Economic Policies
To ensure strong economic growth, there are two main economic policies through which the government may respond to economic activity.
- Fiscal Policy
- Monetary policy
Fiscal policy
Governments can also issue policies to adjust spending, change tax rates, or introduce tax incentives. When it comes to government budgets, governments decide whether to spend more than they plan to raise. This process of assessing public spending aims to promote economic prosperity or cool an overheated economy. Instead of focusing on how the government spends money, general fiscal policy is about how the government raises money. Offering tax incentives, additional tax credits, or tax relief relieves the financial burden on citizens and promotes economic growth. Repeal of favourable tax laws and tax increases slow down economic activity.
Monetary Policy
One of the most common ways governments influence a country’s economic activity is by adjusting borrowing costs. Most often, this is done by lowering or raising the Federal Funds Rate, the target interest rate that affects short-term interest rates on debt such as consumer loans and credit cards. The Federal Reserve raises the federal funds rate to curb economic growth and lowers the federal funds rate to boost economic growth. Another form of monetary policy is the buying and selling of government securities by the Federal Reserve. When the Federal Reserve buys securities from a bank, it injects money into that bank to increase the money supply. Alternatively, you can sell your stocks to eliminate cash and reduce the money supply.
Impact of Government Policies on Business
The government sets many policies that guide businesses. The impact of government policies on business is highlighted below:
- Governments can make tax policy changes that lead to changes in taxes, trade, subsidies, regulations, interest rates etc. Organizations must be flexible enough to accommodate changing rules and policies.
- Government policies can affect the taxes communities pay, pensions, immigration status and laws, penalties for breaking the rules, the education system, trade and commerce in the economy.
- Governments implement policies that change social behaviour in the business environment. Governments can make agreements to develop new technologies that bring about the necessary changes.
- Declining private investment reduces the production of goods and services. This, in turn, could lead to job cuts. Government policies can affect interest rates, and higher interest rates increase borrowing costs.
Impact of Government Policies on People
The government policy can influence how much tax the community pays, pensions, immigration status and laws, penalties for violation of rules, education system, commerce and trade in an economy. The government implements a policy that changes social behaviour in the People