Which policy is described as direct intervention by the government using taxes and government spending to stabilise the economy?

Which policy is described as direct intervention by the government using taxes and government spending to stabilise the economy?

• A. Fiscal policy
• B. Monetary policy
• C. Productivity policy
• D. Contractionary policy

Answer: (A)

Fiscal policy is the use of government spending and taxation to influence the level of economic activity. By adjusting taxes or changing government spending, the government can shift aggregate demand to stabilise the economy, expanding it during downturns or cooling it when inflation is rising. The description in the question matches fiscal policy because it centers on direct government actions using taxes and spending. Monetary policy works through the central bank adjusting interest rates and the money supply, not taxes or spending. Productivity policy aims to improve long-term output through efficiency and innovation rather than short-run demand management. Contractionary policy refers to reducing aggregate demand, which can be implemented via either fiscal or monetary tools, but the mechanism described—using taxes and government spending—identifies fiscal policy.

Fiscal policy is the use of government spending and taxation to influence the level of economic activity. By adjusting taxes or changing government spending, the government can shift aggregate demand to stabilise the economy, expanding it during downturns or cooling it when inflation is rising. The description in the question matches fiscal policy because it centers on direct government actions using taxes and spending.

Monetary policy works through the central bank adjusting interest rates and the money supply, not taxes or spending. Productivity policy aims to improve long-term output through efficiency and innovation rather than short-run demand management. Contractionary policy refers to reducing aggregate demand, which can be implemented via either fiscal or monetary tools, but the mechanism described—using taxes and government spending—identifies fiscal policy.