Economic Policy and Instruments

Saturday, February 18, 2017


Definition 
Economic Policy refers to the strategies and measures adopted by the government to manage the economy as a means of achieving its economic objectives. 

The Economic Objectives 
The following are the usual objectives of the government. 
  1. Lower Inflation (Price level should be lower) 
  2. Lower Unemployment (Less people who are jobless) 
  3. Lower Balance of Payments Deficit (X>M) 
  4. Higher Economic Growth (Higher RGDP per capita) 
  5. Equal Distribution of Income and Wealth (Lower gap between the poor and the rich) 
Instruments of Economic Policy 
It refers to the methods or techniques by which the government tries to achieve its economic objectives. The most common instruments of economic policy are; 
  • Monetary Policy 
  • Fiscal Policy 
  • Direct Control 
  • Supply-side Policies 
  • Income Policy 
Conflict between Objectives 
Managing an economy is highly complex. If there is a wide spread unemployment, the government could increase its spending without increasing taxation. This injection increases employment and national income. It also increases aggregate demand in the economy leading to higher inflation. It means that a policy used to achieve an economic objective often conflicts with other objectives.
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