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Monetary Policy, A demand-side policy using changes in the money supply or…

- - - - Decrease interest rates
        
        Drawbacks
        
        When interest rates are already low, this policy is ineffective because there is a certain extent to which interest rates can be cut.
        
        Although the manipulation of interest rates is fairly simple to execute, there is still a time lag associated with its impacts. Despite a decrease in interest rates, it may still take time to change consumer spending habits and impact AD. It is also possible that in the time taken to influence spending (AD), the situation may already be improved, thus this policy would be ineffective, only causing inflationary pressures.
        
        A decrease in interest rates has negative implications for those who have savings in banks as now the return they get on interest is lesser than before.
        
        Benefits
        
        Decreasing interest rates can help improve consumer/business confidence and thus, consumption/investment, leading to an increase in AD. An increase in AD would help achieve economic growth and could help close a recessionary gap
        
        Expansionary Monetary policy does not have the problem of crowding out as instead of having the government borrowing money (as in fiscal) the central bank can just lower interest rates to increase borrowing
        
        Consumers who have borrowed money now get to pay lower costs because the price of borrowing money has decreased
    - - Structural
        
        Occurs as a result of changing structure of an economy (changes in technology, consumer tastes, etc.). Permanent fall in AD --> long term unemployment due to lack of occupational mobility
      - Frictional
        
        Short term unemployment that occurs when people are in between jobs or have left education and are waiting to get their first job
      - Cyclical
        
        Associated with downturns in the business cycle. As AD falls, firms cut down production --> fall in demand for factors of production (labor)
      - Seasonal
        
        Jobs that are related to seasons and thus causes unemployment during the off-seasons
  - - - Cost-push Inflation: occurs as a result of an increase in costs of production (prices of factors of production)
      - Demand-pull Inflation: occurs as a result of increasing aggregate demand (due to a change in the determinants of AD) in the economy
    - - increase interest rates
        
        Drawbacks
        
        An increase in interest rates reduces business and consumer confidence which could negatively affect economic growth and potentially even contribute to unemployment if firms need to cut down their costs
        
        Increasing interest rates has negative implications for individuals who have borrowed money because now the amount that they owe back increases because the price of borrowing money has increased.
        
        Although the manipulation of interest rates is fairly simple to execute, there is still a time lag associated with its impacts. With an increase in interest rates, it can take time to have an impact on consumer purchases. It is also possible that in the time taken to influence their spending (AD), the situation may have been rectified, thus this policy would be ineffective, only causing inflationary pressures.
        
        Benefits
        
        Increasing interest rates is relatively quick to put into place as it does not require any lengthy democratic process (handled by central bank - an independent body)
        
        There are rarely considerations of political pressures of making an unpopular decision as this is handled independently by the Central Bank (who are not elected)
        
        With the manipulation of interest rates, it is easier to set specific targets in attempts to control inflation (ex. 2%)
- - - - Once again, they both involve a trade off between lower unemployment and higher inflation or vice versa.