Multiple Choice
Which of the following is a type of lag problem faced by the government when implementing fiscal policy?
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19. Fiscal Policy
Introduction to Fiscal Policy
Multiple Choice
Which of the following best describes a fiscal policy tool?
A
Changing the central bank’s policy interest rate to influence borrowing and inflation
B
Changing government spending or tax rates to influence aggregate demand
C
Allowing the exchange rate to depreciate to raise net exports
D
Setting price ceilings on essential goods to control inflation
Verified step by step guidance1
Step 1: Understand the definition of fiscal policy. Fiscal policy involves government decisions on taxation and government spending to influence the economy, particularly aggregate demand.
Step 2: Recognize that changing the central bank’s policy interest rate is a monetary policy tool, not fiscal policy, because it involves the central bank's control over money supply and interest rates.
Step 3: Identify that allowing the exchange rate to depreciate is related to exchange rate policy or monetary policy, as it affects net exports through currency valuation, not direct government spending or taxation.
Step 4: Note that setting price ceilings is a regulatory or price control measure, which is not classified as fiscal policy since it does not involve government spending or taxation decisions.
Step 5: Conclude that the fiscal policy tool is best described by changing government spending or tax rates to influence aggregate demand, as this directly involves government budgetary decisions.
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