Economic Policies

Executive Summary

Analysis and comprehension of economic policies was the primary motive, for which this study was conducted. In order to comprehend the policies, it is imperative that we first understand as to why do the need for installation of economic policies arises. The answer to this would depend on a more fundamental question; what is economics? It has been analyzed that there are two branches of economics: microeconomics and macroeconomics. The designing of economic policies is the domain of macroeconomics as it deals with the economy on the aggregate level. Therefore, we have analyzed the functions of macroeconomics in detail, in order to understand the formulation and implementation of economic policies. In the study, we further established that a state has four primary macroeconomic objectives. It is the achievement of these objectives that give rise to the need for having economic policies in place. We further learn that the economic policies are made up of two tools, the fiscal and monetary policy. The fiscal policy is formulated by the state as it consists of balance between income and expenditure of a government. The monetary policy is designed by a country's central bank. This policy is concerned with the manipulation of interest rates to the advantage of country's macroeconomic requirements. Hence, it can be deduced that it is the coordination and collaboration of a country's government and chief financial institution, the central bank, which formulates and executes the economic policies. It is the joint efforts of these two pillars upon which depends the state development and people's welfare.

Economic Policies

Introduction

The Scottish economist, Adam Smith termed economics as “Wealth of Nations” in his 1776 publication, a term which has been modified and modernized to a great extent over the years since. Economics is now regarded as a study of human behavior by which scarce resources are allocated in a way which satisfies or more appropriately, seeks to satisfy the ever-expanding and limitless human wants.

Primarily, there are two branches of economics: Microeconomics and Macroeconomics. Microeconomics is the branch which is concerned with the behavior of economic agents. These are private individuals, firms and market demand and supply, which are termed as the “invisible hand” by Adam Smith, which affects the prices in the economy. Macroeconomics is concerned with the economy on national level.

Government macroeconomic objectives

The task of any government in the world is two-pronged: development of the state and welfare of the people. In order to accomplish this task, the government needs to achieve four macroeconomic objectives: low-rate inflation, low levels of unemployment, rapid and sustainable economic growth (GDP) and favorable balance of payment account.

Inflation is the persistent and general rise in the prices of goods and services in an economy over a period of time, usually one year. The government aims to keep the rate of inflation low, so to avoid hyperinflation which can prove to be disastrous for the economy. Poverty alleviation is one of the major challenges to the governments of developing countries. In order to achieve this target, ...