Government policies affect the economy

The government regulates the economy by controlling the financial system through its Federal Reserve agency. The financial systems acts like an engine and the Fed controls the amount of fuel available through price manipulation and dictating how the fuel is going to be used. The aim of these actions is to prevent very high rates of economic growth and prevent the shrinkage of the economy.

In this case the fuel represents money, where the Federal Reserve influence on price of money is through increasing and decreasing the rate of interests. The Fed has maintained the interest rate at Zero since 2008 but only the bank can get such money for free: but the public cannot obtain such money since lenders fear a rise in interest that would make such  a transaction a lost opportunity; lenders fear that borrowers may not repay (Appelbaum, 2013).  The Fed also use the bonds to control the market , whereby the purchase of treasury bonds at higher rates drives the prices high  as investors rush to buy  available diminishing securities.  By paying higher prices for Treasury bond, it shows that investors are allowing a lower rate of interest from borrowers. This way, the Fed helps in reducing the interest rates the government pays or buyers pay for mortgage.

 The best thing that is the Fed can do, and which is generally agreed by economist is for Fed to maintain the inflation to be steady and slow. When the economy is too weak, the rate of reduction in inflation can be very low.   The efforts by the government to spur economic growth through purchases of huge assets can eventually lead to higher inflation.  When the purchase of such assets involves creation of money out of nothing, the money supply increases faster than economic growth which leads to inflation (Appelbaum, 2013).  However, in case the economy starts growing, the Federal Reserve can cap the inflation rate though paying higher rates of interests, and this leaves the supply of money intact.  On the other hand, unsustainable rise in the prices of assets can lead to property bubbles. The economic growth can be boosted through consumer spending that can be determined by the government through inflation rates (Schwartz, 2017).

Conclusion

 The government can influence the economic growth rate by using interest rates to control the inflation rate. A reduction in interest rates can lead to increased consumption as borrowing becomes easier for consumers while a high interest rate leads to low consumption. High rate of economic growth means that the GDP of a country will improve buoyed by increased consumption.

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