Question

How do government policies affect the free market economy such as the U.S economy ?

Answer 1

Government policies affect market economies in numerous ways. The largest areas of government intervention in the economy are through Fiscal and Monetary Policy. Fiscal Policy is when the government decides to use revenues obtained through taxation to influence the economy. An example of this is when the US Government bailed out failing financial institutions in 2008 after the financial collapse by using citizens tax dollars to influence the economy. Monetary policy is when the government uses control of the money supply to influence the economy. An example of this is when the US Government buys or sells U.S. Treasury bonds at different rates to increase or decrease the amount of money in supply which influences interest rates and the overall economy. Another example by which the U.S. Government influences the "free market" is by imposing tariffs and quotas on US imported goods. These are essentially barriers or taxes on goods entering the U.S. Market. An example of this could be a 5% Tax on (x) good that is imported from China.