ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A government wants to reduce the general level of demand in an overheating economy by using fiscal policy. Which action is most consistent with this aim?
Increasing income tax rates and cutting public spending is correct because fiscal policy works through taxation and government spending. Both measures reduce aggregate demand, which cools an overheating economy. Changing interest rates or the money supply is monetary policy, not fiscal policy.
- AIncreasing income tax rates and cutting public spendingCorrect
- BCutting interest rates and increasing the money supply
- CReducing corporation tax and increasing government borrowing
- DIncreasing public spending on infrastructure projects
Explanation
Fiscal policy uses government spending and taxation. Raising taxes reduces disposable income and cutting spending reduces injected demand, so aggregate demand falls. Cutting interest rates and expanding the money supply is monetary policy and would increase demand, so it does not fit.
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