18. The government manages the economy by using monetary and fiscal policies to influence spending in the economy.

18. The government plays an active role in managing the economy by using the macroeconomic policy tools, monetary and fiscal policies, to influence the amount of spending in the economy. Expansionary monetary and fiscal policies stimulate the economy by increasing overall spending in the economy. Expansionary policies are appropriate for fighting unemployment. Contractionary monetary and fiscal policies dampen the economy by decreasing overall spending in the economy. Contractionary policies are appropriate for fighting inflation.

The Great Depression was a period of severe economic hardship during the 1930s. Prior to the Great Depression, the predominant economic philosophy was Classical economics, which suggested the economy would correct any problems, such as unemployment or inflation, without any government intervention. The failure of the economy to correct itself in the 1930s helped popularize the idea that the government can play an active role in managing the economy. Macroeconomic policy tools are discussed in detail in modules 9 (Monetary Policy) and 10 (Fiscal Policy).