Stabilization policy tools include which of the following?

• A. Tax policy and wage controls
• B. Monetary or fiscal policy
• C. Trade policy and regulation
• D. Automatic measures

Answer: (B)

Stabilization policy relies on tools that influence overall demand to smooth out ups and downs in the economy. The best answer is monetary policy and fiscal policy. Monetary policy uses central-bank actions like adjusting interest rates and conducting open-market operations to steer credit and spending. Fiscal policy uses government spending and taxation to shift demand directly. Automatic stabilizers do play a role by dampening fluctuations without new policy moves, but they aren’t the discretionary tools policymakers typically cite as stabilization measures. Wage controls aren’t standard stabilization tools in modern practice, and trade policy and regulation affect longer-run conditions more than short-term stabilization.