Economic Policy

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Economic Policy

The U.S. economic policy believes the government should allow a free market whenever possible, but it should regulate and sometimes manage the economy.

Monetary Policy

Monetary policy is the government's control of the money supply. The government can control how much money is in circulation by the amount that they print and coin. If too much money is in circulation, it tends to cause inflation. Too little money causes deflation, which can lead to a recession. The Federal Reserve System, headed by the Federal Reserve Board, controls the money supply by adjusting interest rates — high rates discourage borrowing money, which causes less inflation. The "Fed" can lower interest rates to stimulate borrowing, which encourages consumer spending.

Fiscal Policy

Fiscal policy affects the economy by making changes in the methods of raising money and spending it.

Raising money. The most important way of raising money is through taxation. About 40 percent of the government's total tax collections come from income taxes from individuals and businesses. Other sources are social insurance taxes, such as Social Security, Medicare, and unemployment compensation; and excise taxes on goods such as liquor, tobacco, and gasoline. The government also may borrow money by issuing bonds.
Spending money. The federal budget is measured in trillions of dollars. The President submits an annual federal budget for approval by Congress. The largest amount of money goes to entitlement programs, such as Social Security pensions, unemployment insurance, and Medicare. The second largest amount goes for national defense. The third largest amount pays interest on the national debt. Other expenditures are highway construction, education, housing, and foreign aid.

Fiscal policy also can affect the money supply and can be used to stimulate spending or curb inflation. Tax cuts usually stimulate consumer spending by leaving more money in the hands of American citizens. Tax raises slow inflation by removing money from the hands of consumers. The government can also reduce inflation by cutting government expenditures.

Political and business leaders disagree on the amount of control that government should have over the economy, but everyone agrees on the importance of the government's setting a strong, effective economic policy.