Association of Chartered Certified Accountants (ACCA) Certification Practice Test

How may a government encourage growth in the private sector?

1. By limiting competition

2. By imposing higher taxes on businesses

3. By offering tax incentives and grants

4. By reducing access to credit

The correct answer is: By offering tax incentives and grants

A government can stimulate growth in the private sector by offering tax incentives and grants, as these measures can directly enhance a business's potential for expansion and innovation. Tax incentives reduce the financial burden on businesses, allowing them to retain more of their earnings for reinvestment or to hire new employees. This approach encourages investment in research and development, infrastructure, or operational capabilities, leading to increased productivity and job growth. Grants, on the other hand, provide immediate financial assistance that can help businesses start up or expand without the obligation to repay the funds. This financial support can be particularly vital for small and medium-sized enterprises (SMEs), which often face barriers in accessing capital. Through targeted grants, governments can support industries they wish to promote, thereby fostering a more vibrant and diverse private sector. In contrast, limiting competition, imposing higher taxes, or reducing access to credit would typically hinder private sector growth. Limiting competition can lead to reduced innovation and higher prices, while higher taxes can decrease disposable income for consumers and reduce businesses' investment capacity. Lastly, reduced access to credit restricts businesses' ability to finance their operations and growth, stifling economic expansion.