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DEMAND MANAGEMENT POLICIES (Fiscal policies (Discretionary fiscal policies…

- - - - ↓personal income tax rate
        ↑households’ disposable income ←
        ↑purchasing power ←
        Consumption of goods will ↑ assuming normal goods ←
        Cd ↑ ←
      - ↓corporate income tax rate
        ↑post-tax profits ←
        ↑expected returns from investment ←
        Volume of investment ↑at every given interest rates ←
        MEI shifts to the right ←
        I ↑ ←
    - - Direct impact on AD, intended consequence is met.
      - Unintended benefits of an increase in AS, even though the policy intent could be an increase in AD only.
    - - Crowding out effect
        G is financed by borrowing → Increase AD → ↑ dd for loans → Upward pressure on i/r → Higher cost of borrowing → ↓I and ↓Cd → Fall in AD
      - Negative effects of running a budget deficit
      - Conflict with other macroeconomic goals
        
        Inflation: if at or near full employment, excessive increases in AD cause demand-pull inflation
        
        BOP
      - Accuracy of prediction by government
        
        Depends on the accuracy of information gathered
        
        Dynamic changes not accounted for → likely intended consequences not achieved and require government to review the fiscal policy decision.