CEA - Certified Economic Analyst Monetary and Fiscal Policy Questions and Answers

Question 1

In a scenario where an economy is experiencing high inflation and rapid growth, which of the following represents the most appropriate contractionary fiscal policy response?

Accepted Answer

Decreasing government spending and increasing taxes.

Answer

Increasing government spending and cutting taxes.

Answer

The central bank selling government securities on the open market.

Answer

Lowering interest rates to encourage investment.

Question 2

Which of the following is the best example of an automatic stabilizer in fiscal policy?

Accepted Answer

A progressive income tax system where revenues fall as incomes decline during a downturn.

Answer

The passage of a new law to increase infrastructure spending during a recession.

Answer

A central bank's decision to lower the federal funds rate.

Answer

The government issuing new bonds to finance a budget deficit.

Question 3

A government decides to significantly increase its spending on public infrastructure projects without a corresponding increase in tax revenue. This expansionary fiscal policy could lead to a phenomenon known as:

Accepted Answer

The crowding-out effect.

Answer

The liquidity trap.

Answer

Quantitative easing.

Answer

The multiplier effect.

Question 4

If a central bank aims to stimulate economic activity during a recession, which expansionary monetary policy tool would it most likely employ?

Accepted Answer

Purchasing government securities on the open market.

Answer

Increasing the reserve requirement for banks.

Answer

Increasing the discount rate.

Answer

Selling government securities on the open market.

Question 5

Which of the following best describes the primary objective of Quantitative Easing (QE) as an unconventional monetary policy tool?

Accepted Answer

To increase the money supply and lower long-term interest rates when short-term rates are near zero.

Answer

To directly finance government budget deficits.

Answer

To increase short-term interest rates to control inflation.

Answer

To decrease the national debt by buying back government bonds.

Question 6

A country is simultaneously experiencing a severe recession and high unemployment. A policymaker proposes a combination of cutting taxes and increasing government spending. This is an example of:

Accepted Answer

Expansionary fiscal policy.

Answer

Contractionary fiscal policy.

Answer

Expansionary monetary policy.

Answer

A neutral fiscal policy.