What is fiscal policy and how can it affect development outcomes?

• A. Central bank's control of money supply.
• B. Trade agreements negotiations.
• C. Government spending and taxation decisions that can stimulate growth, reduce inequality, or stabilize the economy.
• D. Corporate tax planning strategies.

Answer: (C)

Fiscal policy uses government spending and taxes to influence the economy and development outcomes. By deciding how much to spend and what tax rules to apply, a government can boost growth through investments in infrastructure, education, and health; reduce inequality with progressive taxes and targeted transfers; and stabilize all of it during business cycles by expanding demand in a downturn or tightening when activity overheats. This description matches how public fiscal actions shape development pathways: they directly affect demand, public services, and the distribution of resources.

Monetary policy, involving the central bank’s control of money supply and interest rates, operates differently and is not about government spending or taxation. Trade negotiations concern international trade rules and policies rather than how a government taxes and spends. Corporate tax planning is strategic behavior by private firms, not how the government uses fiscal tools to steer development.