What is fiscal policy?

• A. Government decisions about taxation and spending to influence the economy.
• B. Rules for protest demonstrations.
• C. Legal actions to resolve disputes.
• D. A plan for military deployment.

Answer: (C)

Fiscal policy is the government’s use of taxation and spending to influence the economy. By adjusting tax rates and deciding how much to spend, the government can change how much people and businesses spend and invest. Lower taxes or more government spending puts more money in households and firms, boosting demand and helping the economy grow during a slump. Higher taxes or less spending can cool down an overheated economy to tame inflation. These tools are expansionary or contractionary fiscal policy. For example, during a recession, cutting taxes and funding public works can create jobs and stimulate activity. The other options describe rules for protests, ways to resolve disputes legally, or plans for military deployment, which are not about influencing the economy through taxation and spending.