Topics: Monetary policy, Inflation, Keynesian economics Pages: 7 (2164 words) Published: December 22, 2013
Economic policy
Economic policy refers to the actions that governments take in the economic field. It covers the systems for setting interest rates and government budget as well as the labor market, national ownership, and many other areas of government interventions into the economy. Such policies are often influenced by international institutions like the International Monetary Fund or World Bank as well as political beliefs and the consequent policies of parties. Types of economic policy

Almost any aspect of government has an economic aspect and so many terms are used. A few example of types of economic policy include: Macroeconomic stabilization policy tries to keep the money supply growing, but not so quick that it results in excessive inflation. Trade policy refers to tariffs, trade agreements and the international institutions that govern them. Policies designed to create Economic growth

Policies related to development economics,
Redistribution of income, property, or wealth
Industrial policy
Technology-based Economic Development Policy [1]
[edit] Macroeconomic stabilization policy
Stabilization policy attempts to stimulate an economy out of recession or constrain the money supply to prevent excessive inflation. Fiscal policy, often tied to Keynesian economics, uses government spending and taxes to guide the economy. Fiscal stance: The size of the deficit or surplus

Tax policy: The taxes used to collect government income.
Government spending on just about any area of government
Monetary policy controls the value of currency by lowering the supply of money to control inflation and raising it to stimulate economic growth. It is concerned with the amount of money in circulation and, consequently, interest rates and inflation. Interest rates, if set by the Government

Incomes policies and price controls that aim at imposing non-monetary controls on inflation Reserve requirements which affect the money multiplier
[edit] Tools and goals
Policy is generally directed to achieve particular objectives, like targets for inflation, unemployment, or economic growth. Sometimes other objectives, like military spending or nationalization are important. These are referred to as the policy goals: the outcomes which the economic policy aims to achieve. To achieve these goals, governments use policy tools which are under the control of the government. These generally include the interest rate and money supply, tax and government spending, tariffs, exchange rates, labor market regulations, and many other aspects of government. [edit] Selecting tools and goals

Government and central banks are limited in the number of goals they can achieve in the short term. For instance, there may be pressure on the government to reduce inflation, reduce unemployment, and reduce interest rates while maintaining currency stability. If all of these are selected as goals for the short term, then policy is likely to be incoherent, because a normal consequence of reducing inflation and maintaining currency stability is increasing unemployment and increasing interest rates. [edit] Demand-side vs. supply-side tools

This dilemma can in part be resolved by using microeconomics, supply-side policy to help adjust markets. For instance, unemployment could potentially be reduced by altering laws relating to trade unions or unemployment insurance, as well as by macroeconomic (demand-side) factors like interest rates. [edit] Discretionary policy vs policy rules

For much of the 20th century, governments adopted discretionary policies like demand management designed to correct the business cycle. These typically used fiscal and monetary policy to adjust inflation, output and unemployment. However, following the stagflation of the 1970s, policymakers began to be attracted to policy rules. A discretionary policy is supported because it allows policymakers to respond quickly to events. However, discretionary policy can be subject...
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