Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does fiscal policy primarily relate to?

1. Interest rates and money supply

2. Expenditure and tax

3. Trade tariffs and quotas

4. Subsidies and regulations

The correct answer is: Expenditure and tax

Fiscal policy primarily relates to government decisions regarding expenditure and tax. It involves the use of government spending and tax policies to influence economic conditions, manage economic cycles, and achieve macroeconomic objectives such as full employment, price stability, and economic growth. When a government increases spending or cuts taxes, it is engaging in expansionary fiscal policy, aimed at stimulating economic activity. Conversely, when it reduces spending or increases taxes, it is implementing contractionary fiscal policy, often to curb inflation or reduce budget deficits. In contrast, the other options address different economic components. Interest rates and money supply are pivotal aspects of monetary policy rather than fiscal policy, which is managed by central banks. Trade tariffs and quotas relate to international trade policy, and while they can impact fiscal revenues indirectly, they do not constitute fiscal policy itself. Similarly, subsidies and regulations pertain to specific forms of government intervention that can affect sectors of the economy but do not encompass the broader framework of fiscal policy, which is fundamentally about how a government collects and spends money.