What is the main purpose of fiscal policy?

The main purpose of fiscal policy is indeed to involve government budget decisions aimed at influencing economic activity. Fiscal policy encompasses the government's use of spending and taxation to manage economic fluctuations, promote economic growth, and achieve macroeconomic objectives such as full employment and price stability. By adjusting levels of government spending and changing tax rates, fiscal policy can affect the overall economic demand, leading to variations in economic activity.

When a government increases spending, it stimulates demand, which can lead to higher production and employment. Conversely, if the government lowers spending or increases taxes, it can help cool down an overheated economy by reducing demand. This strategic manipulation of fiscal instruments is crucial in responding to economic challenges, making it a vital tool in a government's efforts to ensure stable economic growth.

The other options refer to monetary policy or regulatory roles that, while important, do not define the primary function of fiscal policy. Monetary policy involves managing the money supply and interest rates, while regulations on banking institutions are separate from fiscal governance. Therefore, the answer focusing on government budget decisions is the most accurate in defining the purpose of fiscal policy.