expansionary fiscal policy

CFA Level I
#1

An expansionary fiscal poicy is most likely associated with:

A. an increase in government spending on social insurance and benefits

B. crowding out of private investments

C. an increase in capital gains tax rates

Correct answer is B

But, why would it not be A?

Thanks

#2

^^ transfer payments are not included in calculation of Government spending, b/c they are basically just tax revenue, reallocated back to people.

#3

ok I see it now…

Thanks!

#4

More importantly(or so I think) A is not right because expansionary fiscal policies are directed (generally speaking) at govt supporting riskier industry and to promote lending, directly contributing to re-invigoration of the economy. Giving out benefits, by no means achieves this objective.

#5

If I remember correctly the question mentionned DISCRETIONARY. Benefits are automatic stabilizers. Watch out, there is a mistake in the correction on the website: expansionary policy is linked to a higher budget deficit and bigger spending.