The Federal Reserve, the U.S. central bank, aims to control expansion of the money supply in a way that prevents inflation. (Karen Bleier/AFP/Getty Images)

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Macroeconomic Policy

The federal government aims to promote the conditions required for steady economic expansion and high levels of employment, especially a stable general price level and a tolerable tax burden. The Federal Reserve, the independent U.S. central bank, manages the money supply and use of credit (monetary policy), while the president and Congress adjust federal spending and taxes (fiscal policy).

Since the inflation of the 1970s, Federal Reserve monetary policy has emphasized preventing rapid escalation of general price levels. When the general price level is rising too fast, the Federal Reserve acts to slow economic expansion by reducing the money supply, thus raising short-term interest rates.

When the economy is slowing down too fast, or contracting, the Federal Reserve increases the money supply, thus lowering short-term interest rates. The most common way it effects these changes in interest rates, called open-market operations, is by buying and selling government securities among a small group of major banks and bond dealers.

A particularly tricky situation for monetary policy makers, called stagflation, occurs when the economy is slowing down and inflation is rising too fast.

The usefulness of fiscal policy has been subjected to intense academic and political debate. Some people view even massive additional government spending as too small to make any difference in the huge U.S. economy, although specific projects can have locally important effects. Some experts emphasize benefits to the economy from low tax rates; others emphasize harm to the economy from government borrowing.

What happens as the U.S. economy keeps evolving?