CFA Level I · CFA Level I Exam · Fiscal Policy
Interest rates are near zero and monetary policy has little room to ease further, while the economy remains weak. Which response is most appropriate?
Fiscal stimulus is the most appropriate response. When rates are near zero, the central bank has limited room to ease, so government spending or tax cuts can raise aggregate demand directly. Tightening fiscal policy would deepen weakness, and negative rates alone have practical limits.
- AFurther rate cuts to deeply negative levels only
- BFiscal stimulus to support aggregate demandCorrect
- CTighter fiscal policy to lower the deficit immediately
Explanation
At the zero lower bound, conventional monetary easing is limited, so fiscal stimulus such as spending or tax cuts becomes more important for raising demand. Immediate fiscal tightening would weaken demand further. Relying only on deeply negative rates is limited and not the most appropriate response.
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
- A government approves a large infrastructure program to counter a recession, but the projects take two years to plan and start. The recessio…
- An economy is in a deep recession with high unemployment. Policymakers want a fiscal stimulus with the fastest and largest effect on aggrega…
- A government's budget shows tax revenue of 900 and total spending of 1,000, of which 120 is interest on existing debt. The primary balance i…
- Ricardian equivalence is best described as the argument that, when a government finances a tax cut by issuing debt, households will:
- An economy is in a deep recession. The government adopts an expansionary fiscal policy financed by issuing bonds, while the central bank sim…
- A country has a high debt-to-GDP ratio and investors begin to doubt its ability to repay. Which outcome is most likely to limit the governme…