ACCA Financial Management (F9) Certification Practice Exam

What is the primary aim of fiscal policy?

1. To influence interest rates

2. To establish fixed exchange rates

3. To collect or spend money through taxes

4. To control international trade

The correct answer is: To collect or spend money through taxes

The primary aim of fiscal policy is to collect or spend money through taxes and government expenditures. Fiscal policy involves government decisions regarding taxation and spending to influence the economy. By adjusting tax rates and altering spending levels, the government can directly impact aggregate demand, economic growth, and employment levels. When a government increases its spending (for example, on public projects) or reduces taxes, it injects money into the economy, stimulating demand and potentially leading to increased output and employment. Conversely, if the government is reducing expenditure or increasing taxes, it can cool down an overheating economy, which is essential for controlling inflation. The other options relate to different aspects of economic policy. Influencing interest rates is typically the domain of monetary policy, which is managed by central banks and focuses on money supply and cost of borrowing. Establishing fixed exchange rates falls under exchange rate policy, which is not directly linked to fiscal actions. Controlling international trade relates more to trade policy, such as tariffs and trade agreements, rather than the fiscal policy framework. Thus, the correct answer highlights the fundamental role of fiscal policy in managing a nation's economy through public finance measures.