Adam smith and Keynes contributed significantly to the American free enterprise system. One of the key components of a capitalist system is free enterprise, which can be defined as a system where the forces of demand and supply determine the actual price for products and services. Adam Smith gave emphasis on the hands-offposition with regard to the government in the United States. He established what is known as classical economics. The main doctrine of classical economics was the laissez-faire perception of the government towards the marketplace that permits the invisible hand to guide every individual in their economic endeavors, and create economic growth. Additionally, Smith investigated into the dynamics of the labor market, accumulation of wealth, and productivity growth.As a result, the concept of a restricted government is very popular in American economy.
Conversely, to Keynes the state assumes the role of a big spender. This theorist played a vital role in helping the United States to come out of the Great Depression. Additionally, the government follows it when there is a need to influence the economy. Government spending has an effect of boosting the economy by creating job opportunities,which later on boosts the economy.
The government protects economic rights of customers in the American Enterprise System in a number of ways. For instance, it correctsexternalities. An externality is defined as the intangible impact of production and purchases, and its effects can be both favorable and unfavorable.A good example of a negative and positive externality is pollution created by factories and the need for new hybrid cars respectively. Negative externalities can be rectified by the statethrough agencies such as the U.S.Environmental Protection Agency.
The government has enacted laws that aim at protecting citizens and the environment from unsafe business activities that could negatively affect the safety of consumers. Additionally, the government has implemented laws that aim at protecting individuals on the job and requires companies, organizations, and private individuals to inform their workers of probably risky work conditions.
The government protects consumers by requiring all manufacturers to label their products for instance, nutritional labels on food products, providing warnings to customers about commodities that can cause serious injury, and collecting safety information on commodities in the market.
The U.S. monetary policy functions by adjusting the amount of money that circulates in the economy. This later on affects interest rates by influencing the amount of money that is invested and spent in the economy.
There are various tools used by the Federal Reserve to encourage banks to lend money so that people can have enough money to purchase goods and improve economic activities. They include but not limited to adjusting the interest rate that banks charge to lend money. If the U.S. Fed seeks to have more money circulating in the U.S. economy, it cuts the lending rate. An increase in interest rates discourages banks from loaning their reserves because banks cannot wish to lend money from the Fed at an increased interest rate to comply with reserve requirement. Besides, Open market operations are an additional popular tool that the Fed can employ. In particular, it is defined as the purchasing and sale of bonds with the goal of adjustingthe money in circulation.
The government collects taxes in order to fund programs that are aimed at improving the welfare of its citizens. It further collects taxes to pay its daily operations. The government provides programs that help those in need. This enables individuals to support themselves by buying required items for survival, and maintain healthy lifestyles.
Taxes are used to support programs that are vital to citizens at local, state, and federal levels. Furthermore, through taxes, the government is able to redistribute income from the wealthy class to the poor. Additionally, taxes are a key resource in allocating resources within an economy. The government further collects taxes to make payments for services and goods it offers including law enforcement, road, schools, military protection, and parks.
There are numerous effects of the national debt on the domestic economy. To begin with, when a government has a large national debt, it has less money to spend on programs at helping the needy and stimulating the economy. Secondly, a large national debt can also have a negative effect on the economy because it lowers the confidence that investors and other countries have in an economy. These effects are negative in nature because they cannot boost an economy.
The federal debt has two main components, which are mandatory expenditure and discretionary expenditure. There are numerous sections to fund for, like education, defense, and agriculture. Mandatory and discretionary spending differ in a number of ways for example, unlike discretionary, mandatory spending goes to all citizens irrespective of monetary need, and it takes a bigger percentage of the federal budget. On the other hand, in discretionary spending, the amount differs annually; all citizens do not benefit, and makes up the minority of the federal budget. The government can change what is spent for the discretionary spending depending on the amount they can afford and the amount needed in that specific section. Furthermore, mandatory spending goes to all government citizens irrespective of the monetary need while discretionary differs on whom it goes to.
One of the similarities between mandatory and discretionary spending is that they form a key part of the federal budget. The key objective of mandatory and discretionary spending is to support the welfare of American citizens with protection, money, and education.An example of discretionary expenditure is the federal spending on Medicare and social security. On the other hand, expenditures on research and education is qualified as discretionary expenditure.
The U.S. government employs fiscal policies as a tool for stabilizing the economy. Fiscal policy influences the economy through its effects on taxes that businesses and households pay. If the government borrows more to finance its budget deficits, then the forthcoming generations will be required to pay higher taxes to pay the interest. Correspondingly, coming generations will pay reduced taxes if the government has budget surpluses. There are two tools that a government can use to attain this and they include taxation and spending. Contractionary policies refer to a set of tools that a government uses to slow down the rate of growth of the economy. They are executed by the government and in most cases; it is independent of the Central Bank actions, even though when they are implemented at the same time, objectives are attained more smoothly and efficiently.
On the other hand, expansionary fiscal policies entail measures like decreasing tax rates, increasing direct payments to customers through tax refund and increase economic activities and government spending. These policies result in an increase in aggregate demand and supply leading to a rise in production and economic output fiscal policies is to slow down an economy by measures like reducing government spending and increasing taxes. These policies also reduce aggregate demand resulting in a reduction in aggregate supply that reduces production and economic output. Contractionary policies are accompanied with. Contractionary and expansionary policies are used to maintain economic activities and improve it during a depression. Furthermore, the main objective of expansionary contractionary monetary policies for instance, is increasing the interest rates and reducing the supply of money in the money markets making it difficult for people to access money.