Which policy describes government actions intended to influence the level of economic activity via taxation and spending?

• A. Monetary policy
• B. Fiscal policy
• C. Deficit spending
• D. Multiplier effect

Answer: (B)

Fiscal policy describes government actions to influence economic activity through taxation and spending. By adjusting tax rates and government purchases, policymakers can shift aggregate demand and steer the economy toward full employment. For example, in a slowdown, cutting taxes or increasing spending puts more money into households and firms, boosting demand and output. In contrast, reducing spending or raising taxes can cool off an overheating economy and curb inflation. This approach is distinct from monetary policy, which uses tools like interest rates and money supply, not tax and spending decisions. Deficit spending is just one way a government might finance its activities, not the policy name itself, and the multiplier effect is a concept about how initial spending can lead to larger total changes in GDP, not a policy tool.