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 associated with the activities of many bodies and structures: government, central bank, economic policy department, and others. This concept also has its own classification.
Definition
Under economic policy understand the course of action, which is designed to influence or control the economy. Its implementation is usually carried out by the state government. Oversight of its implementation may be the responsibility of the Department of Economic Policy. It includes decisions on government spending and taxation, on the redistribution of income, and on the supply of money. Its effectiveness can be assessed in one of two ways, which are called a positive and normative economy.
Economic Policy Goals
They include value judgments regarding what kind of form should be carried out by the state. Although there is much disagreement on this issue, there are some generally accepted aspects. These include the following factors:
- Economic growth implies that the income level of both all consumers and producers (after inflation has been taken into account) should increase over time.
- Full employment, the purpose of which is that every member of the society who wants to work can find work.
- Price stability: it is aimed at preventing, on the one hand, an increase in the general price level, which is called inflation, and on the other, its decrease, which is called deflation.
Monetary development
In this case, there are two types of economic policy. Expansionary: designed to stimulate aggregate demand. Includes expansionary tax cuts; increased government spending by reducing consumption and investment. The expansionary economic policy of the country is aimed at stimulating consumption, investment and net exports.
Restraint: designed to slow down, reducing aggregate demand. In this case, it is impossible to reduce 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 performance of markets, increasing investment levels or increasing the rate of technological progress. This makes the labor market more flexible, giving firms incentives to invest or participate 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 from inflationary and deflationary trends.
For example, if a country is experiencing inflation, the tax authority will reduce costs and increase taxation, this will reduce the excess cash 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 highest financial authority, which controls the supply of money in the economy by controlling interest rates to maintain price stability and achieve high economic returns.
Monetary type characteristic
Money-credit policy:
- A state or central bank implements a market management process. This includes operations 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 repayment period specified by the state for loans), etc. Indirect instruments in the economic sphere include: the establishment of minimum necessary reserves; operations on the free market (control over the purchase and sale of government securities or other instruments); setting the discount rate charged by the central bank.
The monetary policy pursued by the central bank can be aimed at expanding when the money supply rises by lowering the discount rate, purchasing securities, etc., or reducing it to reduce the money supply (increasing the discount rate).
Fiscal type characteristic
Tax policy includes: government actions; determination of the level of government spending; determination of 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 charge levied on an individual or legal entity by the state. The tax system usually consists of:
- direct taxes - these are payments paid directly to the government by persons (legal or physical), for example, income tax, road tax, real estate tax, etc .;
- indirect taxes - those collected by intermediaries, for example, 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, and reducing net taxes. In addition, it can be a combination of these two directions in order to increase aggregate demand and expand real production.
The purpose of a restraining fiscal policy is to reduce government purchases of goods and services, increase net taxes. It can also be a combination of them in order to reduce aggregate demand and, thus, control inflation.