CFA Practice Question

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CFA Practice Question

When an economy dips into a recession, automatic stabilizers will tend to alter government spending and taxation so as to ______
A. reduce interest rates, thus stimulating aggregate demand.
B. enlarge the budget deficit (or reduce the surplus).
C. ensure that the budget will remain in balance.
Explanation: Automatic stabilizers are built-in features of the economy that tend to promote a budget deficit during a recession. Thus, transfer payments such as unemployment compensation increase during a recession (since output has contracted) and government spending increases.

User Contributed Comments 3

User Comment
meatwork How does a reduction in surplus act as an automatic stabilizer in time of recession?
monteleone If there is a surplus, it will be reduced. If there is a defecit, it will be enlarged. Or in other words, government spending is increased.
jasonkwk A is done by central bank.
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