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ACCA Applied Skills · Financial Management · The economic environment for business

Which of the following is an example of fiscal policy rather than monetary policy?

Raising the rate of corporate income tax is fiscal policy because fiscal policy covers government taxation, spending and borrowing. Changing interest rates, buying bonds to expand the money supply, or managing the exchange rate are monetary policy tools operated by the central bank.

  1. AThe central bank lowers its base interest rate
  2. BThe central bank buys government bonds to increase the money supply
  3. CThe government increases the rate of corporate income taxCorrect
  4. DThe central bank allows its currency to depreciate

Explanation

Fiscal policy concerns government decisions on taxation, public spending and borrowing. Changing the corporate tax rate is a tax decision and so is fiscal. Interest rate changes, bond purchases (quantitative easing) and exchange rate management are carried out by the central bank and are monetary policy tools.

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