Fiscal policy is a tool used by governments to regulate and stabilize the economy. It involves adjustments in government spending levels and tax rates to monitor and influence economic conditions. By altering these levels, the government can affect overall economic demand, employment, inflation, and economic growth. There are two main types of fiscal policy: expansionary fiscal policy, which aims to stimulate the economy by increasing spending or cutting taxes, and contractionary fiscal policy, which aims to cool down an overheated economy by doing the opposite.