How is fiscal policy best defined?

Fiscal policy is best defined as the use of government spending and taxation to influence the economy. This approach allows governments to adjust their levels of spending and taxation in response to economic conditions, with the primary goals of fostering economic growth, reducing unemployment, and managing inflation.

When the government increases spending on infrastructure, education, or social programs, it injects money into the economy, which can stimulate demand and promote job creation. Conversely, by adjusting tax rates, the government can either boost disposable income for individuals and businesses or, in times of economic overheating, reduce demand by increasing taxes.

This contrasts with monetary policy, which focuses on the management of the money supply and interest rates and is primarily handled by central banks. Regulation of financial institutions pertains to ensuring compliance with laws and stability within the financial system, but it does not directly involve fiscal measures. Additionally, the methods used by central banks to control inflation relate specifically to the manipulation of interest rates and the money supply rather than the broader fiscal strategies enacted by the government through spending and taxation.