CFA Practice Question

CFA Practice Question

If unemployment was deemed too high by policy makers, which of the following policy tools might be utilized?
A. borrow to finance new military spending.
B. reduce both taxes and government spending.
C. raise tariffs to help domestic workers.
Explanation: One method to reduce unemployment is to engage in expansionary fiscal policy. This requires the government to spend more than it collects in taxes. The result is a net increase in aggregate demand, which will increase the quantity supplied, and therefore reduce unemployment.

User Contributed Comments 13

User Comment
Spain81 Depending on the country and product the WTO declares tariffs to be illegal. If this were true other countries could be authorized to retaliate by elevating their tariffs and thus hurting US exports. The most efficient way is A not C
ahan Why C is not an correct answer?
Raising tariff to decrease import, so domestic workers can gain more jobs.
Carol1 the test book mentioned that is not a good way to improve the employment situation, which only help the export industry but not make more harmful to the nation economy.
Birdy101 most effiecient way to reduce unemployment is by increasing demand,
if option C would be chosen it increase also the price of the products, thus decrease demand...
cfanoob bailing out an industry?
iambroke what about the crowding out effect of govt borrowing.....which increases interest rates and thus competes with corporations?
Kashi2010 Birdy101 has is. Tariffs hurt efficiency and raise overall price level, which is actually likely to cause further unemployment due the erosion of real wealth that this effects.

A simpler way to think of it though is through the impact lag - new government spending is pretty immediate, trying to encourage domestic production will take longer and therefore be less effective at addressing the immediate problem.
czar Why finance military spending? That threw me off!
czar Continuing...how does that help increase demand?
Andy552 Government spending will boost sales in military goods, which are supplied by the private sector.
Shcote We are all Keynesians now
farhan92 i went with B - reduce taxes more incentive to work and reduce gov spending (reduce benefits) provide more stimulus to look for work.

However, in hindsight A looks like a good shot but under exam situations it was the one I thought was the most incorrect.
harrybay The catch is that it's irrelevant wether the spending goes to military or other productive use. As long as it creates jobs. BUT if the marginal propensity to import is high, then A is totally useless to decrease unemployment. If all your military contracts go to suppliers from a different country then it's useless.
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