What does fiscal policy involve?

Fiscal policy involves managing the economy through tax and spending controls. This approach focuses on government decisions regarding taxation levels and public expenditure. By adjusting these factors, a government can influence overall economic activity, helping to stabilize the economy during fluctuations in growth or inflation. For example, increasing government spending can stimulate economic growth during a recession, while reducing taxes can increase consumer spending and investment.

The other options pertain to different economic policies; for instance, controlling the money supply and interest rates is primarily the domain of monetary policy, which is a function of central banks. Regulating foreign trade and tariffs relates to trade policy, which is concerned with international economic relationships rather than domestic economic management. Setting interest rates for banks is also part of monetary policy, as it is typically managed by a central bank through various tools to influence overall economic conditions. Understanding fiscal policy is crucial for comprehending how government actions can directly shape economic outcomes.