Weird CFAI sample question...

B

brafique

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
Hey guys, this question is from the sample questions CFAI has up on its website:

11. According to new classical economists, is financing a reduction in current taxes by
government borrowing likely to result in an increase in:

aggregate demand? the real interest rate?

A. No No
B. No Yes
C. Yes No
D. Yes Yes

Answer: A.

I've been studying from the 2008 Shweser notes (though I'm taking the June 2009 exam), and there is no mention of "new classical" or neoclassical economists in the Economics section. There IS a mention of classical economists, but they believed that "that taxes were the primary impediment to long-run equilibrium and that if the distortions in incentives from taxes were minimized, the economy would grow in an efficient manner with increases in labor and capital and with improvements in technology."

So if the question is referring to classical economists, wouldn't the answer be D as a decrease in taxes would reduce distortions in the economy and increase aggregate demand - while the fact that the government borrowed the money for the tax cuts would lead to an increase real interest rates?

Also a related question - is it alright if I study off the Shweser notes alone and not the CFAI textbooks? I remember someone here saying you could do that for all topics but ethics, but just wanted to double check.

Thanks!
 
New classical theory is the Riccardo Barro effect. They believe that if the govt borrows to reduce taxes that sometime in the future the public is going to get hit with bigger taxes to finance the deficit. So we the public are so smart and so responsible we antipate this by saving our money instead of putting it back into the economy. Highly unlikely.

It's like when we got those rebate checks, instead of spending them we said nah I'll save them because 2 yrs from now taxes are going to go up so i'll just save my money to pay for the tax hike later on.

I don't know about u but I spent mine lol.
 
^ Thanks for the answer JP - going off what you said, would the interest rates then not increase because the increase in saving by people would offset the need for interest rates to go up?

Is new-classical economic theory something that's been added for the 2009 exam? There's no mention of it at all in the 2008 Shweser notes that I'm using!
 
I'm taking the test in december and it pretty much says it word for word in the Stalla material.

"Another theory, called the Ricardo-Barro effect, challenges the crowding-out theory. It argues that if the govt deficits are financed by issing interest-bearing bonds and assumng taxpayers are perfectly rational, then taxpayers will anticipate that the interest payments on those govt bonds will require higher taxes to be paid in the future. Taxpayers will foresee lower disposable income later on and will increase their saving by the amount of the budget deficit. This shifts the private savings supply curve (which was fixed in the crowding out theory) to the right. This increased saving supply offsets the effects of the govt deficit, and both the real interest rate and the quanity of investment remain constant."
 
^ Wow, that's strange, it sucks if Shweser just skips whole concepts like this one, I hope there's nothing else thats missing...can anyone else who's using Shweser confirm whether this stuff is in their notes? I'm not so sure about my plan to skip reading the CFAI books and focus on the Shweser notes now :/
 
I know from experience that Schweser does skip topics... that is how the cut the material down... We just have to hope that they hit the majority of topics on our exam and we get them all right. :-)
 
What BS.
When I took this question, I knew the Rircardo Barro effect, but did not remember it was also called "the new classical economists"
 
A

good job JP_RL_CFA

JP_RL_CFA Wrote:
-------------------------------------------------------
> I'm taking the test in december and it pretty much
> says it word for word in the Stalla material.
>
> "Another theory, called the Ricardo-Barro effect,
> challenges the crowding-out theory. It argues
> that if the govt deficits are financed by issing
> interest-bearing bonds and assumng taxpayers are
> perfectly rational, then taxpayers will anticipate
> that the interest payments on those govt bonds
> will require higher taxes to be paid in the
> future. Taxpayers will foresee lower disposable
> income later on and will increase their saving by
> the amount of the budget deficit. This shifts the
> private savings supply curve (which was fixed in
> the crowding out theory) to the right. This
> increased saving supply offsets the effects of the
> govt deficit, and both the real interest rate and
> the quanity of investment remain constant."
 
Are you guys sure about the Ricardo Barro being New classical? In the 2009 Scweser notes it says that new classical theory believe that changes in real GDP are only attributed to unexpected changes in AD are the causes of business cycles.
 
All I can say about that question is.

There will always be stuff we dont know. When this is the case we have a
33.333333% probablity if you close your eyes and put your finger on a answer.

:>
 
CFAI econ text also specifies the same thing and I do not have stalla notes.
So I assumed whatever he's "quoting" from stalla should was right, but I could not find anything online (2 min search :|) stating that Ricaro Barro and New classical are same.




spurries Wrote:
-------------------------------------------------------
> Are you guys sure about the Ricardo Barro being
> New classical? In the 2009 Scweser notes it says
> that new classical theory believe that changes in
> real GDP are only attributed to unexpected changes
> in AD are the causes of business cycles.
 
You must log in or register to reply here.
Back
Top