Which statement correctly differentiates fiscal policy from monetary policy?

Fiscal policy indeed involves government budgeting and legislation, which are critical aspects of how a government manages its economy. This encompasses decisions about government spending and taxation levels, aiming to influence economic growth, inflation, and employment rates. For instance, during economic downturns, a government might increase spending or cut taxes to stimulate demand, whereas during times of inflation, it may decide to reduce spending or raise taxes to cool the economy.

In contrast, monetary policy primarily deals with the management of the money supply and interest rates, typically executed by a nation's central bank, such as the Federal Reserve in the United States. This distinction highlights the differing focuses of fiscal policy, which is about the government’s budgetary decisions, and monetary policy, which adjusts economic parameters through the control of money flow.

Recognizing this key aspect makes it clear why identifying fiscal policy with government budgeting and legislation is essential in understanding how a country steers its economic strategies.