Which policy involves government spending and taxation decisions?

Fiscal policy involves government spending and taxation decisions, making it the correct choice in this context. This type of policy is primarily concerned with how the government utilizes its budget to influence the economy. Through fiscal policy, a government can adjust its levels of spending and taxes to either stimulate economic growth during a recession or cool down an overheated economy.

For instance, increasing government spending can boost demand for goods and services, leading to job creation and economic expansion. Conversely, raising taxes can withdraw money from the economy, potentially slowing down inflation.

The other policies mentioned—monetary policy, trade policy, and supply-side policy—focus on different elements of economic management. Monetary policy pertains to the control of the money supply and interest rates, typically managed by a central bank. Trade policy deals with regulations and agreements that govern international trade, affecting imports and exports. Supply-side policy focuses on boosting economic production by enhancing the efficiency of businesses, primarily through tax cuts or deregulation. Each of these plays a critical role in economic management, but only fiscal policy directly involves government decisions regarding spending and taxation.