How_Money_Works_-_The_Facts_Visually_Explained

Deciding on

economic policy

Calibrating the

economic machine

Governments have a number of different controls they

can adjust to help the smooth running of the economy.

The biggest are taxes, spending decisions, and interest

rates. Each of these controls affects the economy in

many different ways, and governments have to consider

these when taking action.

Governments closely monitor data on the economy to establish which

policies might improve its performance. There are numerous ways of

intervening, each with their own pros and cons.

Increasing tax

The government can try to slow

down the economy by raising

taxes, a measure taken when

inflation is a risk. An increase in

taxes reduces spending. When

spending falls, suppliers are less

likely to put up their prices, since

they risk losing a market, and

inflation therefore slows. Cutting

taxes has the opposite effect.

“Inflation is the one

form of taxation

that can be imposed

without legislation”

Milton Friedman

TARGET VALUE

Unemployment

$

Less money in circulation means lower

inflation but also encourages lay-offs,

and unemployment rises.

With high inflation and low

unemployment, the government

raises taxes to reduce money in

the system and reduce inflation.

Inflation

US_118-119_Deciding_economic_policy.indd 118 13/10/2016 16:18