Fiscal Policy practice questions

What to know

Identify the rule, formula, or decision criterion before reading the answer choices. CFA Level I distractors often use the right vocabulary with the wrong condition.

How to practice

Work each item under time pressure, then compare your reasoning with the step-by-step explanation and key takeaway.

Review signal

Missed questions should become scheduled reviews when the error comes from a concept gap, formula setup, or answer-choice trap.

Economics

Fiscal Policy

Several months pass between the start of an economic downturn and the moment policymakers, relying on revised statistical releases, conclude that a downturn is underway. This delay is best described as the:

Economics

Fiscal Policy

Which of the following is most likely an example of discretionary fiscal policy rather than an automatic stabilizer?

Economics

Fiscal Policy

In an economy with no imports, households have a marginal propensity to consume of 0.8 out of disposable income, and a proportional income tax of 25% applies. The fiscal multiplier for an increase in government purchases is closest to:

Economics

Fiscal Policy

Analyst Tomas Novak reviews a country with government debt equal to 90% of GDP, an average nominal interest rate on debt of 4%, and nominal GDP growth of 2%, both expected to persist. To keep the debt-to-GDP ratio approximately stable, the government's primary balance must be closest to a:

Economics

Fiscal Policy

A country's actual budget deficit falls from 5% to 3% of GDP during a boom. Over the same period, its cyclically adjusted deficit rises from 2% to 4% of GDP because of permanent tax cuts. The fiscal stance is most accurately described as:

Economics

Fiscal Policy

During a recession, income tax collections fall and unemployment benefit payments rise without new legislation. These changes are best described as:

Economics

Fiscal Policy

A government wants countercyclical stimulus during a downturn. It can either mail a temporary tax rebate within one month or begin a multi-year infrastructure program after environmental reviews and procurement. The most accurate comparison is that the infrastructure program is likely to have:

Economics

Fiscal Policy

A deficit-financed increase in government spending is enacted when the economy is already near full employment and the central bank is committed to an inflation target. The spending multiplier is most likely reduced by:

Economics

Fiscal Policy

Fiscal policy is best described as the use of:

Economics

Fiscal Policy

A country has a debt-to-GDP ratio of 80%, a nominal interest rate on government debt of 3%, nominal GDP growth of 5%, and a primary deficit of 1% of GDP. The debt ratio is most likely to:

Economics

Fiscal Policy

A budget deficit is best described as the amount by which:

Economics

Fiscal Policy

Which fiscal tool is most likely to increase aggregate demand quickly while also being relatively well targeted to households with high marginal propensities to consume?

Economics

Fiscal Policy

An automatic stabilizer is most likely represented by:

Economics

Fiscal Policy

An analyst classifies a central bank's reduction in reserve requirements and a government's increase in unemployment benefits as the same type of policy because both increase aggregate demand. The classification is least accurate because:

Economics

Fiscal Policy

A decrease in government spending is most likely classified as:

Economics

Fiscal Policy

A government lowers payroll taxes during a recession. The policy is most likely intended to:

Economics

Fiscal Policy

Assume a simple spending multiplier of 4. If government purchases increase by 50 million and no crowding out occurs, the maximum increase in aggregate demand is closest to:

Economics

Fiscal Policy

Crowding out is most likely to occur when expansionary fiscal policy:

Economics

Fiscal Policy

A policy package raises income taxes and reduces transfer payments. The package is most likely:

Economics

Fiscal Policy

A country's fiscal deficit rises during a recession even though no new spending bill or tax cut was enacted. The most accurate interpretation is that the larger deficit is:

Economics

Fiscal Policy

A government implements debt-financed stimulus when the economy is near full capacity. The most likely limitation of this policy is:

Economics

Fiscal Policy

A government increases infrastructure spending during recession, financed by borrowing. The main implementation limitation is most likely: