Economic policy is a policy implemented by the government to sustain economic growth and monitor economic systems. It is implemented in order to control interest rates, national ownership, and labor markets. There are different types of economic policies that serve varying purposes. Macroeconomic policies effect economic activity overall while microeconomic policies aim to improve the activity of certain firms, markets, and industries. Some policies are created to aid in economic growth, which therefore relates to development economics.
In order to keep a stable money supply and avoid inflation, macroeconomic stabilization policies are implemented. Monetary policy is when policies are put into effect to control the cost of availability of money and credit. The objectives of this type of economic policy are to reduce the level of unemployment and stabilize the national currency. Other types of policies include trade policies and regulatory policies.
The objectives leading to the enactment of economic policies are the policy goals, which are the outcomes the policy makers want to achieve. Examples of economic policy objectives are price stability, effective income and wealth distribution, environmental damage control, and increase in employment rate. Governments use policy tools such as tariffs and labour market regulations to obtain these objectives.
Policy makers have to be cautious of the negative consequences that can occur when their objectives are obtained. An economic policy that is successful in achieving its objectives, such as economic growth, can have negative effects on the environment. Conflicts can also occur between trying to increase employment rate and achieving a reduction in inflation.
Economic policies change economic activity in three ways: expansionary, when revenue is reduced and/or expenditure is increased; contractionary, when revenue is increased and/or expenditure is decreased; and neutral stance, when the budget is balanced.