DEMAND-SIDE POLICIES

MONETARY POLICY

FISCAL POLICY

EVALUATION (MONETARY)

EVALUATION (FISCAL)

Expansionary

Contractionary

changes in money supply and interest rates to influence AD

MACRO GOALS:
✅ higher economic growth
✅ lower unemployment
❌ inflation

MACRO GOALS:
✅ lower inflation
❌ lower economic growth
❌ higher unemployment

EXAMPLES
1970 stagflation in America


IR increased from 5% to 13% to combat the high inflation


eval: caused the pre-existing issues of unemployment and low economic growth to worsen


eval: changing interest rates might not be effective because confidence was already low- no one would want to borrow anyway

EXAMPLES
increasing IR during pandemic (USA)


The federal reserve decreased IR from 1.25% to 0.25%


eval: can lead to inflation in the long run if firms become overconfident

"Controlled expansionary measures"


higher output > high GDP > increasing economic growth > low level of unemployment (IN LR)

"Controlled contractionary measures"


lower inflation > high risk of creating unemployment and lowering econ.g > used in more desperate times

Use of government spending and taxation to influanece economic activity/AD

Expansionary
(lowering taxes or increasing govt spending)

MACRO GOALS:
✅ Increased economic growth
✅ lower unemployment
❌ Less govt revenue
❌inflation


EXAMPLES
Great recession in USA


transfer payments and capital expenditure helped protect low-income consumers


provided the nation with well needed infrastructure


Contractionary

MACRO GOALS:
✅ low inflation
✅ more business confidence

POLITICAL AGENDAS AND FISCAL POLICY


Example George Bush's promise for "no new taxes"


he was eventually pressured into accepting increased taxes to pay off national debt


destroyed his political power as he did not keep his promise



TIME LAGS AND FISCAL POLICY


Example; due to the relationship between fiscal policy and politics, it faces obstacles of legislation


it takes time for fiscal policies to be implemented as many political parties share different perspectives and may not agree


*compromises have to be made, which might affect the effectiveness of implementing such a policy

HAS A LONG-TERM EFFECT

NOT APPROPRIATE FOR RAPIDLY CHANGING ECONOMIES


the time lag does not allow it to fine-tune

NO TIME LAG, NO GOVT NEEDED


Not affected by political agendas as IR is managed by central banks

Better suited towards rapidly changing economies because it can 'fine-tune' the economy

LONG RUN NATIONAL DEBT


persistent fiscal stimulus will quickly drive up national debt