What policy involves adjusting government spending and taxation to influence the economy?

• A. Monetary policy
• B. Deficit spending
• C. Fiscal policy
• D. Stagflation

Answer: (C)

Adjusting government spending and taxation to influence the economy is fiscal policy. By changing how much the government spends and how much it taxes, the government shifts aggregate demand, affecting output and employment. An expansionary approach—spending more or cutting taxes—aims to boost demand when activity is weak, while a contractionary approach—spending less or raising taxes—slows demand to combat inflation. Monetary policy, on the other hand, uses tools like interest rates and the money supply. Deficit spending is a tactic within fiscal policy, not the overall concept, and stagflation describes a problematic economic condition, not a policy.