What does fiscal policy primarily involve?

Fiscal policy primarily involves taxing and government budgeting. This approach to economic management is focused on how the government uses its spending and taxation powers to influence the economy. The main tools of fiscal policy include adjustments to government spending levels and modifications of tax policies. By changing tax rates and altering spending amounts, the government can impact overall economic activity, aiming to stimulate growth during downturns or cool down an overheating economy.

For instance, increasing government spending can create jobs and stimulate demand, while adjusting tax rates can either encourage consumer spending or help balance budgets. This is in contrast to monetary policy, which is more about managing interest rates and regulating the money supply through central bank actions.