Economic policy: types, goals, characteristics

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:55

The economic policy of any country in one way or another affects all its inhabitants. However, for many citizens this concept remains very distant. Its implementation is connected with the activities of many bodies and structures: the government, the central bank, the department of economic policy and others. This concept also has its own classification.

Definition

Economic policy refers to a course of action that is designed to influence or control the economy. It is usually carried out by the state government. Supervision of its implementation may be the responsibility of the economic policy department. It includes decisions about government spending and taxation, the redistribution of income, and the supply of money. Its effectiveness can be measured in one of two ways, which are called positive and normative economics.

Economic policy goals

They include value judgments about what kind ofmust be carried out by the state. While there is much disagreement on this subject, there are some generally accepted aspects. They include the following factors:

1. Economic growth implies that income levels for all consumers and producers alike (after inflation is taken into account) must increase over time.
2. Full employment, the goal of which is that every member of society who wants to work can find a job.
3. Price stability: aims to prevent, on the one hand, an increase in the general price level, which is called inflation, and on the other, its decline, called deflation.

Monetary Development

In this case, there are two types of economic policy. Expansionist: Designed to stimulate aggregate demand. Includes expansionary tax cuts; increasing government spending by reducing consumption and investment. The country's expansionary economic policy aims to stimulate consumption, investment and net exports.

Containment: Designed to slow down, reducing aggregate demand. At the same time, it is impossible to cut costs or reduce the money supply. Actions on the supply side are aimed at increasing the natural level of production, for example, by improving the functioning of markets, increasing the level of investment, or increasing the rate of technological progress. This makes the labor market more flexible, providing incentives for firms to invest orparticipation in research and development.

Type classification

Fiscal: This type of economic policy aims to manipulate government spending and taxation in order to stabilize the economy against inflationary and deflationary trends.

For example, if a country is experiencing inflation, the tax authority will reduce spending and increase taxation, this will reduce the excess money in circulation and restore the general price level to achieve high economic growth

Monetary: This type of economic policy is carried out by the country's supreme financial authority, which controls the money supply in the economy by controlling interest rates to maintain price stability and achieve high economic returns.

Characteristic of monetary type

Monetary policy:

• The state or central bank carries out the market management process. This includes transactions with money, interest, loans, etc.
• Government bodies can use direct and indirect tools. Direct instruments include: regulation of investment loans; regulation of consumer loans (for example, the maximum maturity of loans set by the state), etc. Indirect tools in the economic sphere include: establishing the minimum required reserves; operations on the free market (control of the purchase and sale of governmentsecurities or other instruments); setting a discount rate charged by the central bank.

Monetary policy implemented by the central bank can be aimed at expansion, when the money supply is increased by lowering the discount rate, buying securities, etc., or contraction, aimed at reducing the money supply (increasing the discount rate).

Fiscal type characteristic

Tax policy includes: government actions; determining the level of public spending; determining the financing of these costs; affects the government budget.

The formation of this part of the economic sphere of the state is due to taxes. A tax is a financial levy levied on a natural or legal person by the government. The tax system usually consists of:

• direct taxes are payments paid directly to the government by persons (legal or natural), such as income tax, road tax, property tax, etc.;
• indirect taxes - those collected by intermediaries, such as value added tax, consumption tax (alcohol, etc.), environmental tax.
• other income - various customs and administrative fees.

This type of economic policy can be aimed at increasing government purchases of goods and services, reducing "net" taxes. In addition, it can be a combination of these two directions in order toincreasing aggregate demand and expanding real output.

The purpose of the restrictive fiscal policy is to reduce government purchases of goods and services, increase net taxes. It can also be a combination of the two to reduce aggregate demand and thus control inflation.