Governments affect their nations' economies through fiscal and monetary policy. Fiscal policy involves government taxation and spending, while monetary policy involves actions to affect a nation's money supply. These policies affect all manner of business decisions, from whether to hire more workers to whether to seek a loan to finance expansion.
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Fiscal policies often affect the level of taxation faced by business. If government raises taxes, businesses have less money for hiring and investment and might pass the increase on to consumers in the form of higher prices. The Tutor2u website states lower business taxes can stimulate investment spending and job creation.
The Federal Reserve Bank of San Francisco writes that monetary policy exerts major effects on the overall economy, affecting the ability of businesses to obtain credit. An expansionary monetary policy leads to lower interest rates, easing access to credit. A contractionary policy, however, reduces the money supply and makes it more difficult for firms to borrow.
The manner and extent to which fiscal and monetary policies affect business depend on the magnitude of the action and whether the policies are expansionary or contractionary. Expansionary policies involve reduced taxes, increased government spending and an increase in the money supply. Contractionary fiscal and monetary policies involve the opposite actions.
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