CFAI Practice: M03 — Fiscal Policy

Source: CFAI Official Practice Problems 2026

Questions

1. Crowding out refers to:

• A. fall in rates reducing investment
• B. rise in private investment reducing consumption
• C. rise in government borrowing reducing private sector’s access to funds ✓

2. Contractionary fiscal policy always involves:

• A. balanced budget
• B. reduction in government spending
• C. fall in budget deficit or rise in surplus ✓

A reduction in spending + larger fall in taxation = expansionary, not contractionary.

3. Most accurate:

• A. Ricardian equivalence = no idea of future taxes
• B. governments don’t allow political pressure on fiscal
• C. high unemployment → easy monetary + fiscal → expand AD ✓

4. Fiscal policy:

• A. cyclically adjusted budget deficits are appropriate indicators ✓
• B. reduce personal income taxes to raise business capital spending
• C. budget surplus increase = expansionary

5. Least likely reason fiscal can’t fully stabilize AD:

• A. private sector behavior changes
• B. policy changes implemented quickly ✓ (actually, lags exist)
• C. focus on inflation > unemployment