CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

Automatic stabilizers in the economy smooth business cycles by ______
A. increasing transfer payments during recessions and increasing tax collections during inflationary periods.
B. increasing transfer payments during recessions and decreasing tax collections during inflationary periods.
C. decreasing transfer payments during recessions and increasing tax collections during inflationary periods.
Explanation: During recessions, unemployment insurance and other transfer payments increase, and thus consumption does not fall by as much. During a period when income is high (and thus when there are possible inflation concerns), more taxes are collected because taxes are proportional to income. Thus consumption does not increase as much and does not put as much inflationary pressure on the economy.

User Contributed Comments 2

User Comment
danlan Transfer payments are from gouvernment to individual, opposite of personal income tax.
farhan92 essentially saving for a rainy day...you increase the taxes when times are good and use this to pay benefits to the people who lost their jobs during a recession (Circle of life plays in the background..)
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