Understanding Economic Policies: Types, Impacts, and Key Concepts

Economic Policies Overview

Economic policies are the ways in which the state intervenes in the economy to achieve specific economic objectives.

Types of Economic Policies

Fiscal Policy

Fiscal policy involves the government's actions regarding public sector revenue (fundraising) and expenditure to influence the economy.

• Discretionary Fiscal Policies: Intentional government actions to influence income or expenditure.
  • Public Works Programs: Aim to increase production, employment, and infrastructure.
  • Employment Plans and Training: Short-term hiring and worker training initiatives.
  • Transfer Programs: Regular or temporary payments to protect disadvantaged groups.
  • Tax Rate Modifications: Adjusting tax rates to influence disposable income and consumption.
• Automatic Stabilizers: Revenue or public spending changes that automatically adjust with the level of economic production.
  • Proportional Taxes: Tax rates remain constant regardless of income level.
  • Progressive Taxes: Tax rates increase gradually with income level.
  • Social Contributions: Payments made by workers and companies to social security.
  • Subsidies: Financial aid to cover social needs.
• Budget Balance

Monetary Policy

Monetary policy is set by the central bank to maintain economic stability.

Foreign Policy

Foreign policy involves interventions to regulate transactions with other countries.

Incomes Policy

Incomes policy aims to control price inflation and maintain economic stability.

Tax Policy

Tax policy is the intentional action to increase or decrease economic activity.

Key Economic Concepts

Keynesian Economic Model

Advocates for using debt to achieve full employment and economic stability.

Structural Deficit

A constant deficit that persists even near full employment.

Deficit Financing

• Issuing Debt: Borrowing money from businesses and individuals.
• Raising Taxes: Increasing existing or establishing new taxes, which can slow demand.
• Increasing Money Circulation: A measure that can lead to increased prices (inflation).

Consumer Price Index (CPI)

A weighted measure of consumption goods representing a typical average family's consumption.

Inflation Rate

The percentage change in the CPI over a specific period.

Aggregate Demand

Total expenditure at a given average price level by families, businesses, the public sector, and the foreign economy.

Aggregate Supply

• Average Price Level: Low prices may lead businesses to reduce benefits or increase prices.
• Cost of Production: Business profit is the difference between revenue and expenditure.
• Business Expectations: The number of units companies offer can depend on market expectations.

Aggregate supply describes the total production companies are willing to sell at an average price and cost level.

Factors Affecting Consumption

• Demand: Employment affects production and the short-term economy.
• Productivity Capacity: Accumulation of capital goods promotes long-term economic growth.
• Investment in Plant and Equipment: Purchase of durable goods to develop business activities.
• Construction: Investment in property and construction equipment, mainly housing.