What does fiscal policy involve regarding government actions to influence the economy?

Fiscal policy refers to the government's use of spending and taxation to influence the economy. When the government raises or lowers spending, it directly impacts the level of aggregate demand in the economy. For example, increasing government spending can stimulate economic activity by creating jobs and increasing consumption, while decreasing spending can help control inflation and reduce budget deficits.

Similarly, changes in tax rates affect the disposable income of consumers and businesses. Lowering taxes can encourage spending and investment by individuals and companies, which can further boost economic growth. Conversely, raising taxes can help cool off an overheating economy or address budgetary concerns by increasing government revenues.

This approach differs from other forms of economic policy, such as monetary policy, which involves adjusting the money supply and interest rates to control inflation and stabilize the economy. Therefore, the correct understanding of fiscal policy centers on the government's role in influencing economic conditions through changes in spending and taxation.