CFA Practice Question

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CFA Practice Question

A country's budget for 2009 was -$20 billion (deficit) and the GDP for the year was $200 billion. For 2010, the budget was -$25 billion (deficit) and the GDP was $300 billion. This indicates that the country's fiscal policy is shifting towards ______
A. expansion, since its budget deficit increased by $5 billion, or 25%.
B. expansion, since its budget in 2010 was negative, indicating more spending than revenues.
C. restriction, since its budget deficit increased by 25% but the GDP increased by 50%.
Explanation: To determine if the fiscal policy is shifting toward expansion or restriction, economists use changes in the size of the deficit or surplus relative to GDP, not the absolute amount of a deficit or surplus.

User Contributed Comments 9

User Comment
mtcfa What am I missing here? Thit looks expansionary. Can someone explain?
shayu if the budget deficit increased by more than 50% then it would be expansionary. "increasing" itself does not mean expansionary, the key is the relative increase over GDP.
george2006 Examine the deficit as percentage of GDP. it is decreasing, so it is restrictive.
surob Thanks george2006. This makes sense.
omya So if deficit increases more than the GDP then its expansionary else restrictive.
endurance the intuitive keyword here is "shifting towards" which implies a more restrictive fiscal policy going forward. Deficit as a percentage of GDP from 2009 to 2010 decreases from 10 to 8.3 percent while the economy expands - meaning a more restrictive fiscal policy
langy Thanks george2006.
Shaan23 Think like this. If the deficit has decreased then the taxes collected > Government spending. The deficit will decrease.

When taxes > G -- what does that mean --- Restrictive policy ---- Expansin would be if G > T
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