Economic policy

Economic policy is a nation’s use of its RESOURCES and power to achieve economic goals and objectives. Generally the central government has three types of economic policies— fiscal, monetary, and INCOME—that it can utilize. FISCAL POLICY is the use of government taxation and/or spending to achieve economic objectives. For example, in early 2002 Congress and the White House could not reach an agreement on “economic stimuli” to help get the U.S. economy out of the RECESSION. The two groups differed on the composition of fiscal policies each considered best for economic recovery. One group proposed greater tax cuts for businesses, the other lower tax rates for households. MONETARY POLICY is controlling the MONEY SUPPLY to achieve economic growth with stable prices. In the United States, the primary goal of monetary policy is to attain and maintain price stability. Monetary policy is based on monetarism, a school of macroeconomic thought emphasizing the impact of changes in the supply of MONEY on the aggregate economy. Economic policies regarding the control of the money supply are often referred to as “tight money” or “easy money” plans. Generally the goal of monetary policy makers is to increase the money supply, but the question is at what rate to increase the supply. In the United States, the FEDERAL RESERVE SYSTEM determines monetary policy. Income policies, also called WAGE AND PRICE CONTROLS, are government-imposed limits on increases in wages and prices. Income policies are typically imposed during wartime to limit INFLATION. During wars, government spending usually expands rapidly to provide the materials and weapons needed for defense. This increases DEMAND for labor and products and, in absence of wage and price controls, would likely result in inflation. Economic policies can be directed to achieve a variety of objectives. As already stated, common economic objectives include price stability and ECONOMIC GROWTH. Other objectives include full EMPLOYMENT, economic choice and freedom, economic security for the elderly and ill, improvement in economic well-being, and equitable distribution of income among members of society. Some of these objectives are complimentary. Economic growth leads to increased employment and income, but some objectives present potential for conflict. Many economists, using Philips curve analysis, suggest there is a tradeoff between price stability and economic growth in the short run. A more significant conflict exists between ECONOMIC FREEDOM and social objectives. Economic freedom implies individual control and allocation of resources and receiving the rewards and returns from those resources. Economic security for the elderly and ill and equitable distribution of income in a society require economic policies that take resources or income from one group and provide resources and income to another group. Economic policies significantly affect what is produced, how it is produced, and who gets the output of an economic system.