Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Monetary and fiscal policies primarily aim to influence which of the following?

1. Aggregate supply

2. Aggregate demand

3. Consumer behavior

4. Market competition

The correct answer is: Aggregate demand

Monetary and fiscal policies are tools used by governments and central banks to manage economic activity, and their primary focus is on influencing aggregate demand. Monetary policy involves controlling the money supply and interest rates, which affects consumer and business spending. For instance, lowering interest rates makes borrowing cheaper, encouraging spending and investment, which increases aggregate demand. Conversely, raising interest rates can reduce demand by making borrowing more expensive. Fiscal policy, on the other hand, involves government spending and taxation. When the government increases its spending or reduces taxes, it puts more money into the economy, which boosts aggregate demand as households and businesses have more resources to spend. Conversely, a decrease in government spending or an increase in taxes can reduce aggregate demand. While aggregate supply, consumer behavior, and market competition can be influenced by these policies, the direct aim of monetary and fiscal measures is to affect the total demand for goods and services within the economy, making aggregate demand the primary target of such policies.