CFA Practice Question

CFA Practice Question

In the Keynesian view, the most effective policy for increasing aggregate demand is to ______

I. cut tax and thus give consumers more money to spend.
II. increase government expenditures.
III. increase tax rates and raise more money through tax for the government to spend.
IV. borrow money for the government by issuing T-securities.
V. reduce government expenditures.
A. I and II
B. II and III
C. I, II, IV
Explanation: To increase aggregate demand, the Keynesian model suggests that the government should increase its expenditures and/or cut tax. This policy has to be financed by borrowing money.

User Contributed Comments 14

User Comment
humphrey but that would increase interest rate and suppress demand... well, that's not Keynesian view though.
ahan Why III is not correct?
KD101 Ahan, in general Keynes is all about more government spending so Kaynes and V do not go togather - remember Keynesian theory was developed after great depression
KD101 I agree with Humphree - I think Keynes does not care how you finance it - you can print currency too - I am nor sure Keynes cared -
fanfare There is no definitve need shown to actually borrow more (fiscal policy may just reduce a surplus, not necessarily create deficit)
tapiwa Increasing demand usually includes Increases in Govt Expecnditures and reductions in taxes. There is not usually a mention of how this is financed. However, why does the government borrow money? usually to spend! That's why IV is correct.
shinod I agree with ahan that 3 is also correct beacuse the money for ppl consumption is a function of marginal propensity to consume and a part of it goes for saving.
achu I got this wrong but I think that III is clearly not correct. Keynes was for govt spending to help the economy along by increaseing GDP. So II and IV are clearly correct. Tax increases would increase govt revenue BUT depresses Consumer spending (net impact on GDP might not be an increase). That's why 3 is not correct. At least, that's what I think.
JepTang My contribution to this discussion is that, Keynesian view just like Classical, suggests that levying taxes would be a cause of an inefficiency. For example, higher taxes on income and or capital gains, would definitely reduce money of consumers. THerefore, aggregate demand would decrease from the Consumption side. If you have been following the news, in the US, GDP is 2/3 coming from personal consumption.
Merke Ahan, III is clearly not correct because, as Achu said, Increasing tax Decreases spending. That's it directly affects Marginal Propensity to Consume. Second, increasing tax creates more deadweight loss in the economy. That's not a goal of Keynesians.
MaximeL III is not correct, because increasing taxes reduce revenues for the consumer spending and for investing/companies spending. So you got 1 factor pushing up while the other is pushing down.
Friso I also believe IV is not correct. It is a result of more spending and less taxes, but government borrowing is not a demand increasing policy of itself. On the contrary, the crowding out effect would reduce investment -> reduce supply (shift to the left) -> raise equilibrium price -> reduce equilibrium demand
Sheeb The best part of this question is option V. It's not even in one of the answers.
pigletin no respect for answer V
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