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Basic Economic Concepts
Introduction to the Economy, Fiscal and Monetary Policy
by InvestorGuide Staff (Write for us!)
(Click on a link within the article to get a definition of that word)
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 taxationlaw 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 FederalReserve 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 .
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