How is fiscal policy defined?

Fiscal policy is defined as government decisions regarding spending and taxation. This aspect of policy is crucial as it directly influences a nation's economic health by affecting overall demand. When a government increases spending or adjusts tax rates, it can stimulate or contract economic activity, thereby impacting employment levels, inflation rates, and overall economic growth.

The focus on taxation is particularly important, as tax policies can encourage or discourage consumer spending and investment by households and businesses. Adjustments to spending and tax policies are tools used by governments to manage the economy's performance and respond to economic fluctuations.

In contrast, the other options pertain to different areas of government action. Military spending and policies are specific to defense budgets and do not encompass the broader economic implications of fiscal policy. Regulatory measures on financial institutions relate to the oversight of banks and financial markets, which falls under monetary policy rather than fiscal policy. Lastly, guidelines for international economic treaties are focused on cross-border trade and investment agreements and do not address domestic economic measures of spending and taxation, which are central to fiscal policy.