Describe the three ways the Federal Government can affect the economy.
It can regulate the investment and banking industries.
It can raise or lower interest rates.
http://economics.about.com/od/howtheuseconomyworks/a/government.htm
It can tax, or not tax.
It can print money, or not print.
It can spend, or not spend.
The Federal Government can affect the economy in three main ways: through fiscal policy, monetary policy, and regulatory policy.
1. Fiscal policy: This involves the government's use of its spending and taxation powers to influence the economy. The government can stimulate economic growth by increasing spending or reducing taxes, which puts more money in the hands of consumers and businesses, leading to increased spending and investment. Conversely, the government can enact contractionary fiscal policies, such as reducing spending or increasing taxes, to slow down an overheating economy or control inflation.
To understand the effects of fiscal policy, one can study various economic indicators, such as GDP (Gross Domestic Product), consumer spending, investment levels, and employment rates. By examining historical data and analyzing the correlation between fiscal policy changes and economic outcomes, economists can determine the impact of government actions on the economy.
2. Monetary policy: This refers to the management of the money supply and interest rates by the central bank, in the United States' case, the Federal Reserve. By adjusting interest rates and conducting open market operations, the Federal Reserve influences the cost and availability of credit, which affects borrowing and spending decisions by individuals and businesses.
To understand the impact of monetary policy, researchers and policymakers rely on indicators like inflation rates, interest rates, and bank lending activity. They also closely monitor the Federal Reserve's statements and actions, paying attention to their stated goals and policy tools, such as adjusting the federal funds rate or implementing quantitative easing.
3. Regulatory policy: The government also influences the economy through various regulations and policies imposed on businesses and industries. These regulations aim to protect consumers, ensure fair competition, safeguard the environment, and maintain financial stability. The impact of regulatory policies can be seen in areas such as labor market regulations, environmental regulations, financial regulations, and trade policies.
To understand the effects of regulatory policy, economists and analysts often study specific industries and sectors, examining changes in business practices, market dynamics, and economic indicators like job creation, market concentration, and innovation. They also follow legal and regulatory developments, including new legislation or changes in enforcement priorities by regulatory agencies.
By studying the interactions between government policies and economic outcomes, economists and policymakers can gain insights into how the Federal Government affects the economy.