How Government Control The Economy And What Are The Tools Of Government Policy?


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Tariq Habib answered
Debates about the government's role often take place and often the bumper stickers are found inscribed with "No new taxes" or "Balance the budget." These simplistic phrases cannot capture the serious business of government economic policy. Say the populace decides that it wants to devote more resources to improving public health or reducing famine; or that the country needs to mobilize when the armies of a foreign dictator overrun a friendly country and attack ships; or that protecting our precious environment for future generations is a key to national priority; or that more resources should be devoted to educating the young; or that the rich are getting too large a slice of the national pie and more resources should flow to the poor; or that unemployment in a deep recession should be reduced.
We can identify three major instruments or tools used by the government to influence private economic activity. These are:
1. Taxes on income and goods and services reduce private income, thereby reducing private expenditures and providing resources of public expenditure.
2. Expenditure on certain goods or services along with transfer payments that provide resources to individuals.
3. Regulations or controls that direct people to perform or refrain from certain economic activities.

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