What is meant by "fiscal policy"?

Fiscal policy refers specifically to the use of government spending and taxation as tools to influence the economy. It involves decisions made by the government regarding how much money to spend and how to collect revenue, primarily through taxes. This policy aims to manage economic fluctuations by influencing aggregate demand, which can help to stimulate economic growth during a downturn or cool off an overheating economy.

When the government increases spending or cuts taxes, it puts more money into the economy, which can stimulate growth and reduce unemployment. Conversely, if the government raises taxes or reduces spending, it can help to cool down inflation by decreasing the total amount of money circulating in the economy. Therefore, fiscal policy directly impacts national income, inflation, and employment levels, making it a critical component of economic policy.

In contrast, central bank policies regarding interest rates pertain to monetary policy, which is distinct from fiscal policy. Government strategies for managing inflation rates might involve both fiscal and monetary policy but do not specifically define fiscal policy. Lastly, regulations on financial markets focus on ensuring market stability and protecting investors rather than directly influencing the economy through spending and taxation.