CFA Practice Question

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CFA Practice Question

During an economic contraction, automatic stabilizers reduce ______.

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?
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