Introducing Economic Policies

Economic policies are intended to influence the behaviour of an economy through some action taken by the government. The government is responsible for manipulating economic tools, such as taxation and government expenditures, in an attempt to achieve certain economic objectives. Some of the objectives that economic policies are deployed to achieve are; sustained economic growth; stable prices (low inflation); and low unemployment. An economy that satisfies these macroeconomic objectives is generally perceived as healthy.

Demand-side Economic Policies

There are many different types of economic policies, but most of the focus is on ‘demand-side policies’, which involve monetary and fiscal policy. With a monetary approach, the Central Bank controls the money supply by altering interest rates with the goal of stimulating aggregate demand. In many cases, the monetary policy comes in handy to combat inflationary pressures or a deep recession. On the other hand, a fiscal policy approach incorporates tax policies and government spending to be handled, in order to influence aggregate demand. This style of economic policy has direct implications on consumer confidence and spending, due to the involvement of public sector wages and income tax levels. Ultimately, both monetary and fiscal policies are macroeconomic demand-side structures, which are utilised to regulate economic activity.

Supply-side Economic Policies

A ‘supply-side policy’ attempts to tackle the productivity and efficiency of an economy in pursuit of boosting aggregate supply, thus yielding amplified economic growth. Such policies include education, legislation, privatisation, unemployment benefits and much more. In comparison to demand-side policies, a supply-side policy focuses more on the output that leads to economic growth. Moreover, the goal is to shift the aggregate supply curve outwards, thus causing an expansion in output and the normalisation of prices.

Other Policies

There are several other policies, besides the ones that have already been discussed, such as labour market, trade and population policies. Labour market policies aim to induce legislation for labourers, for instance, the legal minimum wage or total working hours/weeks. Lastly, population policies zone in on the geographical distribution of people and how to allocate land to certain populations, given the investment and service provisions in the location. All economic policies are incentive-driven by the state, so that the health and well-being of taxpayers are cared for, in addition to the way in which income is redistributed. The existence of a progressive tax reform enables the government to levy more tax on those who earn higher bands of income. Therefore, this achieves the protection of the low-income earners, which entitles them to save more and prevents financial restrictions.