Which of the following best describes the primary objective of a government's fiscal policy?
Show answer & explanation
Correct answer: C
Explanation
Answer: To influence aggregate demand and economic activity through government spending and taxation.
Explanation: Fiscal policy refers to the use of government revenue (taxation) and government expenditure to influence a country’s economic conditions. Its main objective is to manage aggregate demand, stabilize the economy, promote growth, and reduce unemployment or inflation. By increasing or decreasing spending and taxes, the government can either stimulate or slow down economic activity.
Additional Key Facts:
Fiscal policy is handled by the Ministry of Finance.
It includes instruments like taxation, public expenditure, and public borrowing.
It is different from monetary policy, which is controlled by the central bank (RBI in India).
Expansionary fiscal policy increases demand during recessions.
Contractionary fiscal policy is used to control inflation.
Potential Exam-Oriented Questions & Answers:
Question: What is the main objective of fiscal policy?
Answer: To manage aggregate demand and economic stability.
Question: What are the main tools of fiscal policy?
Answer: Taxation and government expenditure.