Final answer:
Fiscal policy is enacted through changes in taxation and government spending, which shift the aggregate demand curve to manage economic growth. The correct answer to the student's question is 'D. Taxation and government spending'.
Step-by-step explanation:
Fiscal policy is the use of government spending and tax policy to influence the path of the economy over time. When it comes to fiscal policy, changes in taxation and government spending are the primary tools used to adjust aggregate demand, which can either stimulate economic growth or slow it down, depending on the need to address economic issues such as unemployment and inflation.
The application of fiscal policy can be seen in its ability to shift the aggregate demand curve outward in the case of expansionary fiscal policy — which involves decreasing taxes or increasing government spending — and inward in the case of contractionary fiscal policy, which involves increasing taxes or decreasing government spending.
Therefore, the correct answer to the question is 'D. Taxation and government spending' as these are the mechanisms through which fiscal policy is enacted.