Question

Setting government spending and taxes in an effort to change overall spending in an economy is called:

a) Fiscal policy
b) Monetary policy
c) Supply-side policy
d) Trade policy

Answer 1

Fiscal policy is the government's use of spending and taxes to influence the economy, which includes expansionary and contractionary approaches to adjust aggregate demand and promote economic stability. Option a

Step-by-step explanation:

The correct answer to the question is a) Fiscal policy. Fiscal policy is utilized by the government to influence the economy through adjustments in government spending and taxation. This policy is a key tool for the government to manage economic activity and is responsible for either stimulating or slowing down the economy, depending on the current economic circumstances.

Expansionary fiscal policy involves increasing government spending or decreasing taxes to boost aggregate demand. Conversely, contractionary fiscal policy reduces government spending or increases taxes to decrease aggregate demand. Over time, as resources grow and technology improves, a shift to the right of the aggregate supply curve is expected, which promotes economic growth.

Making these changes allows the government to control inflation, reduce unemployment, and influence the level of economic activity. Fiscal policy is a powerful tool alongside monetary policy, which is managed by the Federal Reserve. While fiscal policy focuses on spending and taxation, monetary policy involves managing money supply and interest rates. Option a