ACCA Financial Management (F9) Certification Practice Exam

Which economic policy is concerned with taxes and government spending?

1. Monetary policy

2. Fiscal policy

3. Exchange rate policy

4. Trade policy

The correct answer is: Fiscal policy

Fiscal policy is the economic policy that focuses on government spending and taxation. It involves the use of government budgets to influence the economy's overall activity, including managing public spending and tax revenues to achieve macroeconomic objectives such as economic growth, reduced unemployment, and controlled inflation. Through fiscal policy, a government can stimulate economic activity by increasing its spending or decreasing taxes, thereby putting more money into the hands of consumers and businesses. Conversely, during periods of high inflation or economic overheating, it may choose to reduce spending or increase taxes to cool down the economy. The effectiveness of fiscal policy is often contingent upon timing and implementation, making it a critical tool for managing economic conditions. In contrast, monetary policy pertains to the management of a country's money supply and interest rates, primarily conducted by a central bank. Exchange rate policy deals with the value of a country's currency in relation to others, while trade policy focuses on regulations and agreements governing international trade. Each of these policies has a distinct purpose and instrument, unlike fiscal policy, which is explicitly about governmental financial management through taxes and spending.