Macroeconomic policy known as fiscal policy is primarily concerned with which of the following instruments?

Introduction / Context:
This question tests understanding of the basic tools of macroeconomic policy. Recognising the difference between fiscal policy and monetary policy is fundamental for exams in economics, banking and general studies.

Given Data / Assumptions:

• The focus is on fiscal policy, not monetary or exchange rate policy.
• Options combine different instruments such as spending, taxation, money supply and exchange rates.
• We assume standard textbook definitions followed by central banks and finance ministries.
• The question asks which instruments fiscal policy is concerned with.

Concept / Approach:
Fiscal policy refers to decisions of the government regarding its expenditure and its revenue, mainly through taxes and non tax receipts. It influences aggregate demand, growth and distribution. In contrast, monetary policy is conducted by the central bank and uses instruments like money supply and interest rates. Therefore fiscal policy is primarily about government spending and taxation, not about direct control of money supply or exchange rates.

Step-by-Step Solution:
Step 1: Recall that the budget of the government summarises its fiscal policy choices.Step 2: Identify the two main components of a budget, namely expenditure and revenue through taxes.Step 3: Recognise that changes in these items, such as increasing spending or cutting taxes, constitute fiscal policy actions.Step 4: Review the options to find the one that mentions both government spending and taxation together.Step 5: Select government spending and taxation as the correct combination.

Verification / Alternative check:
Standard macroeconomics textbooks and policy documents from ministries of finance define fiscal policy as the use of government spending and taxation to influence the economy. They treat money supply and interest rates as instruments of monetary policy managed by the central bank, and exchange rate management as part of external sector policy. This clear separation verifies that option A is correct.

Why Other Options Are Wrong:
Money supply only is the central bank domain and is associated with monetary policy, not fiscal policy.
Combining government spending, money supply and taxation into one policy set ignores the institutional distinction between the finance ministry and the central bank.
Taxation only is incomplete, because changes in government expenditure are also crucial parts of fiscal policy.
Exchange rate management falls under external sector or currency policy and is influenced by central bank operations and trade conditions, not just by fiscal decisions.

Common Pitfalls:
Students sometimes confuse fiscal and monetary policy because both affect aggregate demand. Another common error is to think that any macroeconomic policy that deals with money or banks is fiscal, when in fact most of that work belongs to monetary policy. A simple memory aid is that fiscal comes from words related to the treasury and budget, which focus on government spending and taxes.

Final Answer:
Fiscal policy is primarily concerned with government spending and taxation.