How Do Fiscal, Monetary, and Balance of Payments
Policies Influence the Economy?
Given these policy goals, managers need to understand how spending in each of the
sectors of the economy and the overall level of economic activity are affected by
fiscal policy, or changes in taxes and government spending by the executive and
legislative branches of government; monetary policy, or changes in the money
supply and interest rates by the Federal Reserve, the country’s central bank; and
balance of payments issues, or changes in the rate at which different countries’
currencies can be exchanged for each other and in the flow of goods and services
and financial assets among countries.
Policy makers in a country’s legislative and executive institutions use taxes and
government expenditures as tools to influence the growth of GDP, among other
goals. These tools include policies that influence aggregate expenditure (the
demand side of the economy) and policies that affect incentives to work, save,
and invest (the supply side of the economy). The central bank, which is independent
from the government in the United States, uses its control over the money
supply to change interest rates and credit conditions in order to influence consumer
and business spending. All of these institutions must respond to changes in
a country’s currency exchange rate, the rate at which one country’s currency can
be exchanged for that of another; the trade balance, the relationship between a
country’s exports and imports; and capital flows, the buying and selling of existing
real and financial assets among countries.