Economy and Taxes

One of the main purposes of government is to protect the economy. There are several economic indicators that help us determine how well the economy is doing. The Consumer Price Index (CPI) reports the costs of the most common necessities (food, shelter, etc.). When the CPI is low, the economy is doing well. The economy is also measured by the Gross Domestic Product (GDP). The GDP relates to the value of goods produced in the United States. When the GDP is high the economy is doing well. Finally, the unemployment rate determines what percentage of the adult population is unemployed and looking for full time work. When the unemployment rate is low the economy is doing well.

The government regulates the economy through two major policies – Monetary and Fiscal. Monetary Policy is controlled by the FED (Federal Reserve Bank). The goal of Monetary Policy is to regulate the amount of money in circulation through changing the interest rates, reserve requirement, and the buying and selling of government securities. When there is high unemployment, the economy needs more money in circulation. To get more money in circulation, the FED can lower the interest rate, lower the reserve requirement, and buy government securities. All of these put more money in circulation which leads to people spending more. When inflation is high, the economy needs less money in circulation. To do this, the FED can increase the interest rate, increase the reserve requirement, and sell government securities.

Through Fiscal Policy, Congress can affect the amount of money in circulation through taxing and spending. When the economy is slow (unemployment is high) Congress will try to put more money in circulation through lowering taxes and increasing government spending. When the economy is experiencing some inflation, Congress will try to decrease the amount of money in circulation through raising taxes and cutting spending.