Which government policy deals with taxation and government expenditure to affect the level of economic activity?

• A. Monetary policy
• B. Fiscal policy
• C. Tariffs
• D. Protectionism

Answer: (B)

Fiscal policy uses taxation and government spending to influence the level of economic activity. By adjusting tax rates and public spending, the government can shift aggregate demand: cutting taxes or increasing spending raises disposable income and demand, helping to boost output in a downturn; raising taxes or cutting spending can cool an overheating economy. This differs from monetary policy, which works through the money supply and interest rates, and from tariffs or protectionism, which are trade-focused tools.