The Econo policy is an economic policy that aims to support economic activity. This policy was created during the First World War to control inflation. Today, many countries are still using this type of policy in order to control the cost of economic activity. The economic policy of many governments covers all the major aspects of the economy, from national budgets, tax schemes, the exchange rate, central bank interventions, public ownership, and several other aspects of public economic intervention in the economy. If a country wishes to have more economic growth and is facing a significant problem on how to make up for a particular deficit, it may resort to this type of policy to curb the cost of economic activity.
There are four different types of economic policy, each applicable in certain economic problems. The first one is called a central economic policy. In this case, the central bank controls the overall price level through various methods like interest rate decisions, currency exchange rates, or the balance of trade. The central bank is also allowed to intervene in the market to change the interest rate if necessary to stabilize inflation. Changes in the foreign exchange rate may affect production, employment, infrastructure, and capital investment. It also affects trade flows and reallocation of resources.
The second type of policy is called price controls. In this case, the central bank limits the cost of economic activities through various means, such as fixing prices or increasing the monetary base. Price ceilings protect the weakest members of the industry from predatory competition. Control over costs can also be used to avoid inflationary shocks to the economy and maintain competitiveness.
The third type of economic policy is called price stability. In this case, the central bank does not interfere with market costs. However, it is allowed to intervene in the market to change the cost of economic activities to stabilize inflation. This policy is called a form of deflation. Inflation usually leads to costlier goods and services, which lead to a decrease in demand for goods and services, which lead to less employment and a decrease in investment.
Inflation and cost constraints can be combined to form a form of price stability. Price changes are allowed only to bring about an increase in long-run efficiency. Thus, policy makers use various instruments like taxes, price ceilings, and interest rate modifications to bring about this cost-eliminating policy. These policies do not, however, eliminate inflation.
The fourth type of economic intervention is called stabilization. In order to stabilize an economy, the central bank should adjust interest rates, target short-term rates, or both in order to make market adjustments. Stabilizing monetary policy, for example, is a form of economic stimulus. Economic policies that aim at stabilizing inflation also constitute this policy. A number of countries employ this form of intervention today.
Market-based interventions are the last category of economic policies. They are designed to correct the negative effects of any form of price increase, including cost-push inflation, on the size of the economy. Examples of market-based interventions are import price controls, export restrictions, and trade protection. The main purpose of this type of intervention is to make the domestic economy more efficient by correcting the external imbalances that tend to cause price increases.
All these types of interventions aim at bringing about a change in the structure of the economy, with the aim of reducing aggregate demand in response to increased aggregate supply. Aggregate demand refers to the tendency for prices to rise when supply is reduced. The term ‘monetary policy’ refers to any measure or combination of policies that are implemented in response to the changes in aggregate demand. Policy makers use different policies to bring about changes in the structure of the economy, depending on their view of the equilibrium of the economy. Monetary policy is therefore a key component of an economic policy.