Interactions Between Government and Economics.

¶ … interactions between government and economics. The government influences the economy of the country through both fiscal policy (budgetary spending and taxation) and monetary policy (control of the money supply). The former is controlled by Congress and the Executive Branch, the latter by the central bank (Federal Reserve). Over the years, economists have developed multiple competing views of how the interaction between government and the economy should work. Classical economists believe that government intervention in the market should be minimal, because over time the market will find an equilibrium point where supply and demand for both goods and labor are aligned. The Keynesian view argues for government response to economic conditions, for example increasing spending during difficult economic times in order to prop up demand, thereby lessening the intensity of economic slumps. Supply-side economists take the view that government spending should always be at low levels, with low tax rates to match, as this will encourage more enterprise. Monetarists believe that monetary policy should reflect demand, and the use of monetary policy to stoke demand (as in the Keynesian view) will create inflationary conditions.

For the most part, few of these theories have been implemented cleanly in the United States, as economic policy from government tends to reflect not only competing interests but competing economic worldviews. The performance of the economy is usually measured with the gross domestic product (GDP), which is the sum of all economic activity in the country. GDP growth is particularly important. Unemployment is another economic measure, but one that illustrates a social objective, so unemployment has become important for government and has had a strong influence on the policies that government has enacted at various points in the 20th and 21st centuries. The last major measure of the health of the economy is inflation, which measures the changes in purchasing power over time. The Federal Reserve System is mandated with contributing to the management of all three of these measures. The role of the Federal Reserve is to control money supply, something it does via the setting interest rates and through open market operations. The Federal Reserve works independent of the White House, although there may be consultations to ensure a match between fiscal and monetary policy.