Why would a government's expansionary fiscal policy lead to a larger budget deficit?
Answer(s): D
An expansionary fiscal policy involves increased government spending or reduced taxation to stimulate economic growth. When this extra spending is not matched by increased revenues, it is typically funded through borrowing, leading to a larger budget deficit.
Why should standard deviation, as a measure of volatility, not be used on its own?
Standard deviation is a backward-looking (historic) measure of volatility and reflects past performance, which may not accurately predict future risk. Relying solely on it ignores forward-looking risks and other factors that could affect an asset's volatility.
How does 'relief at source' normally operate in relation to overseas dividend income?
Answer(s): A
In the context of overseas dividend income, `relief at source' typically means that a reduced rate of withholding tax is levied by the source country. This is often governed by double taxation agreements, allowing investors to benefit from lower tax rates without needing to reclaim the excess later.
Which of the following will be a major constraint on a client's ability to invest and protect against all of the risks that might arise?
Answer(s): B
Affordability is a major constraint because a client may not have sufficient financial resources to invest in all the solutions needed to protect against every possible risk. This makes prioritisation essential in financial planning.
If a firm operating in a perfect free market is able to make supernormal profit in the short-run, what is likely to occur in the long-run?
In a perfect free market, supernormal profits attract new firms due to low barriers to entry. As new competitors enter, supply increases, prices fall, and profits are competed away until only normal profit (zero economic profit) remains in the long run.
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