ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
A government wants to stimulate a weak economy by using fiscal policy. Which action is an example of expansionary fiscal policy?
Cutting income tax rates while keeping public spending unchanged is expansionary fiscal policy, because it raises household disposable income and aggregate demand. Interest rate changes and bond sales are monetary tools, while higher VAT would reduce demand and so is contractionary.
- AIncreasing the central bank's base interest rate
- BCutting income tax rates while maintaining public spendingCorrect
- CSelling government bonds to reduce the money supply
- DRaising value added tax rates to cut the budget deficit
Explanation
Fiscal policy uses government spending and taxation. Cutting income tax leaves households with more disposable income and so raises aggregate demand. Raising the base rate and selling bonds are monetary measures, and raising VAT is contractionary.
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