plan for how to use demand side policies to sustain the recovery of an…
plan for how to use demand side policies to sustain the recovery of an economy
define sustained recovery
"this essay will argue that..."
define fiscal and monetary policy
fiscal policy is a policy which uses the tax revenue collected by the government and the level of government spending to control consumption as well as other things in the economy
we're mainly concerned with budget deficits (T<G) and budget surpluses (T>G)
monetary policy is how the central bank (e.g. the Bank of England) uses the overall money supply within the economy and control over interest rates to influence consumption and output as well as employment and prices
fiscal policy (demand side and supply side) along with monetary policy
show ways in which fiscal and monetary policies can be used to sustain recovery
both aim to maintain positive economic growth (close to the long run trend of 2.5%), they aim for full employment and they both aim to keep inflation low (inflation target of 2%)
in a recession monetary policy aims that by cutting interest rates, you will stimulate spending and investment which will increase aggregate : demand which will then get you out. it will also lead to a weakening in your currency's exchange rate which makes exports cheaper.
increase the money supply, reduce bond yields and avoid deflation. does lead to your currency being devalued.
liquidity will play a factor.
the multiplier effect can increase the size of injections which can then further increase AD
show ways in which fiscal and monetary policies have been used but didn't sustain recovery
can never garuntee what effects a change in interest rates or policies will have
changes in bank rates usually take between 12-24 months to have an effect through the transmission mechanism
governments need to make sure they have the correct information before making any fiscal policy changes. for example, if a government believed that they were heading into a recession they'd use fiscal policy to increase AD, but if the economy is not approaching a recession, the economy may grow too fast and the government action would cause heavy inflation.
cutting taxes and increasing government spending will lead to a budget deficit or an increased deficit which could have adverse side effects. higher taxes will be required in future and it may cause crowding out.
Sometimes, government adopts an expansionary fiscal policy stance and increases its spending to boost the economic activity. This leads to an increase in interest rates. Increased interest rates affect private investment decisions. A high magnitude of the crowding out effect may even lead to lesser income in the economy.
if consumer confidence is low, fiscal policy measures to increase AD may not work.
any injections may be affected by the multiplier effect
monetary and fiscal policy can be used sustain recovery however this will not always be the case
a government needs to be sure they have the right information before implementing either types of policy
INCLUDE A DIAGRAM
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