Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does fiscal policy provide a method for managing in the economy?

1. Interest rates

2. Aggregate demand

3. Inflation rates

4. Global trade

The correct answer is: Aggregate demand

Fiscal policy provides a method for managing aggregate demand in the economy. This approach involves government spending and taxation decisions aimed at influencing economic activity. When the government increases its spending or decreases taxes, it typically boosts aggregate demand, leading to higher consumption and investment. Conversely, reducing spending or increasing taxes can help control inflation or reduce deficits by lowering aggregate demand. Interest rates are primarily controlled through monetary policy, not fiscal policy, as that is the responsibility of central banks. Inflation rates, while they can be impacted by fiscal policy, are more directly influenced by both monetary policy and supply-side factors. Similarly, global trade is influenced by a range of factors, including international agreements and currency exchange rates, but it is not directly managed through fiscal policy.