Which term is described as the government's approach to stabilizing the economy through changes in taxes and spending?

Which term is described as the government's approach to stabilizing the economy through changes in taxes and spending?

• A. Monetary policy
• B. Entitlements
• C. Subsidy
• D. Fiscal policy

Answer: (D)

Stabilizing the economy through adjustments in taxes and spending is fiscal policy. This approach uses the government’s budget decisions to influence overall demand: cutting taxes or increasing spending puts more money into households and businesses, boosting aggregate demand during a recession; raising taxes or cutting spending dampens demand when the economy is overheating. Monetary policy, by contrast, relies on the central bank to change the money supply and interest rates, not tax or spending levels. Entitlements describe automatic, mandatory spending on programs like Social Security and Medicare, which are part of fiscal policy but do not define the stabilization approach by themselves. Subsidies are payments to support particular activities or industries and are also instruments within fiscal policy, not the overall method of stabilization.

Stabilizing the economy through adjustments in taxes and spending is fiscal policy. This approach uses the government’s budget decisions to influence overall demand: cutting taxes or increasing spending puts more money into households and businesses, boosting aggregate demand during a recession; raising taxes or cutting spending dampens demand when the economy is overheating. Monetary policy, by contrast, relies on the central bank to change the money supply and interest rates, not tax or spending levels. Entitlements describe automatic, mandatory spending on programs like Social Security and Medicare, which are part of fiscal policy but do not define the stabilization approach by themselves. Subsidies are payments to support particular activities or industries and are also instruments within fiscal policy, not the overall method of stabilization.