In answering the questions above, the economy will determine what is necessary to produce in order to achieve the desired economic goals and the manner of production i.e. whether to use the labor-intensive or capital-intensive technique. After production, the goods and services must be distributed to the target group or sector of the economy. In doing this, the economist must further ensure that it promotes economic stability i.e. a situation in which the inflation rates, interest rates, unemployment rate, foreign exchange rate are all put under control. Moreover, resource allocation must promote economic growth.
The government in solving the economic problems and achieving economic stability uses both fiscal and monetary policies. Fiscal policy is the use of taxation and government spending to influence economic performance whereas monetary policy entails the control of interest rates and spending to attain economic stabilization (Bidard 66). The government can use either fiscal policies or monetary policies or both in solving the economic problems.
During the recession, for instance, the level of economic activity is low and the government problem will be on how to stimulate economic activities in the economy. To achieve this, the government will increase its level of spending and reduce the tax rate. This would, therefore, result in an increase in disposable income that would be invested to stir economic activity. Increased investment would lead to economic growth and increased level of employment. Similarly, the government will control the level of inflation by the use of monetary policies. In the case of high level of inflation, the government, through the central bank will increase the level of interest rates (Bidard 72). An increase in the interest rates will lower the level of economic activity and reduce the amount of spending. . .