CFA Practice Question

CFA Practice Question

Since 1960, the federal budget deficit as a percent of GNP has generally ______ during recessions and ______ during periods of economic expansion.
A. declined; increased.
B. increased; declined.
C. increased; remained stable.
Explanation: This is an example of counter-cyclical policy: during recessions, government revenue falls and government expenditures rise.

User Contributed Comments 4

User Comment
dealsoutlook is this due to automatic stabalizers kicking in?
steved333 Basically, yes. During a recession, there is less output to tax, so there is less revenue for the government. They spend money on expansionary projects and may even cut taxes to stimulate growth, which will actually give the gov't more revenues over time, as shown by the Laffer curve, since (to a degree) a slightly lower percentage of a much larger number is a much larger number.
jerasmus Was this a theoretical question, or what practically happened in the US over the last 50 years?

Does the US federal deficit really decline during economic expansion, or just increase less (remain stable) ?

I know the theoretical answer is B, but what is the practical answer for the US?
Merke It seems it's an empirical question since they're giving specific examples of past time, so the answer should be C. I don't think we can say that the US budget deficit declined over that period. It rather stayed stable during expansions though I don't have statistical data on my hand, it's just my opinion :)
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