The national budget generally reflects the economic policy of a government, and controversy among economists over the substance and meaning of Keynes's. The economic policy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, national ownership, and many other areas of government interventions into the economy.‎Types of economic policy · ‎Macroeconomic · ‎Economic policy through. 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.


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In recent years, governments, discouraged by past failures economic policy definition fiscal economic policy definition, have turned to monetarist policies to attempt control of the economy.

At its simplest, monetarist theory postulates that in the economy there is a fixed amount of money, which circulates at a given velocity. This money is then available to finance the various transactions carried out in the economy at the prevailing prices.

Under these circumstances, according to the theory, control of the price level can be maintained by controlling the amount of available money.

What is Economic Policy? definition and meaning

Although a desire to control inflation has been at the heart of the recent rise to prominence of monetary economic policy definition in many countries, monetary policy can be used to affect a number of different facets of economic behaviour.

In time of unemployment the economic policy definition bank may stimulate private investment expenditure, and possibly also household spending on consumer economic policy definition, by reducing interest rates and taking measures to increase the supply of credit, liquid assets, and money.

The customary tools for doing this are open market operations, the discount rate of the central bank, and cash reserve requirements for commercial banks. In open market operations the central bank buys government securities —bonds and treasury bills—from the private sector.

The effect is to reduce interest rates by bidding up bond prices.


The sellers of the government securities obtain cash that they deposit in the banks, thus increasing the cash reserves of the banks and enabling them to expand credit to private borrowers; this in turn causes interest rates economic policy definition the private sector to fall and the terms of credit to become easier.

In response, firms are likely to increase their investment expenditures, and households are likely to spend more on consumer economic policy definition.

The second tool of monetary policy, the discount rate of the central banks, economic policy definition often used together with open market operations.

This is the interest rate at which commercial banks can borrow funds from the central bank.

Economic policy financial definition of economic policy

If the discount rate is reduced, banks become more willing to extend credit to private borrowers because they can obtain funds themselves on easier terms. In many countries, changes in the discount rate tend to be followed by similar changes economic policy definition the interest rates charged by banks economic policy definition their borrowers.

The third tool of monetary policy, that of the cash reserve requirements and, in some countries, certain types of government securities for commercial banks, provides that banks must maintain money balances in the form of deposits in the central bank at a certain proportion of their liabilities.

This means that the banks cannot expand their earning assets such as government securities and private loans, beyond that point.

Government economic policy | finance |

If the government reduces the reserve requirements, the banks can expand their loans economic policy definition, thus increasing the total volume of credit outstanding.

Monetary policy, like fiscal policy, may also be used to combat inflationary tendencies by reversing the above measures; the central bank will then economic policy definition government securities thereby increasing interest rates and reducing the supply of private credit and moneyraise the discount rate, or increase reserve requirements.


Stabilization policy problems A broad distinction may be made between two types of stabilization policies: Discretionary policies involve deliberate actions taken by the authorities, such as open market operations, changes in discount rates and reserve requirements, and changes in tax rates or government economic policy definition.

Automatic policies put reliance on built-in stabilizers that function without any deliberate intervention by the authorities. In the monetary field, for example, an increase in commodity prices tends to reduce the real value of economic policy definition assets, and if the government does nothing to offset this by increasing the volume of financial assets in the system, private spending will tend to decline.


On economic policy definition fiscal side, the main automatic stabilizer is the relation between tax revenues and cyclical changes in the economy. During booms, economic policy definition revenues rise and the need for expenditures on unemployment compensation decreases, channeling a larger proportion of the national income into government coffers; these effects are accentuated if the tax system is progressive because tax revenues rise more rapidly than money incomes.

Provided that the government does not raise its expenditures economic policy definition with the increased revenues, the budget tends to have a braking effect on private expenditure in boom times and an expansionary effect in times of recession. The problem of time lags There has been much discussion over the merits of discretionary policies as against automatic stabilizers.

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One advantage of automatic stabilizers is that the effects occur without the necessity of government action, which means that there is no delay, or lag, because of political controversies, administrative problems, or difficulties in determining whether the time has come to act.

There are three types of lag in economic policy: The recognition lag is the time it takes for the authorities to discover the need to make a change in economic policy. The reasons for this type of lag are that statistical information is often somewhat behind the event and that it is sometimes difficult to economic policy definition between random economic policy definition and fundamental shifts in economic trends.