Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which of the following best describes fiscal policy?

1. Adjustments in interest rates by the central bank

2. Changes in government spending and taxation

3. Control of money supply in the economy

4. Regulation of private sector industries

The correct answer is: Changes in government spending and taxation

Fiscal policy primarily involves the government's use of spending and taxation to influence the economy. This includes decisions made about how much the government will spend on public services, infrastructure, and various social programs, as well as how much it will collect through taxes. By increasing spending or cutting taxes, a government can stimulate economic activity, thereby encouraging growth during slow economic periods. Conversely, reducing spending or increasing taxes can help cool down an overheated economy by slowing down inflation. In contrast, the other options relate to different aspects of economic policy. Adjustments in interest rates by the central bank are indicative of monetary policy, which focuses on managing the economy's money supply and maintaining price stability. The control of money supply in the economy is also a function of monetary policy, as it directly influences inflation and interest rates. Regulation of private sector industries pertains to regulatory policy, which involves rules and laws that govern how businesses operate, aimed at protecting consumers and ensuring fair competition. Thus, the emphasis on government spending and taxation clearly defines fiscal policy, which is why this answer is the most suitable.