Government in the Economy <ul><li>Nothing arouses as much controversy as the role of government in the economy. </li></ul><ul><li>Government can affect the macroeconomy through two policy channels: fiscal policy and monetary policy. </li></ul><ul><ul><li>Fiscal policy is the manipulation of government spending and taxation. </li></ul></ul><ul><ul><li>Monetary policy refers to the behavior of the Federal Reserve regarding the nation’s money supply. </li></ul></ul>
The Budget Deficit <ul><li>A government’s budget deficit is the difference between what it spends ( G ) and what it collects in taxes ( T ) in a given period: </li></ul><ul><li>If G exceeds T , the government must borrow from the public to finance the deficit. It does so by selling Treasury bonds and bills. In this case, a part of household saving ( S ) goes to the government. </li></ul>
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