Which of the following best describes fiscal policy?

Fiscal policy is best described as government decisions on taxation and expenditure. This policy involves the way a government adjusts its spending levels and tax rates to influence the economy. By changing tax rates and levels of government spending, a government can directly impact economic activity, manage economic cycles, and affect employment levels. For instance, increasing government spending can stimulate economic growth, especially during a recession, while increasing taxes might help to cool off an overheating economy.

In contrast, the other options focus on different aspects of economic management. Central bank activities affecting money supply pertain to monetary policy, which involves tools used by the central bank to control inflation and stabilize the currency. Regulation of financial markets by the central bank also falls under the domain of monetary policy, aiming to maintain the stability of the financial system. Control of inflation through interest rates is another function of monetary policy, where the central bank adjusts interest rates to influence borrowing, spending, and investment in the economy. Each of these operates separately from fiscal policy, which is specifically concerned with government budgetary actions.