Stabilizing the Economy
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The government controls economic activity through two approaches; fiscal policy and monetary policy. Fiscal policy involves influencing taxation rates and people’s spending capacity. It may also be used to redistribute wealth and income such that the poor are taxed less in order to increase their spending capacity and standard of living, while the wealthy are taxed more in order to reallocate their wealth. On the other hand, monetary policy involves controlling the level of money supply within the economy as well as the interest rates. The policy that the government will apply depends on the prevailing economic conditions. Fiscal and monetary can be used together to accelerate economic growth, or to slow it down when the economy begins to grow too fast.