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We apply a microscopic theory of polarization and magnetization to crystalline insulators at zero temperature and consider the orbital electronic contribution of the linear response to spatially varying, time-dependent electromagnetic fields. The charge and current density expectation values generally depend on both the microscopic polarization and magnetization fields, and on the microscopic free charge and current densities. But contributions from the latter vanish in linear response for the class of insulators we consider. Thus we need only consider the former, which can be decomposed into "site" polarization and magnetization fields, from which "site multipole moments" can be constructed. Macroscopic polarization and magnetization fields follow, and we identify the relevant contributions to them; for electromagnetic fields varying little over a lattice constant these are the electric and magnetic dipole moments per unit volume, and the electric quadrupole moment per unit volume. A description of optical activity and related magneto-optical phenomena follows from the response of these macroscopic quantities to the electromagnetic field and, while in this paper we work within the independent particle and frozen-ion approximations, both optical rotary dispersion and circular dichroism can be described with this strategy. Earlier expressions describing the magnetoelectric effect are recovered as the zero frequency limit of our more general equations. Since our site quantities are introduced with the use of Wannier functions, the site multipole moments and their macroscopic analogs are generally gauge dependent. However, the resulting macroscopic charge and current densities, together with the optical effects to which they lead, are gauge invariant, as would be physically expected.