What is fiscal policy best defined as?

Fiscal policy is best defined as the government’s use of tax and spending powers. This definition encompasses how a government influences the economy through its taxation and expenditure decisions. When the government alters tax rates or changes spending levels, it can directly impact economic activity by influencing consumer spending and investment.

For example, increasing government spending can stimulate economic growth during a recession by creating jobs and increasing demand for goods and services. Conversely, reducing taxes can leave individuals and businesses with more disposable income, potentially boosting consumer spending.

Understanding fiscal policy is crucial as it is a primary tool used by governments to manage economic fluctuations, control inflation, and reduce unemployment. This definition distinguishes fiscal policy from monetary policy, which focuses on managing the money supply and interest rates through central banking mechanisms.