Demand Side Policies VS Supply Side Policies

Kati Christova
Mind Map by , created over 5 years ago

A Levels Economics (Macroeconomics) Mind Map on Demand Side Policies VS Supply Side Policies, created by Kati Christova on 03/15/2014.

Kati Christova
Created by Kati Christova over 5 years ago
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Demand Side Policies VS Supply Side Policies
1 Evaluation
1.1 It is hard to estimate how much and when exactly we need the policies
1.2 Time lags in the policy process: measurement, decision, execution and then effectiveness of policy changes
1.3 Changes in fiscal or monetary policy affect other economic objectives - such as the exchange rate, the trade balance and the provision of public services
2 Impacts
2.1 Monetary policy affects all sectors of the economy although in different ways and with a variable impact.
2.2 Fiscal policy changes can be targeted to affect certain groups (e.g. increases in benefits for low income households, reductions in corporation tax for small enterprises, investment allowances for businesses in certain regions)
3 Time Lags
3.1 Monetary and fiscal policies have different time lags. Monetary policy is extremely flexible (rates can be changed each month) and emergency rate changes can be made in between meetings of the MPC, whereas changes in taxation take longer to organize and implement. Because capital investment requires planning for the future, it may take some time before decreases in interest rates are translated into increased investment spending. Typically it takes 6 -12 months or more before the effects of changes in UK monetary policy are felt.
3.2 The impact of increased government spending is felt as soon as the spending takes place and cuts in direct and indirect taxation feed through into the economy pretty quickly. However, considerable time may pass between the decision to adopt a government spending programme and its implementation. In recent years, the government has undershot on its planned spending e.g. HS2.
4 Effectiveness
4.1 When the economy is in a recession (confidence is low and deflationary pressures are taking hold) monetary policy may be ineffective in increasing current national spending and income. E.g. the problems experienced by the Japanese in trying to stimulate their economy through a zero-interest rate policy. In this case, fiscal policy might be more effective in stimulating demand. Other economists argue that short term changes in monetary policy do impact quite quickly and strongly on consumer and business behaviour. However, there may be factors which make fiscal policy ineffective aside from crowding out. Future-oriented consumption theories hold that individuals undo government fiscal policy through changes in their own behaviour – for example, if government spending and borrowing rises, people may expect an increase in the tax burden in future years, and therefore increase their current savings in anticipation of this.
5 Expansionary policies
5.1 Monetary expansion - Lower interest rates will lead to an increase in both consumer and fixed capital spending both of which increases current equilibrium national income. Since investment spending results in a larger capital stock, then incomes in the future will also be higher through the impact on LRAS.
5.2 An expansion in fiscal policy (i.e. an increase in government spending) adds directly to AD but if financed by higher government borrowing, this may result in higher interest rates and lower investment. The net result (by adjusting the increase in G) is the same increase in current income. However, since investment spending is lower, the capital stock is lower than it would have been, so that future incomes are lower.
6 Fiscal policy should not be seen is isolation from monetary policy.
7 Demand Side Policies VS Supply Side Policies

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