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 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 affects the economy by making changes in the methods of raising money and spending it.
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.
Source: Economic Policy
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