Government regulation is a set of measures, actions applied by the state to correct and establish basic economic processes. Economy is being influenced by the decisions of the government that are maid through the concept of fiscal and monetary policies. Mechanisms of state regulation of the market economy are based on the fiscal and monetary policies usage.
Fiscal policy refers to the term of government policy and it is seen as one of the main methods of state intervention into the national economy in order to reduce the business cycles fluctuations and provide a stable economic system in the short term. The main instruments of fiscal policy are the revenues and expenditures of the state budget, taxes, transfers, and government purchases of goods and services). The main goal of fiscal policy is to control aggregate demand by changing the rates of taxation and government spending. Fiscal policy of government is able to affect following objectives: changes in real national output and employment, inflation control, economic growth. Therefore, the fiscal policy means the regulation and taxation of the state budget in order to stabilize and revive the economy.
Monetary policy responds for control over the money supply in the economy. Its goal is to support sustainable economic development. Monetary policy can be also described as a tool by which governments seek to influence the macroeconomic environment, increasing or decreasing the money supply. Monetary policy defines and implements by the central bank of a country. The main policy that is done through the monetary one is to ensure that: economic growing stably, full resources usage, price level is stable, the balance of payments is cause positive effect for the economy. Monetary policy affects the economic conditions through the aggregate demand changes. However, the change in the money supply in the economy is the result of operations that were made not only by the central bank, but also by the commercial banks and non-banking sector (households and firms). Tactical objectives (target benchmarks) of monetary policy of the central bank may be: controlling the supply of money, monitoring the level of interest rates, and control of the exchange rate of the national currency.
When a country is being in a deep depression with the high level of unemployment, low level of interest rate, and low GDP growth it is needed to take the sate actions through the fiscal and monetary mechanisms usage. During the recession in order to increase aggregate demand, the government should increase spending on public sector and on the implementation of various government programs, thereby this will help to revive many industries and firms. Government has to increase its spending in order to stimulate economic and business cycles to increase money turn out periods. The increase of business activity will lead to the new business opportunities that would prevent to the new business opening. New companies and firms are the new works positions that would decrease the unemployment rate within the country. Low interest rate creates opportunities for business sector and increase the money supply. In this case, the population will increase the demand for goods consumption, and the enterprises will have more opportunities to invest, which should ultimately lead to economic recovery.
According to the Okun’s law, low level of unemployment will lead to the all labour resources usage, that would obviously increase the GDP. Therefore, the revival of the industries will increase the GDP of the country. The Phillips curve shows that with the decrease of unemployment the prices will become stable that would lead to the increase of consumption and stabilisation of inflation rate. Due to the multiplier concept the increase of the investments of both government and outside investors will also have positive effect on the GDP level of the country.
Such measures can have both positive and negative outcomes. Positive side can be seen in the increase of the investments and international capital within the country that would obviously have positive effect on the amount of goods export and consumption. The negative side of the increase of governmental expenditures can be seen in the possibility of high inflation accuracy. However, the case is to leave the low inflation in the country, therefore, the progressive tax system should be developed. Tax system of every country has a set of taxes that are used for the country budget filling, so the government should decrease all tax rates, however increase the income tax. Therefore, with the increase of income tax rates government budget increase simultaneously, that will make possible to raise social expenditures but slow down the inflation rate. However, in order to stimulate core industries of the country, government can promote specific tax rebates. Also, to decrease the inflation level, government can promote the open economy concept, where national companies can work for the exporting of the goods. Such measures will help to stimulate economy and keep the inflation low.
In this case the first president action should be connected with the increase of public government expenditures. In the same time the first action of Fed is to develop progressive tax system with the increase of income tax and decrease of other taxes.
The rise of debt to GDP is lower the future potential GDP of the definite country that may lead to the increase of budget deficit. When the debt increases all the country should be tighten, because increase of budget deficit will prevent to the tax increases, government expenditures decrease and investing cuttings. These measures will be taken in order to finance debt. If this situation is occurred in the definite country for which was developed the set of economic activities previously, it will not change the main set of actions, because the only way to deal with the debt without strict tighten is to stimulate economic growth.
As a conclusion it is necessary to stress that the fiscal and monetary policies are the good method for government to influence economic situation in the country. However, it is always necessary to study both positive and negative effects of the taken economic measures and actions.