Future Business Leader Achievments (FBLA) Economics Practice Exam

Fiscal policy can directly change the level of aggregate demand by influencing which of the following?

1. Consumption spending

2. The money supply

3. The multiplier

4. The investment/GDP ratio

The correct answer is: Consumption spending

Fiscal policy directly affects aggregate demand primarily through changes in consumption spending. When the government alters its spending or adjusts taxation levels, it influences the disposable income of individuals and households. For example, an increase in government spending can inject more money into the economy, leading to higher consumption as individuals have more income to spend on goods and services. Similarly, a decrease in taxes means that consumers retain more of their earnings, which can also increase consumption and consequently aggregate demand. While the money supply is primarily influenced by monetary policy—which entails the central bank's actions rather than fiscal measures—fiscal policy focuses on government expenditures and taxation. The multiplier effect refers to the proportionate increase in final income that results from an injection of spending, but it is contingent upon the initial changes in spending or taxation, hence it is not directly controlled by fiscal policy itself. The investment/GDP ratio can change due to various factors, including both fiscal and monetary policy, but it does not represent a direct mechanism through which fiscal policy operates to shift aggregate demand. In essence, consumption spending is the most direct link to how fiscal policy can change aggregate demand, making it the correct answer.