Final answer:
A nation reducing income taxes to stimulate the economy is exercising its fiscal policy, which targets aggregate demand to manage economic activity and growth.
Step-by-step explanation:
When a nation reduces income taxes for individuals so they will have more income to spend as a means of stimulating the economy, the nation is exercising its fiscal policy. Fiscal policy involves the government's use of its spending and tax policies to influence economic conditions. By reducing income taxes, the government aims to increase the disposable income of its citizens, encouraging them to spend more, which can stimulate economic activity. Such a policy is intended to influence aggregate demand directly and is typically used to combat recessions and incentivize economic growth.
It is important to differentiate fiscal policy from monetary policy, which is managed by a nation's central bank and involves changing the interest rate or money supply to affect economic activity. In contrast, supply-side policies focus on increasing productivity and efficiency within the economy. Lastly, demand-side policies are strategies to encourage consumer spending, investment, and export to increase economic demand.