What role does fiscal policy play in the economy?

Fiscal policy refers to the use of government spending and taxation to influence the economy. It plays a critical role in shaping economic conditions by either stimulating growth or curbing inflation. When a government increases its spending or reduces taxes, it injects money into the economy, which can lead to an increase in demand for goods and services. This boost in economic activity can stimulate job creation and overall economic growth. Conversely, if the government raises taxes or cuts spending, it may reduce demand, which can help control inflation but might also slow economic growth.

The correct answer emphasizes this essential aspect of fiscal policy, showcasing its influence on economic growth through its tools of expenditure and taxation, which can encourage or restrain economic activity based on the government's strategic objectives.

Other choices do not accurately reflect the primary functions of fiscal policy. Regulating currency supply is typically handled by monetary policy, while addressing international trade deficits is more related to trade policy rather than fiscal policy. Lastly, local government budgets may involve elements of fiscal policy, but they operate on a different level and are not the primary focus of broader fiscal policy discussions.