Tiêu đề 2.3 Fiscal Policy.pdf ✅

1. Which of the following is most likely a long-run objective of fiscal policy?  A. Stabilize GDP growth rates B. Maximize growth and minimize unemployment C. Minimize the amount of government borrowing Explanation The general goal of fiscal policy (ie, government spending and taxes) is maximizing overall welfare. Specific policies are often designed to aid disadvantaged population groups (eg, disabled or low-income populations) or help specific sectors (eg, infant or strategic industries). Those goals are more easily attained when an economy is growing at its potential. Consequently, the most significant fiscal policies are designed to stabilize output near an economy's sustainable GDP growth rate. At that level of output, income growth and employment are at the highest levels that can be maintained without creating inflationary pressure. Growth above that level is countered with contractionary policies to stifle inflation. Growth below potential is addressed by fiscal stimulus to prevent excessive unemployment. (Choice B) Expansionary fiscal policies could enable an economy to grow above its sustainable rate in the short run, at the cost of rising inflation. The long-run result is likely slower growth and higher unemployment. (Choice C) Although less indebtedness is preferable, the amount of government borrowing is much less important than GDP growth and unemployment rate targets. Also, many economists believe government deficits and debt have little impact on GDP growth. Things to remember: The broad goal of fiscal policy is maximizing general welfare. Policies are usually designed to stabilize an economy at levels of output near its sustainable GDP growth rate. Growth exceeding that level is countered with contractionary policies to stifle inflation. Growth below potential is addressed by fiscal stimulus. Describe roles and objectives of fiscal policy as well as arguments as to whether the size of a national debt relative to GDP matters LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.
2. An economy is experiencing a recession and rising rates of unemployment. If income tax cuts are used to stimulate more rapid GDP growth, which of the following factors is most likely to impede the effectiveness of that fiscal policy?  A. Consumers may decide to increase savings. B. Businesses may not be able to increase output to meet rising demand. C. Government spending will be reduced to offset the decline in tax revenues. Explanation It is often difficult to predict the private sector's reaction to government economic policy actions. In weak economies, the expansionary impact of income tax cuts may be significantly dampened by consumers' decisions against spending the additional after-tax income. Consumers may increase savings instead, either to cushion the impact of an ongoing recession or to pay for expected future tax increases. (Choice B) In a recession, the business sector is operating well below full capacity. Consequently, any increase in demand could be met by increasing output. (Choice C) Unless operating under a balanced budget constraint, governments would not have to reduce spending to offset the loss of revenue from cutting income tax rates. Things to remember: Income tax cuts may not result in economic growth. Consumers may increase savings due to fears of an ongoing recession or to pay for expected future tax increases. Explain the implementation of fiscal policy and difficulties of implementation as well as whether a fiscal policy is expansionary or contractionary LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.
3. Which of the following is most likely to be considered a type of indirect tax? A. Taxes on corporate profits B. Inheritance taxes on estates  C. Excise taxes on sales of fuel Explanation Categories of taxes Direct Indirect Tax on Income: wages, interest, business profits, capital gains Wealth: real estate, inheritances Sales of goods or services: sales, value-added (VAT), excise Paid by Recipient/holder Buyer Collected from Recipient/holder Seller Fiscal policy is the use of government spending and taxation to influence economic activity. Governments impose taxes primarily to raise revenue to fund operations and repay debt, although tax policy can also be used to encourage or discourage certain consumer and business behaviors. Indirect taxes are taxes on spending for goods or services. The tax may apply to the full price of a product (eg, sales tax) or to only a portion of the product's value (eg, value-added tax). Such taxes are described as indirect since, although the tax is effectively paid by the buyer (as part of the purchase cost), the tax is collected by the product seller, who then pays it to the government. A sales tax applies generally to all products (with specified exemptions); an excise tax is applied only to a specific product (eg, fuel, tobacco). One way to view the distinction between direct and indirect taxes is that a collector of indirect tax, such as a gas station, collects the excise tax on gasoline from consumers and remits it to the government. A direct tax, such as an income tax on the gas station's profits, is assessed against the station and is not passed along to the station's customers. (Choices A and B) Both taxes on corporate profits (a type of income tax) and inheritance taxes (a type of wealth tax) are direct taxes. Direct taxes are paid directly to the government by the beneficiary of the item being taxed. Things to remember: Indirect taxes are taxes on spending for goods or services. An indirect tax is effectively paid by the buyer but collected by the product seller, who then pays it to the government. A sales tax is generally applied to all products; an excise tax is applied only to specific products such as fuel or tobacco. Describe tools of fiscal policy, including their advantages and disadvantages LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.
4. A country with an independent central bank experiences an unanticipated recession and responds with an expansionary monetary policy rather than a discretionary fiscal policy. Which of the following is the best rationale for the country's response?  A. Monetary policy can be implemented more rapidly. B. Monetary policy is more powerful than fiscal policy. C. Fiscal policy is ineffective at stimulating economic activity. Explanation Recognition lags, action lags, and impact lags impede successful management of economic cycles. The first of these (ie, recognition lag) results from not recognizing the need to act, which may delay both monetary and fiscal policy actions. However, monetary policy (eg, reducing interest rates) can usually be implemented more rapidly and can affect the economy more immediately than fiscal policy (eg, infrastructure spending). Central banks can implement monetary policy changes within days of deciding to act, and the changes begin affecting the economy fairly quickly. In contrast, even when governments have discretionary spending authority, well-designed fiscal stimulus programs can take many months to plan. When significant changes in government spending or taxes require legislative approval, action and impact lags often result in prolonged delays before the new policies affect the economy. (Choice B) Both monetary and fiscal policy actions can have a substantial impact on an economy. The impact depends on the magnitude of the policy action. No consensus exists regarding which is more powerful. (Choice C) Increases in government spending or reductions in taxes (ie, expansionary fiscal policy) are usually very effective at stimulating higher levels of GDP. Things to remember: Recognition, action, and impact lags impede successful economic management. Both monetary and fiscal policy actions can be delayed if the need to act is not recognized. Since monetary policy usually has shorter action and impact lags, it is more frequently used to offset unexpected economic fluctuation. Compare monetary and fiscal policy LOS Copyright © UWorld. Copyright CFA Institute. All rights reserved.