Fiscal policy refers to:

• A. The use of monetary sterilization to control money supply.
• B. The central bank's action to adjust interest rates.
• C. The use of taxes, government transfers, or government purchases to stabilize the economy.
• D. The commitment to keep inflation at zero.

Answer: (C)

Fiscal policy is the government's use of taxes, transfers, and purchases to influence the level of economic activity. The statement that employs taxes, government transfers, or government purchases to stabilize the economy is the best description because it directly uses fiscal tools to affect aggregate demand and smooth out business-cycle fluctuations. For example, cutting taxes or increasing transfers or government spending can raise demand during a recession, while raising taxes or cutting spending can cool demand when inflation is rising. This is distinct from monetary policy, which relies on tools like changing interest rates or adjusting the money supply, and from aims to keep inflation at a fixed rate, which is not itself a fiscal instrument.