Note: The original text contained a typo stating "The correct answer is D", but the provided explanation explicitly marks D as incorrect and describes option B as the correct definition.

Fiscal dominance occurs when the government's financing needs take precedence over the central bank's monetary policy objectives. In this scenario, the central bank is pressured to keep interest rates low to reduce the cost of servicing public debt, even at the expense of its primary goal, such as controlling inflation. This compromises the central bank's independence and can result in higher inflation or reduced confidence in monetary policy.

A is incorrect because the central bank does not control fiscal policy (e.g., taxes) and fiscal dominance specifically refers to the central bank losing independence, not setting mandates.

C is incorrect as it describes coordinated policy-making rather than fiscal dominance. Fiscal dominance implies a lack of balance, where fiscal needs override monetary policy objectives.

D is incorrect: While market pressures can influence fiscal and monetary decisions, this scenario does not define fiscal dominance, which specifically refers to the government’s spending priorities overriding central bank autonomy.