Government and the Economy
The actions of government play a major role in the flow of economic activity. Governments consume and produce goods and services. Fiscal and monetary policies, as well as economic regulations, provide the means for government intervention in the economy.
23. The federal government uses spending and tax policy to maintain economic stability and foster economic growth. Regulatory actions carry economic costs and benefits.
Fiscal policies fall into two broad categories: expansionary policies (involving increased government spending and reduced taxes) to increase the level of aggregate demand and contractionary policies (involving decreased government spending and increased taxes) to decrease the level of aggregate demand.
There are difficulties in using fiscal policy to maintain economic stability and foster economic growth. Much government spending is fixed (e.g., entitlement programs), so only a small portion of the federal government’s budget is discretionary. Predicting the impact of spending and taxing is difficult as is predicting future economic performance.
Government spending and taxing does not produce immediate results and economic conditions may change; thus, expansionary policies could result in inflation and contractionary policies could result in recession. Coordinating federal spending and taxing with monetary policy and with state policies is difficult and may be contradictory. Fiscal policy is subject to political pressures; in the past, expansionary policies have tended to be popular and contractionary policies have tended to be unpopular.
The imposition of government regulations may foster economic benefits such as prohibiting unfair business practices and providing consumer protections. Government regulations may carry costs such as reduced corporate profits and slower economic growth.
Expectations for Learning
Explain how the federal government uses spending and tax (fiscal) policy to effect changes in the nation’s economic conditions.
Examine applications of government regulation and determine a cost and benefit of each application.