CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

If the government uses a discretionary fiscal policy to combat a recession and the tax rate is not changed, the policy will most likely lead to a ______.

A. balanced budget
B. budget deficit
C. budget surplus
Correct Answer: B

To combat a recession, the discretionary fiscal policy is to increase government expenditures at the same time that tax revenues are lower than normal (since the economy is in a recession, corporate profits and personal income taxes are lower than before).

User Contributed Comments 4

User Comment
surjoy Excellent question.
Raok when it said tax rate is not changed, that means they are at a budget surplus? Or else why does the question have to specificy state tax rate is not changed
leftcoast Raok - They could be at a deficit, surplus or have a balanced budget before hand. Where they start from doesn't really matter all that much. If government expenditures are increased and the tax rate remains the same it will most likely lead to a budget deficit, regardless of where you started from.

I suppose if they were running a very large surplus you could end up with a balanced budget or a small surplus. But the question asked what is most likely.
KarenMaciel Discretionary fiscal policy govt spending and taxation
during recession- govt needs to spend more to stabilize the economy
without tax increase- this would result in budget deficit
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