CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

In the U.S., the Congress passes a law requiring the government to pay certain debts of companies that have declared bankruptcy. Which of the following terms most accurately describes this program?
A. Expansionary fiscal policy
B. Automatic stabilizer
C. Monetary policy
Explanation: An automatic stabilizer is anything that would decrease the government budget surplus during slow economic periods and increase the surplus during strong economic periods. During slow economic periods, bankruptcies are likely to rise, and by paying a portion of the defunct firms' debts, the government is injecting demand into the economy. This should be distinguished from an expansionary fiscal policy, because the program is not designed to expand national income but to stabilize a slowdown without the need for further government action.

User Contributed Comments 7

User Comment
past1sttime if congress passed a law legislative action has been taken, which would make this expansionary
escempep I'd name it a "stabilizer" rather than an "automatic stabilizer".
SrobH it's automatic in the sense there is only administrative functions to carry out, no more legal or legislative hurdles.
cfaeater I really don't think this is an 'automatic' stabilizer. Stabilizer yes, automatic, no.
endurance When governments creates programs that pay benefits to suitably qualified people and businesses, it called an outlay - also referred to as a needs-tested spending. This results in transfer payments. Needs-testing spending increases during times of recession
ars2011 It is an automatic Stabiliser the bill has been passed and we can more bankruptcy filings during economic busts and that is when this passed law will act as an automatic stabilser
farhan92 I like the explanation given -not expand income but stabilize slowdon
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