Multiple Choice
In macroeconomics, fiscal policy refers to which of the following?
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19. Fiscal Policy
Introduction to Fiscal Policy
Multiple Choice
Which of the following statements is true of fiscal policy?
A
Fiscal policy refers to long-run changes in technology that shift an economy’s production possibilities frontier outward.
B
Fiscal policy is carried out primarily through changes in the central bank’s policy interest rate and reserve requirements.
C
Fiscal policy refers to changes in government spending and taxes designed to influence aggregate demand and overall economic activity.
D
Fiscal policy is aimed solely at keeping the exchange rate fixed by buying and selling foreign currency.
Verified step by step guidance1
Step 1: Understand the definition of fiscal policy. Fiscal policy involves government decisions about spending and taxation to influence the economy.
Step 2: Recognize that fiscal policy is distinct from monetary policy. Monetary policy is managed by the central bank and involves tools like interest rates and reserve requirements.
Step 3: Identify that fiscal policy aims to influence aggregate demand and overall economic activity by adjusting government spending and tax policies.
Step 4: Note that fiscal policy is not about long-run technological changes or shifting the production possibilities frontier; those relate to economic growth and supply-side factors.
Step 5: Understand that fiscal policy is not primarily concerned with maintaining fixed exchange rates; that is typically a function of monetary policy or foreign exchange interventions.
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