Governments may make policy changes in response to economic conditions. Government regulation of the economy is frequently used to engineer economic growth or prevent negative economic consequences. During periods of weak growth, Keynesian economists recommend lowering interest rates to encourage borrowing and restore economic growth. In response to inflation concerns, governments may decide to increase interest rates. Government policies may use tax incentives to direct economic conditions also. The active use of these strategies demonstrates government interest in preserving particular economic circumstances to further the economic well-being of important stakeholders and the public.
Generally speaking, economic growth is beneficial to those in political power who may also be seeking re-election. Strong growth typically translates into more hiring and higher wages for some workers, although not always. Strong economic growth can also lead to higher corporate profits, which is a positive for the stock market.
The Role of the Federal Reserve
In the United States, the Federal Reserve has the authority to direct economic policy for the country as a whole. Established in 1913, the Federal Reserve controls the money supply and actively uses policy to respond to and influence economic conditions. Increasing or decreasing available funds influences bank behavior. Banks are offered a discount rate by the Federal Reserve on funds borrowed to re-lend to consumers and industry clients. Changing the costs of borrowing by changing rates is another means of directing bank activity. Major banks have tremendous influence on the consumer economy because they are gatekeepers. Funds flow from the Federal Reserve to the major banks and the government actively uses this means to direct the economic rate of growth.
Outside events may influence economic activity and governments may use economic means to enact changes. Tax policy is frequently used to direct economic action, as is legislation. Government responses to economic conditions typically include using multiple strategies simultaneously.