“How the Government Uses Monetery and Fiscal Policies to Benefit the Economy”

Topics: Monetary policy, Federal Reserve System, Central bank Pages: 4 (1253 words) Published: December 6, 2009
How does the Government use Monetery and Fiscal Policies to Benefit the Economy? Our governments roll in the American economy extends far beyond its activities as a regulator of specific industries. The government also manages the overall pace of economic activity, seeking to maintain high levels of employment and stable prices. The government has two main tools for achieving these objectives: fiscal policies, through which it determines the appropriate level of taxes and spending; and monetary policies, through which it manages the supply of money. Fiscal policy the use of government expenditures and taxes to influence the level of economic activity is the government counterpart to monetary policy. Like monetary policy, it can be used in an effort to close a recessionary or an inflationary gap The development of fiscal policy is an elaborate process. Each year, the president proposes a budget, or spending plan, to Congress. Lawmakers consider the president's proposals in several steps. First, they decide on the overall level of spending and taxes. Next, they divide that overall figure into separate categories -- for national defense, health and human services, and transportation, for instance. Finally, Congress considers individual appropriations bills spelling out exactly how the money in each category will be spent. Each appropriations bill ultimately must be signed by the president in order to take effect. This budget process often takes an entire session of Congress; the president presents his proposals in early February, and Congress often does not finish its work on appropriations bills until September (and sometimes even later). The federal government's chief source of funds to cover its expenses is the income tax on individuals, which in 1999 brought in about 48 percent of total federal revenues. Payroll taxes, which finance the Social Security and Medicare programs, have become increasingly important as those programs have grown. In 1998, payroll taxes...
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