Actuarial Core Principles · Business Economics · Impact of macroeconomic policies on businesses

During a downswing of the business cycle, which combination of policy responses is consistent with a counter-cyclical stance that would help firms in financial services?

Counter-cyclical policy in a downswing is expansionary, so lower interest rates combined with higher government spending support aggregate demand. Options that raise rates, cut spending or raise taxes would be pro-cyclical and deepen the downturn, harming firms' sales and credit quality.

  1. ALower policy interest rates and higher government spending to support demandCorrect
  2. BHigher policy interest rates and reduced government spending
  3. CHigher taxes on corporate profits and tighter credit controls
  4. DUnchanged interest rates and a balanced budget requirement
  5. Higher policy rates to defend the currency and cuts in public investment

Explanation

Counter-cyclical policy leans against the cycle, so in a downswing it is expansionary: lower interest rates and higher spending or tax cuts raise aggregate demand. The other options tighten policy or leave it neutral, which would amplify or fail to offset the downswing.

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