How Does the Government Function Within the Economy?

How does the Government function within the economy?

The six categories that the government's affect on the economy is broken into have a vast affect on our economy. The government plays such a large role that many people argue that the economy is completely controlled by the government. For this assignment, I found the article, "Bernanke: Fed will protect U.S. economy from Europe" on CNN Money. This article is interesting because it not only talks about what the Fed does, but also what the Fed's boundaries are within the economy. The article doesn't talk too much about Europe. It mentions that if Europe goes down then we go down with them, but the article mainly covers how the Fed affects our economy. The examples of how the Fed functions within the economy in this article are monitoring foreign affairs, setting the interest rates, and regulating monetary policy.

Europe's debt problems began in Greece over two years ago. Today, Europe is still suffering. The government must monitor the situation to make sure that Europe's economy does not crash because that will be dangerous for our economy. This role of the government falls under correcting for externalities. The only reason that the government is helping Europe is to protect the U.S. this is correcting for externalities because Europe's situation is an impending crisis that if not handled could lead to greater issues. It is interesting that the Fed is in charge of monitoring Europe's fiscal situation. Bernanke says that the first priority is to, "Do no harm..." It is a slow process however Europe is recovering and it is important to keep it that way.

Setting interest rates is a tough job to perfect. When interest rates are low, capital is easier to acquire. Therefore, people have more available money to purchase what they want. However, is they are too low it can cause inflation by offsetting the supply and demand. On the other hand, if interest rates are too high, then people can't afford to pay their mortgages and such. This can result in deflation when it is extreme. The Fed intends to keep interest rates low until the end of 2014. This hints at the idea that the economy will not fully recover for another three years. Setting the interest rate falls under stabilizing the economy. By setting interest rates, the Fed is determining how much people can purchase and how much money flows through our economy.

The main job that the Fed has is to regulate monetary policy. The Fed decides how much money to print, therefore determining inflation. Bernanke says that their goal is to keep inflation around 2% each year, while it tries to bring down the unemployment rate. Many people don't like this plan because it could potentially be fueling asset bubbles, which would result in eroding the value of the dollar. This year is still a recovery stage and the government is predicting that