What does fiscal policy encompass?

Fiscal policy encompasses government spending and tax policies, which are fundamental tools used by the government to influence the economy. It involves adjustments in government expenditures and tax rates to affect economic activity. By changing these factors, the government can stimulate growth during a recession by increasing spending or reducing taxes, thereby boosting demand. Conversely, it can cool down an overheating economy by reducing spending or increasing taxes, which can help control inflation.

This approach directly affects disposable income, consumer spending, and overall economic activity, making it a key tool for managing economic fluctuations. In contrast, the other options do not fall under fiscal policy. Regulations of financial institutions pertain more to monetary policy and financial stability, consumer price adjustments relate to inflation measurement rather than government policy, and international trade agreements are focused on trade relations rather than domestic economic management.