The governments and their central banks can influence the economy of their countries through a number of measures (Attinasi & Klemm, 2016). When the rates of inflation rise, the interest rates rise, similarly, recession can cause many business to close down and rise in unemployment rates within a country. In order to mitigate such effects on a country’s economy, the governments and the central bank can develop policy measures that can cushion its local companies and control the inflation and unemployment rates.
One such measure that the government, through its central bank, may use are the fiscal policy measures. The fiscal policy measures include taxation measures and government expenditures. The government can manage their economies through increase/reduction of expenditure or an increase or reduction in taxes (Attinasi & Klemm, 2016). For example, if a country is faced with recession, the government can choose to increase the levels of its borrowing. Through increased spending in infrastructure, governments will inject more money to the economy and this help in creation of employment opportunities. This also creates a multiplier effect, where higher spending will occur due to the initial injection of the money. The increased aggregate demands are important in cushioning the country out of recession.
However, if the government faces higher inflation rates, the government can increase taxation to reduce demand and consequently reduce the rates of inflation (Attinasi & Klemm, 2016). The increase in taxation is done with a reduction in the government spending. This ultimately reduces the money in circulation within the country and thus reduces the inflation rates.
The other measure is the monetary policy, which is carried out by the central bank of a country, such as the Federal Reserve in the U.S. Monetary policy is mainly concerned with the management of the interest rates and the supply of money in circulation within a country (Ryoo & Skott, 2016). The monetary policy has been employed by the central banks to stimulate economic growth or slow down the rate of growth for fears of inflation.
The major tools of the monetary policy include the changes in the commercial banks’ reserve requirements and the open market initiatives (Ryoo & Skott, 2016). The central bank or Federal Reserve in the U.S can set the amount of money the commercial banks can withhold without lending, called the reserve ratio. In doing so, the Federal Reserve or the central bank exercises direct influence on the amount of cash that is available for loans. The open market operations, mainly done by the Federal Reserve concern the daily purchase and sale of the bonds in a move to inject or limit the money under circulation.
The monetary and fiscal policies are economic measures can be considered as short-term measures since their results can be felt within a reasonable shorter time. However, sometimes, the government can undertake long-term measures to influence the country’s economic growth (Bripi, 2015). For example, a country may increase import duties on certain products to protect local industries. Also, the government may develop policy measures that limit the amount of imports, to help cut the country’s deficit. Moreover, a country may decide to reduce tax on certain important imports in order to spur infrastructural development. All these measures provide long-terms measures with which the government can influence its economic growth.
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