What does fiscal policy primarily seek to affect?

Fiscal policy primarily seeks to influence the level of taxation and government spending. This approach is used by governments to manage economic activity and affect overall economic performance. When a government alters tax rates or changes spending levels, it aims to either stimulate growth during economic downturns or cool down an overheated economy to prevent inflation.

By increasing spending and/or decreasing taxes, the government can boost aggregate demand, encouraging individuals and businesses to spend more, which supports economic growth. Conversely, reducing spending or increasing taxes can help to rein in inflation and manage public debt levels. This fundamental understanding underscores the importance of fiscal policy in shaping economic conditions.

The other options, while they are also important concepts in economics, do not align as closely with the primary purpose of fiscal policy. The supply of money in the economy is managed by monetary policy, not fiscal policy. Interest rates set by banks are influenced by central bank actions and monetary policy, while stock market volatility is a broader economic indicator that can be affected by various factors, not solely fiscal policy changes.