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.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the definition of fiscal policy. Fiscal policy involves government decisions about spending and taxation to influence the economy.
2. 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.
3. Step 3: Identify that fiscal policy aims to influence aggregate demand and overall economic activity by adjusting government spending and tax policies.
4. 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.
5. 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.