The control of aggregate demand through changes in government spending and tax rates is referred to as?

Step 1: Analyze the question The question asks for the name given to controlling aggregate demand (total spending in the economy) by changing two things: government spending and tax rates.

Step 2: Explain the concept Governments manage the economy using different policy tools:

• Fiscal policy: The use of government spending and taxation to influence the level of economic activity, aggregate demand, employment, and inflation.
• Monetary policy: Controlled by the central bank (CBN in Nigeria). It uses interest rates (MPR), money supply, cash reserve ratio, and open market operations.
• Income policy: Direct government control over wages, prices, and incomes (e.g., wage freezes, price controls).
• Government policy: A vague, general term. It is not a specific economic technique.

Step 3: Apply to the question

• Changing government spending (e.g., building roads, paying salaries) is a fiscal tool.
• Changing tax rates (e.g., raising VAT or company income tax) is also a fiscal tool.
• To increase aggregate demand, the government raises spending or cuts taxes (expansionary fiscal policy).
• To reduce aggregate demand and fight inflation, it cuts spending or raises taxes (contractionary fiscal policy).

Since both tools named in the question are spending and taxation, the answer is fiscal policy.

Step 4: Answer The correct option is D. fiscal policy.

Exam tip: Remember "Fiscal = Finance ministry" (budget, taxes, spending), while "Monetary = Money supply / MPR" (central bank). If the question mentions taxes or government spending, think fiscal. If it mentions interest rates or money supply, think monetary.