Association of Chartered Certified Accountants (ACCA) Certification Practice Test

How are fiscal policy components categorized?

1. Taxation and regulation

2. Expenditure, revenues, and borrowing

3. Inflation and unemployment

4. Trade and investment

The correct answer is: Expenditure, revenues, and borrowing

Fiscal policy components are categorized into three main categories: expenditure, revenues, and borrowing. Expenditure refers to the government spending on goods and services, which can influence economic activity. This includes spending on public services such as education, health care, and infrastructure. Revenues are primarily derived from taxation, including income tax, corporate tax, sales tax, etc. These revenues fund government operations and services. Borrowing is used when the government's expenditures exceed its revenues, allowing it to finance deficits and manage cash flow impacts on the economy. This categorization allows economists and policymakers to analyze and implement fiscal policies effectively to achieve economic objectives such as stimulating growth, controlling inflation, and reducing unemployment. By adjusting expenditure levels, modifying tax rates, and managing debt, the government can influence overall economic performance. The other options, while relevant to economic discussions, do not accurately define the specific components of fiscal policy. For example, taxation and regulation mix elements of fiscal policy with other economic laws. Inflation and unemployment are economic conditions that fiscal policy may aim to address but do not represent its components. Trade and investment involve aspects of economic policy and development that are more relevant to international economics than to the categorization of fiscal policy.