How The Federal Government Influences Economic Activity

The federal government influences economic activity in an attempt to maintain growth, employment, and price stability through fiscal policies. Our government influences economic activity by implementing a discretionary fiscal policy or a monetary policy. A discretionary fiscal policy is used to expand or contract economic growth. Monetary policies are by the Federal Reserve to expand or contract the economy’s wealth. Both discretionary and monetary policies affect the aggregate demand and the aggregate supply.
The aggregate demand is the total demand for goods and services by consumers. The aggregate supply is the production of goods and services that are going to be sold. In macroeconomics, we look at buying and selling by the whole economy

(total demand + total supply). Factors that shift the aggregate demand and aggregate supply is the selling price, interest rate, taxes, government spending, and net exports. Households and business will be affected and determine the overall goods and services they purchase or supply. When consumption and investments change, so does the shift in the aggregate demand curve. In economics this is an important tool to measure the health of an economy. If the aggregate demand curve is to the left, our economy is not doing well. If the aggregate demand curve is to the right, our economy is doing well. The same goes for the demand curve of supply.
The four effects of GDP (Y) = C + I + G + NX
I am better able to understanding of how governmental shifts the aggregate demands curve, either to the left or right.

“The goal is an equilibrium level of national income that generates full employment with price stability”. (Amacher & Rate, 2012 pg. 9.2) During a recession, the government can use an expansionary fiscal policy to fill the recessionary gap, influencing the aggregate curve to the right. A recessionary gap happens when the economy is operating under full unemployment. When the economy is going through a recession; net exports, individual incomes, and investments will decrease affecting our GDP. President Barack Obama used an expansionary fiscal policy by enacting the Economics Stimulus Act during the Great Recession. If the government wants the opposite effect, it would implement a contractionary monetary policy, which slows down the economy. An economy is slowed down by reducing the money supply. The Federal Reserve contracts the money supply by selling bonds through market operations, meaning the public market. When bonds are sold, interest is collected by the central bank which has an effect on the price of goods and services (Inflation). The Federal Reserve can also affect the money supply by adjusting interest rates which will affect borrowing, consumption, and investments. If the Federal Reserve wants to expand the money supply it will purchase government bonds. This will cause interest rates to fall resulting in an increase in investments and borrowing

from consumers and business.

Another form of fiscal policy to contract economic growth is through the use of taxation. Taxation will affect individual's income by decreasing the consumption of goods. Businesses will decrease the amount of money they borrow to make investments in capital labor, products, and services. The government can use the fiscal policy to expand the economy through spending; our defense, services (healthcare), highways, and education. When the government spends it reduces the level of unemployment which has a positive effect on the consumption, investments, and borrowing. This causes business to hire more employees.
Prior to this class, I would have agreed with the classical traditions viewpoints on fiscal policies and government intervention. I believed the use of fiscal policies were intrusive and seemed to create more harm than good. As I reach the end of my studies on macroeconomics, I agree with the Keynesians viewpoints on government regulations as a necessary to stimulate economic growth or a way to contract it.
References:
Amacher, R. & Rate, J (2012) Principles of Macroeconomics. San Diego, California. Bridgepoint Education, Inc.