The following questions have appeared on CFA examinations.
a. Which one of the following statements best expresses the central idea of countercyclical fiscal policy?
(1) Planned government deficits are appropriate during economic booms, and planned surpluses are appropriate during economic recessions.
(2) The balanced-budget approach is the proper criterion for determining annual budget policy.
(3) Actual deficits should equal actual surpluses during a period of deflation.
(4) Government deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.

€¢ Industry sales growth-Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next three years.
€¢ Non-U.S. markets-Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited.
€¢ Mail order sales-Some manufacturers have created a new niche in the industry by selling electric toothbrushes directly to customers through mail order. Sales for this industry segment are growing at 40% per year.
€¢ U.S. market penetration-The current penetration rate in the United States is 60% of households and will be difficult to increase.
€¢ Price competition-Manufacturers compete fiercely on the basis of price, and price wars within the industry are common.
€¢ Niche markets-Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service.
€¢ Industry consolidation-Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase.
€¢ New entrants-New manufacturers continue to enter the market.
b. Which one of the following propositions would a strong proponent of supply-side economics be most likely to stress?
(1) Higher marginal tax rates will lead to a reduction in the size of the budget deficit and lower interest rates because they expand government revenues.
(2) Higher marginal tax rates promote economic inefficiency and thereby retard aggregate output because they encourage investors to undertake low-productivity projects with substantial tax-shelter benefits.
(3) Income redistribution payments will exert little impact on real aggregate supply because they do not consume resources directly.
(4) A tax reduction will increase the disposable income of households. Thus, the primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus.

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Year 2005 2007 2008 2009 2010 12.5% 2 21.6% 21.6% 4 28.5 × 2 23.2 × 9 18.5 × 1 16.2 × 8.8% 39.2 80% 6 14.3% 8 2 0.3% 3.8 0.3% 2 0.8% 2.3 1.0% 2.1