Introduction to the Economy, Fiscal and Monetary Policy
Behind almost every major market trend is some underlying economic factor. From rising GDP growth rates to declining unemployment or the threat of inflation in Europe, economic trends are a major determinant of what happens to American companies and their stock prices. Along with corporate earnings, economic reports are the most watched regularly scheduled pieces of news. Almost every week there is an economic report that can help investors estimate what the future of the economy holds. This section will educate you about several basic, yet crucial economic concepts and will tell you the economic information that's most important to you as an investor.
The economy can be impacted by the U.S. government through two major types of economic policy.
The first type is called fiscal policy, which is economic policy instigated by the President or by Congress. The fundamental tools at the disposal of these branches of government are taxation law and government spending. By changing tax laws, the government can effectively modify the amount of disposable income available to its taxpayers. For example, if taxes were to increase, consumers would have less disposable income and in turn would have less money to spend on goods and services. This difference in disposable income would go to the government instead of going to consumers, who would pass the money onto companies. Or, the government could choose to increase government spending by directly purchasing goods and services from private companies. This would increase the flow of money through the economy and would eventually increase the disposable income available to consumers. Unfortunately, this process takes time, as the money needs to wind its way through the economy, creating a significant lag between the implementation of fiscal policy and its effect on the economy.
The second way the government can impact the economy is through monetary policy. Monetary policy is instigated by the central bank of a nation (the Federal Reserve in the U.S.) to control the supply of money within the economy. By impacting the effective cost of money, the Federal Reserve can affect the amount of money that is spent by consumers and businesses .
By InvestorGuide Staff