The action taken by the federal government to manipulate the economy is called Government economic policy. This can be fiscal or monetary one. The fiscal policy is based on the consumption and spending of the government, whether if it decides to spend more than they collect or vice versa. Instead, monetary policy takes as its main variable to stabilize the economy the amount of money in circulation. These policies affect directly the interest rate (i) and the output (Y) of the economy. They can be contractive or expansive. The PFC makes i and Y decrease, while PFE makes the contrary effect in both. The PMC makes Y to decrease and i to grow, while PME makes Y to grow and I to decrease. The problems of the actual effect of the policies is that the expectations plays a solid part of it, also the time to define which policy would be the best to solve the problem or keep on with the stabilization is self-defeating, as much as the credibility that people have on the policy makers.
