The correct answer is option C - Discretionary fiscal policy.

Explanation:
Discretionary fiscal policy refers to the deliberate actions taken by the government to adjust its spending levels and tax rates with the goal of stabilizing the economy. Unlike automatic stabilizers, which are built into the fiscal system and automatically respond to changes in economic conditions, discretionary fiscal policy requires conscious decisions and actions by policymakers.

Here is a detailed explanation of discretionary fiscal policy:

1. Definition:
- Discretionary fiscal policy refers to the use of government spending and taxation measures to influence the overall state of the economy.
- It involves active decision-making and policy implementation by the government to counteract economic fluctuations.

2. Purpose:
- The primary goal of discretionary fiscal policy is to stabilize the economy during periods of recession or inflation.
- It aims to influence aggregate demand, employment levels, and overall economic growth.

3. Tools of Discretionary Fiscal Policy:
- Government spending: The government can increase or decrease its spending on various sectors, such as infrastructure, healthcare, education, etc., to stimulate or restrain economic activity.
- Taxation: The government can adjust tax rates, exemptions, and deductions to encourage or discourage consumer spending and business investment.

4. Expansionary Fiscal Policy:
- During a recession or economic downturn, the government can implement expansionary fiscal policy.
- This involves increasing government spending and/or reducing taxes to boost aggregate demand and stimulate economic growth.
- By increasing spending, the government creates jobs, increases consumer purchasing power, and encourages investment.

5. Contractionary Fiscal Policy:
- During periods of high inflation or economic overheating, the government can implement contractionary fiscal policy.
- This involves reducing government spending and/or increasing taxes to reduce aggregate demand and control inflationary pressures.
- By reducing spending and increasing taxes, the government aims to slow down the economy and reduce inflationary pressures.

6. Limitations of Discretionary Fiscal Policy:
- Time lags: Implementing discretionary fiscal policy measures takes time, and their impact may not be immediate.
- Political constraints: The effectiveness of discretionary fiscal policy can be influenced by political considerations and the ability to gain consensus.
- Economic forecasting challenges: Accurately predicting the state of the economy and determining the appropriate policy measures can be challenging.

In conclusion, discretionary fiscal policy refers to the deliberate actions taken by the government to stabilize the economy by adjusting its spending levels and tax rates. It is an active approach that requires conscious decision-making and policy implementation to counteract economic fluctuations.