Explain how the government plays both a direct and an indirect role in the economy. 

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

In the United States, the government plays many roles in the economy.  Some are direct and some are indirect.

In terms of the direct role the government plays, we can think of many different examples.  One example would be that the government actually runs certain businesses.  These are businesses like Amtrak or like the US Postal Services.  They are businesses that would not exist if the government did not run them.  Another example would be through direct regulation.  The government, for example, mandates that almost all workers be paid a minimum wage.  This has a direct impact on the economy.

However, there are also other ways in which the government affects the economy.  For example, the government, in the form of the Fed, sets interest rates.  These rates affect the amount of economic activity that goes on in the country.  As another example, the government pays for public schools and public universities.  The presence of these schools makes for a much more educated workforce.  This workforce allows the US economy to be more innovative and productive than the economies of some other countries.

In these ways, the US government plays both a direct and an indirect role in the economy.

pholland14's profile pic

pholland14 | (Level 1) Associate Educator

Posted on

Government and the American economy are closely related.  Government plays a direct role in the economy with farm subsidies.  Many farmers would not be able to stay in business without price supports.  Government also supplies welfare and food stamps to people in need.  Also, government runs some public utilities such as the Tennessee Valley Authority (TVA).  Government also plays a role in healthcare through Medicare and Medicaid programs.  Many rural hospitals are able to stay in business through these payments.  Government is also a leading employer in places like Washington D.C and several cities with military bases.  

Government also plays an indirect role in economics in the form of raising and lowering interest rates and determining the rate on which federal, state, and municipal bonds are paid.  This is important for investors.  Government also determines taxation rates which can either help or hinder business.  Government determines trade policy which may make foreign goods more expensive due to tariffs.  Government supplies money to college students for grants, and many cities in America are benefited by college students being there and spending money.  

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