Government policy refers to the actions that governments take to resolving economic issues and regulating the economy. Polices can be made to affect everyone in the economy or a specified group of individuals. Government policy is demonstrated by macroeconomic stabilization policies such as trade policy, monetary policies, taxation policies, and interest rate policies. These types of policies are put in place by the government to achieve economic goals. An example of how governments use policies to achieve their objectives is by implementing interest rates to reduce inflation.
Governments implement different types of policies to target the different functions and areas within an economy. Policies are designed to deal with the distribution of income and property, promote economic growth, the value of currency, and other aspects within an economy.
The two main types of government policy are fiscal policy and monetary policy. Fiscal policy is the change of level of taxation or government spending in order to impact the demand for goods and services. Monetary policy refers to the various actions the central bank can do to affect the interest rates and money supply in order to affect aggregate demand.
Government policies can have negative consequences as well, for different aspects of the economy. For example, raising interest rates or taxes to control inflation can result in reduced employment rates and hinder economic growth in incomes and output.