Congress Passes Law to Pay Debts of Bankrupt Companies | CFA Level 1 Test Prep

Government Program for Paying Bankrupt Company Debts | CFA Level 1 Exam

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Question

Congress passes a law requiring the government to pay certain debts of companies that have declared bankruptcy. Which of the following terms most accurately describes this program?

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A. B. C. D. E. F.

B

An automatic stabilizer is anything that would decrease the government budget surplus during slow economies and increase the surplus during strong economic periods. During slow economic periods, bankruptcies are likely to rise, and by paying a portion of the defunct firms' debts, the government is injecting demand into the economy. This should be distinguished from an expansionary fiscal policy, because the program is not designed to expand national income, but to stabilize a slowdown without the need for further government action.

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