How do fiscal policies primarily influence the economy?

Fiscal policies primarily influence the economy by changing government spending and taxation. This approach directly affects aggregate demand, as increases in government spending can stimulate economic activity by creating jobs and generating income, leading to higher consumption. Conversely, taxation influences disposable income for consumers and businesses, thereby affecting their spending behavior.

When the government alters its fiscal policies—either by increasing or decreasing taxes or adjusting spending levels—it can either provide a boost to the economy during a downturn or cool it off during periods of inflation. This dynamic is critical for managing economic cycles, promoting growth, and achieving macroeconomic stability.

In contrast, regulating the banking system is more aligned with monetary policy, which focuses on controlling the money supply and interest rates rather than directly influencing aggregate demand through fiscal measures. Similarly, increasing tariffs on imports primarily concerns trade policy and international economics rather than addressing domestic economic conditions through fiscal measures. Lastly, controlling the money supply is also a function of monetary policy aimed at influencing interest rates and inflation, but it does not fall under fiscal policy, which focuses specifically on government budget decisions.