Which policy uses government spending and taxation to influence macroeconomic conditions?

• A. Monetary Policy
• B. Fiscal Policy
• C. Trade Policy
• D. Industrial Policy

Answer: (B)

Using government spending and taxation to influence macroeconomic conditions is fiscal policy. This approach works by shaping overall demand in the economy. When the government spends more or cuts taxes, households and firms have more money to spend, boosting consumption and investment and raising aggregate demand—helpful during a recession. Conversely, cutting spending or raising taxes can cool demand to tackle inflation. This contrasts with monetary policy, which uses central bank tools like interest rates and money supply to influence the economy; trade policy deals with tariffs and import/export rules; industrial policy focuses on supporting specific industries rather than the overall level of demand.