How can fiscal policy be implemented to stimulate the economy?

Fiscal policy is a crucial tool used by the government to influence the economy. It can be implemented to stimulate economic growth through a combination of increased government spending and tax cuts. When the government increases its spending, it injects money directly into the economy, creating demand for goods and services, which can lead to job creation and increased consumer expenditure. This direct financial support can help to boost economic activity, especially during times of recession or slow growth.

Additionally, cutting taxes puts more disposable income into the hands of consumers and businesses. This additional income allows households to spend more and businesses to invest, further stimulating demand. The combination of increased government spending alongside tax reductions leads to a multiplier effect in the economy, where the initial spending creates further economic activity.

In contrast, increasing taxes or reducing government spending would generally contract economic activity, potentially leading to slower growth. Limiting the monetary supply would typically pertain to monetary policy rather than fiscal policy and is focused on controlling inflation rather than stimulating economic growth.

Therefore, the correct answer highlights the dual approach of increasing government spending or cutting taxes as effective methods to stimulate the economy through fiscal policy.