The Role of Government in the Economy

A government is very important in shaping a country’s economic direction. The government supports the economy when it enhances communication and transport via highways and postal service, and establishes the military and police to protect life and property. State or local government also supports the economy by building roads and funding education.

Government’s makes rules that ensure trade and businesses operate in the best interests of the public. For example, the government may permit a monopoly to operate in an industry or market with little competition, but limit the freedom of such company to increase prices. Such act helps to avoid adversely affecting consumers who would have no recourse.

A government also devises monetary policies to control the growth of the economy. By adjusting tax rates and interest rates, controlling access to credit, and controlling circulation of money, the government can control the decline of the economy or the inflation. Similarly, the economy is affected when the government provides certain businesses special treatment, such as imposing higher taxes on imports or limiting foreign competition in a certain market to boost domestic production.

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