Error in CFA I test question?

On page 318 of the study guide volume 2, there is a question that asks which statement is most accurate. I will include only the two choices in question.

Choice A says an increase in budget deficit is always expansionary.

Choice B says an increase in government spending is always expansionary.

I picked B but the solution says it is A. It further says note that increases in government spending may be accompanied by an even bigger rise in tax receipts and hence may not be expansionary.


On page 316 it clearly said govt deficit may NOT be a good indicator of policy stance. How can A be correct?

Can someone please explain?

Thank you.

I think you have to consider the automatic stabilizers mentioned back on page 302/303

An increase in government spending during a recession for social benefits is offset/paid for by the increase in tax base later during good economic times. As such, the net effect should be zero (ie. balanced budget). There was no action above and beyond what a government would do to stabilize the economy. This is a neutral stance.

When you see a deficit increase year over year, the government is actively spending more to spur growth. This is beyond what is needed to just stabilize the economy so is viewed as expansionary.