- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 3. Fiscal Policy
- Subject 4. Fiscal Policy Implementation
CFA Practice Question
During an economic contraction, automatic stabilizers reduce ______.
B. a budget surplus but increase a deficit
C. a budget deficit but increase a surplus
A. both budget surpluses and deficits
B. a budget surplus but increase a deficit
C. a budget deficit but increase a surplus
Correct Answer: B
Automatic stabilizers are counter-cyclical fiscal policies, so as income falls, taxes fall and spending increases. Both changes increase a budget deficit or reduce a surplus.
User Contributed Comments 3
| User | Comment |
|---|---|
| danlan | Automatic stabilizers do not require any fiscal change or gouvernment expenditure change, the effect is automatic with the economic expansion/recession. |
| Chidinmaiw | thank you danlan, you cleared that up for me |
| polaska | it is equivalent to say that during an economic expansion, they increase a budget surplus and decrease a deficit, isn't it? |