Economic Policy

While the United States is accurately characterized as a capitalistic system in which the ups and downs of the market are largely dictated by the economic transactions of individuals and groups, the United States Government nonetheless plays a significant role in regulating the nation's economy. The government's economic policies can generally be broken down into two major categories: monetary policy and fiscal policy.

Monetary Policy
The Constitution grants Congress the authority to coin money and to establish its value. The federal government's monetary policies are aimed at managing the economy by regulating the money supply. By making monetary adjustments, the government attempts to keep inflation and unemployment under control. The primary mechanism used for this purpose it the Federal Reserve Board's control of the "discount rate" on which banks base their interest rates. The Federal Reserve Board (often called the "Fed") is a private-public banking regulatory body established in the early 1900s. During difficult economic times, the Federal Reserve will usually lower interest rates to encourage investment in the economy. When the economy is booming, the Fed will sometimes raise interest rates to keep inflation under control.

Fiscal Policy
Fiscal policy is established by the Congress and the President through the federal budget process. Through this process, the federal government determines who will be taxed, what types of income and activities will be taxed at what rates and what will be done with the money that is collected.