ACCA Applied Knowledge · Business and Technology · Political and legal factors affecting business
A government announces a large increase in public spending on road and rail construction, funded by borrowing. Which effect on construction firms is most likely in the short term?
Construction firms are most likely to see higher demand. Increased government spending on roads and railways creates new contracts and orders for them. This is expansionary fiscal policy acting directly on the sector, whereas the other options describe effects that do not follow from the policy.
- AHigher demand for their servicesCorrect
- BLower demand because interest rates fall
- CHigher costs because of price controls
- DLower demand because of increased subsidies to rivals
Explanation
Increased government spending on infrastructure creates contracts for construction firms and raises demand for their services. The other options describe effects that do not follow from the policy described, such as a fall in demand or price controls.
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