Future Business Leader Achievments (FBLA) Economics Practice Exam

Fiscal policy refers to the control of

1. interest rates by the Federal Reserve System

2. the money supply by Congress

3. the government budget in order to influence aggregate demand

4. government spending in order to balance the federal budget

The correct answer is: the government budget in order to influence aggregate demand

Fiscal policy is primarily concerned with how a government adjusts its spending levels and tax rates to influence the overall economy. By managing the government budget, which includes government expenditures and revenue generation through taxes, fiscal policy can effectively alter aggregate demand—the total demand for goods and services within an economy. When the government increases spending or decreases taxes, it typically stimulates economic activity by encouraging consumer and business spending, leading to economic growth. Conversely, cutting spending or raising taxes can help cool down an overheated economy. The other choices do not accurately describe fiscal policy. For instance, the control of interest rates pertains to monetary policy, which is managed by a central bank like the Federal Reserve. The manipulation of the money supply also falls under the jurisdiction of the Federal Reserve, not Congress. Finally, while government spending plays a vital role in fiscal policy, the aim is not specifically to balance the federal budget but rather to influence economic performance through adjustments in spending and tax policies based on the economic conditions. Thus, option C correctly captures the essence of fiscal policy.