CFA Level I · CFA Level I Exam · Fiscal Policy
Which of the following is best described as an automatic stabilizer?
A progressive tax system that collects less revenue as incomes fall is an automatic stabilizer, because taxes and transfers adjust with the economic cycle without any new legislative action. A legislated spending increase is discretionary fiscal policy, and central bank bond purchases are monetary policy.
- AA progressive tax system that collects less revenue as incomes fallCorrect
- BA legislated increase in infrastructure spending during a downturn
- CA central bank purchase of government bonds in the open market
Explanation
Automatic stabilizers work without new legislation: progressive taxes and unemployment benefits adjust with income and employment, dampening cycles. A legislated spending increase is discretionary fiscal policy. Open market purchases are monetary policy.
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