Government in the Economy

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  • Created by: Em
  • Created on: 19-03-16 04:37

The role of the Government in the Economy

  • Make the most efficient/productive use of economic resources
  • Establish laws/infrastructure so the economy operates efficiently and effectively 
  • Establish and maintain a standard of living accessible to all
  • Ensure a stable economy 
  • Balance competing economic and social interests 
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Monetary Policies

  • Policies placed by the government that change the interest rate and influence money supply
  • Usually impacts the amount of money circulating in the economy to control inflation
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Fiscal Policies

  • Policies that involve the government changing tax rates and levels of government spending to influence aggregate (total) demand in the economy
  • These policies usually adjust spending, taxation and borrowing within the budget 
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Government Role in Market failures

  • The government can place taxes on goods/services, particularly socially undesirable or harmful goods/services (e.g. cigarettes or alcohol)
  • They can subsidise desirable goods/services, which is usually a cash payment (e.g. subsidies for homes with solar power)
  • The government can introduce legisaltions (laws) that alter the allocation of resources or discourage businesses from certain economic activity, such as price-fixing in petrol stations
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