ECONOMIC POLICY

-It is the policy by the government that covers the systems for setting levels of
taxation,government budget,money supply,interest rates,labour,markets and many other
ares of government interventions in to the economy.
-It is a course of action that is intended to influence or control behaviour of the economy.
Objectives of Economic policy
1.Stabilizing markets both internally and externally
2.Promoting economic prosperity(economic growth)
3.Promoting employment
4.Control of inflation and stabilizing prices
5.Achieving government policy tools ie interest rates,money supply,taxation,government
budget.

Factors of economic policy

i. Fiscal economic policy
ii. Monetary economic policy

i. Fiscal economic policy

-Refers to measures taken by government to influence aggregate demand for goods and
services especially through taxation and government expenditure.
-Measures employed by government to stabilize the economy specifically by
manipulating levels and allocations of taxes and government expenditure.
Objectives of a fiscal policy in an economy
1.Full employment-To reduce unemployment and underemployment
2. Price stability-Removes the bottlenecks and structural rigidities which cause imbalance
in various sectors of the economy.
3.To accelerate(achieves and maintains) the rate of economic growth-should promote the
economy as a whole which helps to raise national income and per capita
income(measures amount of money earned per person in a nation).
4. Optimum allocation of resources-it aims to push the growth of social infrastructures)
5.Equitable distribution of income and wealth- re-distributive expenditure should help
economic development.
6. To promote economic stability in the face of short-run international cyclical
fluctuations ie managed inflation,stable prices and exchange rates etc.
7.To encourage investment-aims at acceleration of the rate of investment in the public as
well as in the private sectors of the economy.

Positive effects the economy may achieve from the use of fiscal policies
1.Unemployment reduction-when unemployment is high,the government can employ
expansionary fiscal policy.
2. Budget deficit reduction-lowers its expenditures to be equal to its revenue
3.Economic growth increase-enhances expansion of the economy by use of expansionary
fiscal policy
4. Tax policy adopted will enhance more savings in the economy hence more investment
5.Tax policies may discourage polluting activities
6. Fiscal policies may bring down the debt in the economy
7.The fiscal policies may encourage investment in the country
8.These policies are useful in curbing inflation

Limitations associated with adopting fiscal policy as an instrument of economic

stability
1.The corrective action taken by the government does not produce immediate results
because of prolonged time interval between enforcement of fiscal measures and their
final impact on functioning of the economy.
2.Fiscal steps taken by the government to unemployment may fail to yield results if the
unemployment is due to causes other than deficiency aggregate demand
3.Increase in public expenditure may bring about a huge public debt and reduce volume
of investment thus affecting economic development.
4.A strong fiscal policy to curb unemployment may result to huge public debt
5.In dealing with hyperinflation and boom,the government may carry out fiscal policies
in extreme leading to depression
6.Difficult of accurately forecasting of what will happen may make government to be
overwhelmed when fiscal policies are required and government had not planned for any
problem
7.May lead to inflation where there is increased expenditure by the government
8.Increased taxation may increase cost of production thus making production to go low

MONETARY ECONOMIC POLICY

-Deliberate efforts by the government through central bank to control supply and cost of
money.
-It involves management of money supply and interest rate and the demand side
economic policy used by the government of a country to achieve macroeconomic
objectives like inflation,consumption,growth and liquidity.
Objectives of monetary policy
1. Controlling inflation-achieving price and financial stability
2. Managing employment levels
3. Maintaining long term interest rates
4. Maintaining currency exchange rates
Tools/Instruments of monetary policy
1.Reserve requirement
2.Open market operations
3.Rate of interest on lending/discount rates
4.Selective credit control
5.Directives to commercial banks from central bank
6.Moral suasion
7.Cash and liquidity ratios
Limitations of monetary economic policy
a.Liquidity trap-This occurs when a cut in interest rates fail to stimulate economic growth
eg banks don’t want to pass base rate cut to consumers.
b.Central bank may not have full knowledge of true structure of the economy
c.Central bank may be biased in selective credit control
d.Large non-monetized sector which hinders success of monetary policy ie in rural areas
e.Undeveloped money and capital markets
f.Large number of non bank financial intermediaries not under control of M.A
g.Money not deposited with banks