We have seen that through its monetary policies government can try to control money to curb inflation , fight depressions , and provide full employment. By trying to control the amount of money in circulation,the government influences the amount of investment, savings, and expenditures that take place in the economy. However, as part of its fiscal policy, the government can, if it chooses, also expand or contract its own expenditures. It can build or refrain from building highways, military aircraft,schools and a hundred other things for which it spends money. Because the government spends between 20 percent and 25 percent of the total Gross National Product on goods and services ( excluding transfer payments) ,this spending or restraint will have a major effect on the condition of the economy.
When the government increases its level of spending without raising taxes,it is pumping more money into the economy. During sluggish period, this process can serve to heat up the economy, cause new investment, and create jobs. On the other hand , too much stimulus can aggravate inflation.
What can monetary policies do when government put them into appropriate use in terms of economy?