What’s in This Chapter?

Governments conduct two types of policies to affect the economy: fiscal policy and monetary policy. In democratic countries fiscal policy is decided by elected politicians. In most countries monetary policy is decided by the country’s central bank.

The nation’s fiscal policy in the United States is in the hands of the President and Congress. It is the subject of this unit’s discussion. Monetary policy, the other main economic policy affecting the economy, conducted by the Federal Reserve System in the United States and central banks around the world, will be discussed in detail in Unit 9.

On a national scale, in the United States, Congress and the White House decide how much money to spend on the various government programs. They also decide how much to tax people, and if and how much money to borrow. The fifty states, Washington, D.C., and the various counties and municipalities have their own expenses and sources of revenue. Government spending and taxation policies have an important effect on the nation’s employment, incomes, economic productivity, and economic growth. This unit discusses fiscal policy according to Keynesian and classical economists.