Philip II's policy to rid Spain of all non- Catholics was called Inquisition. Thus second option is correct.
What was Philip II's Policy?
Philip II wanted to have the peace with his neighboring states specially with the western Europe. He was also involved in the fight with the Ottoman Empire in 1568.
Philip had improved the conditions of the Spanish church and also employed the Spanish inquisition to eliminate the heresy and reform the program.
The Spanish Inquisition was Philip II's campaign to purge all non-Catholics. The second choice is the right one.
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