Demand-side Policies
Demand-side policies refer to government actions aimed at influencing the level of aggregate demand in an economy. These policies typically involve measures to stimulate consumer spending and business investment, such as cutting taxes, increasing government spending, or lowering interest rates. The goal is to boost overall demand for goods and services, thereby stimulating economic growth and reducing unemployment.
5 Key excerpts on "Demand-side Policies"
eBook - ePub- James Gosling, Marc Allen Eisner(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
...Yet economic prosperity cannot be taken for granted. Workers, businesses, and elected public officials reap the benefits of growth and suffer the consequences of decline. In one sense, they are captive of the vagaries of economic cycles and fluctuations. In another sense, however, all share the conviction that government can and should act to stabilize the economy at desired levels of economic performance. Policymakers rely primarily on fiscal and monetary policy to manage the economy. This chapter addresses fiscal policy. Fiscal policy deals with the tax and spending decisions of national governments. In the United States, that means the tax and spending decisions of Congress, as affected by actions of the president. Tax and spending choices influence the national economy by affecting aggregate demand. Government taxes reduce aggregate demand because they take resources away from individuals and businesses that might otherwise be spent. Conversely, tax cuts transfer resources from the public to the private sector and increase after-tax disposable income that can be spent. Tax policy, depending on its structure, can also affect aggregate supply, to the extent that it provides strong incentives for individuals or firms to save and invest rather than spend. Government spending adds to aggregate demand through the purchases that government makes directly or through those made by the recipients of government financial assistance, whether they be individuals or other governmental units. In the latter case, states and local governments in the United States spend federal aid directly or distribute it to individuals who, in turn, spend it. In either case, this added spending increases aggregate demand. Government spending can also influence the level and potential growth of a nation’s economy, depending on the nature of that spending...
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...In the short run, fiscal policy affects the economy’s business cycle by combating a recession or inflation. Combating Recession Referring to Figure 13.1, suppose that the economy suffers from recession at equilibrium point A, where the aggregate demand curve intersects the aggregate supply curve. In equilibrium, the level of output is $700 billion, below the full-employment output of $900 billion. Here, the economy can be improved by following Keynesian economics and shifting the aggregate demand curve to the right—say, from AD 0 to AD 1. By doing so, the economy’s output increases from $700 billion to $800 billion. Notice that the price level remains constant given the abundance of idle resources in the economy. Figure 13.1 Expansionary Fiscal Policy If the government wants to expand the economy, it can increase government spending or lower taxes. Either policy shifts the aggregate demand curve rightward, which results in an increase in real output and also an increase in prices as the economy approaches full employment. How can the government increase aggregate demand? It has three fiscal policy options: (1) increase government spending, (2) cut taxes, or (3) combine the two in some manner. If the federal budget is initially balanced, fiscal policy should move toward a budget deficit (government spending in excess of tax revenues) in order to combat a recession. Increased Government Spending The simplest method would be to increase government spending. If government were to step up its purchases of jet planes, highways, and other goods, the increased spending would add directly to aggregate demand. According to the multiplier effect discussed in Chapter 12, aggregate demand would rise by more than just the added government spending. If the government purchases, say, $25 billion of jet aircraft from Boeing, this sets the multiplier process in motion. The initial effect of the increased demand from the government is to stimulate employment and profits at Boeing...
eBook - ePub- W. Sean Cleary(Author)
- 2017(Publication Date)
- Wiley(Publisher)
...Chapter 5 ECONOMIC POLICY CSC EXAM SUGGESTED GUIDELINES: 14 questions combined for Chapters 4 and 5 ECONOMIC THEORIES Governments have historically tried to use monetary and fiscal policy (both discussed later) to influence the long- and short-run performance of economies. Usually, the purpose is to attempt to smooth out the business cycle by adopting countercyclical policies, which try to boost output during times of weak economic activity and to slow down the economy during growth periods. Monetarist Theory advocates a lack of intervention by the government based on the belief that the economy will gravitate toward stable economic growth, if left to its own devices. It also argues that increases in the money supply are the major causes of inflation and that the best monetary policy is to increase money supply at a stable amount that approximates the economy's long-run growth rate (i.e., 2% to 3% per year). Keynesian Theory advocates government intervention (in the form of increased spending or reduced taxes) to stimulate the economy whenever it is operating below full capacity. Alternatively, when the economy is growing too fast, the government should increase taxes and/or decrease spending. Supply-Side Economics advocates minimum government intervention and the maintenance of low taxes and low government spending. It was the basis for many tax reductions initiated in the United States and other economies during the 1980s. Rational Expectations Theory suggests that government policy will have little effect on the economy since the economic agents will anticipate the future outcomes that will result from today's actions. For example, if the government cuts taxes today, agents will not spend the extra disposable income, but will save it since they realize the government will have to raise taxes in the future to offset today's losses...
eBook - ePub- Rob Dransfield(Author)
- 2013(Publication Date)
- Routledge(Publisher)
...At one level this involves the relationship between total public spending and total public revenues. For example, a deficit budget can pump extra spending into the economy whereas a budget surplus would withdraw spending from the economy. Fiscal policy also involves adjusting different types of tax and spending in order to target specific objectives. For example, the government may shift the emphasis from direct to indirect taxes or from regressive to progressive taxes. Keynesian economists believe that fiscal policies can be used by the government to stimulate the economy. In contrast neoclassical and monetarist economists believe that there should be a balanced budget. Key Ideas Fiscal policy Fiscal policy is government policy designed to use its own spending and the taxes that it raises in order to achieve desired policy objectives such as full employment or economic growth. Whereas monetarists seek to balance government revenues and taxes, Keynesian economists believe that fiscal stimulus can be used to support economic growth and to counteract unemployment. The balance between government spending and taxes is made up by government borrowing (or paying back debt). Government expenditure The main area of government expenditure is on welfare, including health, education and social benefits. Government expenditure is one of the main ingredients of GDP. Free market supporters believe in rolling back the size of the government in the economy. Government spending includes central and local government spending. Government taxes Progressive taxes take a greater percentage of income from the rich than the poor. Regressive taxes take the greatest proportion from the poor. Direct taxes are deducted directly from a taxpayer’s income at source...
eBook - ePub- Andrew Barkley, Paul W. Barkley(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...However, monetary policy is an inexact policy instrument: changes in the money supply cause predictable changes in unemployment levels, economic growth, and inflation, ceteris paribus. Given the huge range of other economic activities occurring in an economy, including international trade, technological change, and income growth, monetary policy is a crude instrument. Particularly vexing to the monetary authority is the time lag between when monetary policies are conducted and the corresponding changes in economy-wide activities. Given the huge size of the economy, it takes time for monetary policy to work. 11.4.5 Fiscal policy Fiscal policy is the second type of macroeconomic policy. • Fiscal Policy = attempts by a government to influence macroeconomic variables through taxes and government spending. There is a great deal of disagreement and debate among economists about the most appropriate form of fiscal policy. Expansionary fiscal policy is employed during times of recession: the government will increase government spending and/or lower tax rates with the goal of spurring economic growth. Restrictive fiscal policy involves reducing government spending and/or increasing taxes to reduce economic activity. The legislative branch of government typically appropriates money for government expenditures and sets tax rates. In the US, Congress has authority to enact fiscal policies. The goals of fiscal policy are identical to those of monetary policy: to reduce or eliminate fluctuations in business cycles, keep inflation low and steady, and promote economic growth. However, the policy instruments differ substantially: fiscal policy uses tax rates on individuals and corporations to expand or contract economic activity. The main idea is that if household and firms are able to keep more of their earnings, they will spend the retained earnings and have an incentive to earn more. Thus, the economy can be stimulated through lower tax rates...
