Analyze the United States tax system.

While the United States is accurately characterized as a capitalistic system in which the ups and downs of the market are largely dictated by the economic transactions of individuals and groups, the United States government nonetheless plays a significant role in regulating the nation’s economy. The government’s economic policies can generally be broken down into two major categories: monetary policy and fiscal policy.

Monetary Policy

The Constitution grants Congress the authority to coin money and to establish its value. The federal government’s monetary policies are aimed at managing the economy by regulating the money supply. By making monetary adjustments, the government attempts to keep inflation (increases in the average level of prices of goods and services) and unemployment under control. The primary mechanism used for this purpose is the Federal Reserve Board’s control of the “discount rate” on which banks base their interest rates. The Federal Reserve Board (often called the “Fed”) is a private-public banking regulatory body established in the early 1900s. During difficult economic times, the Federal Reserve will usually lower interest rates to encourage investment in the economy. When the economy is booming, the Fed will sometimes raise interest rates to keep inflation under control.