Which statement correctly defines fiscal policy?

Fiscal policy refers specifically to how a government adjusts its levels of spending and taxation to influence the economy. This tool is used to manage economic fluctuations, aiming to promote economic stability and growth. When a government increases spending or cuts taxes, it stimulates demand, which can help counteract economic slowdowns. Conversely, reducing spending or increasing taxes can help cool down an overheating economy.

The other options revolve around different concepts in economic management. The management of the money supply pertains more to monetary policy, which is typically the domain of a central bank. Control of interest rates also falls under monetary policy. Lastly, regulating labor markets relates to employment laws and wage regulations, separate from the fiscal measures involving spending and taxation. Thus, the correct choice clearly embodies the essence of fiscal policy and its role in economic management.