Which tools fall under fiscal policy?

Fiscal policy primarily involves the use of government spending and taxation to influence the economy. This approach aims to adjust the level of aggregate demand through changes in public expenditure and tax levels.

Taxation acts as a tool by modifying consumers' disposable income, which can either stimulate or contract economic activity depending on whether tax rates are raised or lowered. Transfer payments, such as welfare or unemployment benefits, also play a crucial role in fiscal policy by providing financial support to consumers, thereby increasing their spending capabilities during economic downturns.

Government spending directly injects money into the economy, impacting employment and production levels. By altering these tax and spending mechanisms, a government can effectively manage economic conditions.

In contrast, options that reference monetary policy, trade tariffs, quotas, or investment subsidies lack the primary characteristics of fiscal policy, which is fundamentally about how a government utilizes its budget through taxation and spending decisions.