Economic development is generally believed to be dependent on the growth of real factors such as capital accumulation, technological progress, and increase in quality and skills of labour force. This view does not adequately stress the role of money in the process of economic development. It is said that money is a mere veil and intrinsically unimportant.
In every country, the government takes steps to help the economy achieve the goals of growth, full employment, and price stability.
In the United States, the government influences economic activity through two approaches: Through monetary policythe government exerts its power to regulate the money supply and level of interest rates.
Through fiscal policyit uses its power to tax and to spend. When the Fed believes that inflation is a problem, it will use contractionary policy to decrease the money supply and raise interest rates. When rates are higher, borrowers have to pay more for the money they borrow, and banks are more selective in making loans.
To counter a recession, the Fed uses expansionary policy to increase the money supply and reduce interest rates.
In theory, both sets of actions will help the economy escape or come out of a recession. Both taxation and government spending can be used to reduce or increase the total supply of money in the economy—the total amount, in other words, that businesses and consumers have to spend.
When the country is in a recession, the appropriate policy is to increase spending, reduce taxes, or both. Such expansionary actions will put more money in the hands of businesses and consumers, encouraging businesses to expand and consumers to buy more goods and services.
When the economy is experiencing inflation, the opposite policy is adopted: Because such contractionary measures reduce spending by businesses and consumers, prices come down and inflation eases.
The National Debt If, in any given year, the government takes in more money through taxes than it spends on goods and services for things such as defense, transportation, and social servicesthe result is a budget surplus.
If, on the other hand, the government spends more than it takes in, we have a budget deficit which the government pays off by borrowing through the issuance of Treasury bonds.
Historically, deficits have occurred much more often than surpluses; typically, the government spends more than it takes in. As you can see in Figure 1. The significant jump that starts in the s reflects several factors: If you want to see what the national debt is today—and what your current share is—go on the Web to the U.
National Debt Clock http: Macroeconomics investigates overall trends in imports and exports, while microeconomics explains the price that teenagers are willing to pay for concert tickets.
Though they are often regarded as separate branches of economics, we can gain a richer understanding of the economy by studying issues from both perspectives.
Key Takeaways The U. Both have the same purpose: Monetary policy is used to control the money supply and interest rates. To counter a recession, it will use expansionary policy to increase the money supply and reduce interest rates.
When the country is in a recession, the government will increase spending, reduce taxes, or do both to expand the economy. When the government takes in more money in a given year through taxes than it spends, the result is a surplus.
When the opposite happens—government spends more money than it takes in—we have a deficit. The cumulative sum of deficits is the national debt—the total amount of money owed by the federal government.
What actions should the Fed take to pull the country out of the recession?Functions of Money Money is often defined in terms of the three functions or services that it provides. Money serves as a medium of exchange, as a store of value, and as a unit of account. The Role Of Banks In The Economy Karyna Golovchenko group 16 The health of the economy is closely related to the soundness of its banking system.
As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. Money in Economic Life: Money plays an important role in the shaping of the economic life in a country. Money is characteristic of nearly highly developed civilization, and we might almost say that it is necessary to such developed.5/5(1).
Role of Money in Economic Development of Developing Countries! Economic development is generally believed to be dependent on the growth of real factors such as capital accumulation, technological progress, and increase in quality and skills of labour force.
money even in the face of countercycical central bank policy.” 2 This general argument guided the construction of an explicit model designed to emphasize the role of the public’s and the banks’ behavior in the determina-tion of the money stock, bank credit and interest rates.
2 . Discuss the government’s role in managing the economy. In every country, the government takes steps to help the economy achieve the goals of growth, full employment, and price stability.
In the United States, the government influences economic activity through two .