How does fiscal policy primarily aim to influence the economy?

Fiscal policy primarily aims to influence the economy through government spending and taxation decisions. This approach focuses on how the government allocates its budget—determining how much it spends on public services, infrastructure, and welfare, as well as how much it collects in taxes.

When the government increases its spending, it injects money into the economy, which can stimulate demand, create jobs, and drive economic growth. Conversely, adjusting tax rates can affect consumers' disposable income; lowering taxes gives individuals and businesses more money to spend, while raising taxes can reduce spending and slow the economy.

The effectiveness of fiscal policy lies in its ability to directly impact overall economic activity, making it a powerful tool for policymakers to manage economic cycles, address unemployment, and control inflation. This is why the choice regarding government spending and taxation decisions is fundamentally linked to fiscal policy's goals and mechanisms.