How can the U.S. government protect the economy through fiscal policy?

Fiscal policy refers to the government's use of spending and taxation to influence the economy. The U.S. government can protect and stimulate economic growth through fiscal policy primarily by raising or lowering taxes.

When the government decreases taxes, consumers and businesses have more disposable income to spend, which can increase demand for goods and services. This boost in spending can stimulate economic growth and potentially reduce unemployment. Conversely, if the government raises taxes, it can help reduce inflation during an economic boom by cooling down consumer spending and demand. Therefore, the ability to adjust tax rates is a fundamental tool for the government to manage economic fluctuations and promote stability.

Other options such as changing the discount rate or adjusting reserve requirements are tools of monetary policy that are managed by the Federal Reserve, not the government itself. Issuing treasury bonds primarily relates to the government borrowing or financing its deficits and does not directly influence economic protection like fiscal policy does. Thus, the focus on tax adjustments as a fiscal policy tool is essential for correctly understanding how the government can actively manage the economy.