CFA Practice Question

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CFA Practice Question

Which of the following is an example of an automatic stabilizer?

A. The reduction in the money supply that occurs as banks become less willing to make loans during a recession
B. The reduction in real wages that occurs as the economy goes into a recession
C. The increase in government spending that occurs as the result of new spending bills passed by Congress
D. The rise in tax revenue that occurs as a result of growth in real GDP
Correct Answer: D

An automatic stabilizer is a fiscal policy that produces countercyclical movements in aggregate demand without any need for discretionary fiscal policy.

User Contributed Comments 4

User Comment
danlan since automatic stabilizer does not require any change in money supply or government spending or fiscal policy change, their effects are caused by the result of output (real GDP).
MattyBo Tax rate remains the same because tax law is set. Tax revenue automatically increases because of growing real GDP.
thekid 2 consecutive quarter Real GDP decrease leads to a recession and as Real GDP falls so does the real wages. So don't understand why 'b' is not a correct answer as well.
YOUCANDOIT B is not correct b/c it is not stabilizing the economy.

it is tricky since B is neither discretionary or automatic fiscal policy.
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