A categorical grant is a transfer of federal funds designed for

• A. the private sector
• B. discretionary use by a state
• C. specific purposes
• D. programs with matching grants

Answer: (C)

Categorical grants are federal funds allocated for very specific purposes, with strings attached and accountability requirements. This is why the correct answer is the one that says funds are for specific purposes. The money is earmarked to support a defined program or activity—like a particular education or health initiative—rather than being usable for broad or discretionary spending. The idea that funds go to the private sector or that states have broad discretion describes other funding types, not categorical grants. And while some categorical grants require matching funds, that isn’t what defines them; the defining feature is the targeted, specific use of the money.