CFA Practice Question

CFA Practice Question

Changes in the size of the federal deficit or surplus are often used to gauge whether fiscal policy is adding additional demand stimulus or imposing additional demand restraint. If we've noticed recently that the federal budget is shifting toward a deficit, we can conclude:
A. An expansionary fiscal policy is being implemented.
B. A restrictive fiscal policy is being implemented.
C. We can conclude nothing about discretionary fiscal policy.
Explanation: Changes in the size of the deficit may arise from two different sources.
They may reflect the state of the economy: during a recession the budget will shift to a deficit one even if there is no change in fiscal policy.
They may reflect discretionary fiscal policy (expansionary or restrictive).

User Contributed Comments 8

User Comment
keithinny if the deficit is increasing then expansionary fiscal policy is being implemented. This may be through design or the economic cycle. Hard to see then why A is wrong ?
Spain81 Keith just because the budget is shifting towards a deficit means nothing. If the budget deficit were increasing but the GDP is increasing at a faster rate there would be a restrictionary policy being implemented and not expansionary. Therefore there is not enough info given to conclude anything
DAS11 I think the key word is "conclude". We cannot CONCLUDE that this is an expansionary fiscal policy. I think it would have been different if the statement read "we can assume"
nmirza maybe my basic eco is rusty, but why is increasing gdp faster than deficit increase restrictive policy?? isnt gdp expansion a result of expansionary policies to increase output?
StanleyMo a deficit = income - spending if spending > income.

or it might be because income reducing due to bad economy.
psos you have to remember that when an economy goes into recession that the automatic stablisers take effect and will move the budget towards deficit (if it wasn't already in one), note that this is not a discretionary policy, this occurs without any government intervention. It could be reasonable to conclude 'A' but we can be more certain in answer 'C'
pstebelp I took this question as: Assuming the premise in our first sentence is true, what does that last sentence imply? But the first sentence is just a correlation, not causation...
pigletin it could be a auto stablizer at work
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