Introduction to Finance

Policy Makers
Federal Reserve System
The President
Congress
U.S. Treasury
Types of Policies
or Decisions
Monetary Policy
Fiscal Policy
Debt Management
Economic Objectives
Economic Growth
High Employment
Price Stability
FIGURE 5.1
 Policy Makers 
and Economic Policy Objectives
3
For a further discussion of past U.S. presidents, see Frank Freidel and Hugh S. Sidey, 
The Presidents of the United 
States of America, 
(Willard, OH: R.R. Donnelley and Sons, 1996).

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5.3 Government Influence on the Economy
107
Central Bank (ECB)
focuses on maintaining price stability across the 19 eurozone countries. 
The sheer size of the EMU also means that European policy makers and U.S. policy makers 
must work closely together in trying to achieve the worldwide goals of economic growth and 
price stability.
DISCUSSION QUESTION 1
How successful have U.S. policy makers been in achieving high employment and low 
infl ation in recent years?
5.3
Government Influence on the Economy
The federal government plays a dual role in the economy. It provides social and economic ser-
vices to the public that cannot be provided as effi
ciently by the private sector. The federal gov-
ernment is also responsible for guiding or regulating the economy. Actions by the four policy 
maker groups need to be coordinated to achieve the desired national economic objectives. The 
president and the Council of Economic Advisors (CEA) prepare an annual 
federal budget
containing revenue and expenditure plans that refl ect fi scal policy objectives concerning 
government infl uence on economic activity. Congress reviews, makes changes, and passes 
legislation relating to budget expenditures. A 
budget surplus
occurs when tax revenues 
(receipts) are more than expenditures (outlays). When revenues are less than expenditures, 
there is a 
budget defi cit
. The Treasury must borrow funds by selling government (Treasury) 
securities to cover a defi cit.
A government raises funds to pay for its activities in three ways: 
• Levies taxes 
• Borrows 
• Prints money for its own use 
Because the last option has tempted some governments, with disastrous results, Congress 
delegated the power to create money to the Fed. Our federal government collects taxes to pay 
for most of its spending, and it borrows, competing for funds in the fi nancial system, to fi nance 
its defi cits.
To illustrate the complex nature of the government’s infl uence on the economy, consider 
the many eff ects of a federal defi cit. To fi nance it, the government competes with other bor-
rowers in the fi nancial system. This absorbs savings, and it may raise interest rates. Private 
investment may be reduced if it becomes more diffi
cult for fi rms to borrow the funds needed. 
On the other hand, a defi cit stimulates economic activity. The government is either spending 
more or collecting less in taxes, or both, leaving more income for consumers to spend. The 
larger the defi cit, the more total spending, or aggregate demand, there will be. In some circum-
stances, this stimulation of the economy generates enough extra income and savings to fi nance 
both the defi cit and additional investment by fi rms.
During periods of war-related budget defi cits (e.g., World Wars I and II), the Fed 
engaged in an activity known as