Series 65

By Investopedia AAA

Basic Economic Concepts - Economic Growth Factors


Here are some factors that can impact the growth rate of the economy:

  • Fiscal policy - this refers to government actions (approved by Congress) that may influence economic activity. These would include changing tax rates, increasing Social Security payments, and increasing or decreasing government spending.

Learn how governments adjust taxes and government spending to moderate the economy within the article What is Fiscal Policy?

  • Monetary policy - this refers to actions taken by the Federal Reserve to either increase or decrease the money supply in the economy. The Fed uses the following strategies to expand or contract funds in the banking system:
    • Buying or selling government securities in the open market. Buying government securities increases the money supply by injecting cash into the economy and helps lead to lower interest rates; selling securities decreases the money supply by removing cash from the economy and helps to raise interest rates.

    • Increasing or decreasing member bank reserve requirements. Higher reserve requirements tighten the money supply; lower reserve requirements loosen the money supply.

    • Increasing or decreasing the discount rate to member banks who borrow reserves from the Fed. A higher discount rate tightens money supply; a lower discount rate loosens money supply.

    • Changing the percentage of credit required to buy securities on margin.


Look Out!
The Fed can expand the money supply so that credit is easier to obtain and interest rates are lowered, which increases spending. When it tightens the money supply, the reverse occurs.


Learn about the tools the Fed uses to influence interest rates and general economic conditions within the article Formulating Monetary Policy.

The Effect of the Business Cycle on Stock Markets
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