CFA Level I · CFA Level I Exam · Fiscal Policy
During a downturn, tax revenues fall and unemployment benefit payments rise without any new legislation. The budget deficit widens and supports aggregate demand. This outcome is best described as the result of:
This is the work of automatic stabilizers. Tax revenue falls and unemployment benefits rise automatically as income and employment decline, widening the deficit and cushioning demand without any new legislation. Discretionary policy would require deliberate government action, which is not described here.
- Adiscretionary fiscal policy
- Bautomatic stabilizersCorrect
- Ca structural budget surplus
Explanation
Automatic stabilizers are built-in tax and transfer rules that change with income and employment, without new legislation. Discretionary policy needs a deliberate government decision. A structural surplus is unrelated to cyclical changes.
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