# Recession and Balancing the Budget

Something to keep in mind. A good question. Say the government wants to balance its budget while the economy is in recession, what will happen? Its actions will: a) Make recessions worse by cutting taxes and/or raising spending. b) Make recessions worse by raising taxes and/or cutting spending. c) Combat recessions by cutting taxes and/or raising spending. d) Combat recessions by raising taxes and/or cutting spending.

What sort of question is this? My answer would be C. D can’t be the answer cuz it sounds super counterintuitive. A can’t be the answer cuz it sound counterintuitive as well. B can be the answer, but so can be C. in exam i’d actually chose B because I tend to go to C on the forum and usualy what I pick first turns out to be the wrong answer.

I am confused between B and C.

B…this sounds like the crowding-out effect

Gives me confidence that thunder and strange are choosing B. so in exam I’d get it correct. wow!

strangedays Wrote: ------------------------------------------------------- > B…this sounds like the crowding-out effect you mean C—> raising spending will result in crowding-out effect and might not help as much?? B is my ans

B

I was going to say A because of the Ricardo-Barro effect. I don’t even know. Man I’m so screwed…

pepp, > in exam i’d actually chose B because I tend to go to C on the forum and usualy what I pick first turns out to be the wrong answer. That’s a new problem solving skill I’m not aware of! So, you’d actually eyeball two answers, pick the one you think is right, then quickly switch to the other one? I’ll try that if it works.

Dreary…is it B? We need your bless

For this one, I got B. If the economy is in a recession, government tax receipts decrease, so the government is bringing in less money but still must balance the budget. In order to balance the budget, spending must be decreased or taxes must be raised which both make the recession deeper. This was a classic argument against the balanced budget amendment… it would make the bad times worse and the good times great.

> > That’s a new problem solving skill I’m not aware > of! So, you’d actually eyeball two answers, pick > the one you think is right, then quickly switch to > the other one? I’ll try that if it works. I am pretty confident that for most of the questions I am trying to solve, I am able to eliminate 2 choices. With the remaining two choices i always get confused. so I have 50% chance. When in doubt, on CFA exam, I am going to trust the opposite of my instincts!! seems like they have a way to trap you with instincts.

pepp Wrote: ------------------------------------------------------- > > > > That’s a new problem solving skill I’m not > aware > > of! So, you’d actually eyeball two answers, > pick > > the one you think is right, then quickly switch > to > > the other one? I’ll try that if it works. > > I am pretty confident that for most of the > questions I am trying to solve, I am able to > eliminate 2 choices. > > With the remaining two choices i always get > confused. so I have 50% chance. When in doubt, on > CFA exam, I am going to trust the opposite of my > instincts!! seems like they have a way to trap you > with instincts. Just think for 30 sec and tick the answer that it will come up in your mind! The other side of your is usually correct

Dingo said it well. Answer is B. pepp, keep your method going, you may be into something