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    Demand-Side Policies

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    André Qian
    Monetary policy conducted by central banks aims to influence aggregate demand and achieve economic goals like price stability and employment. It works through tools that impact money supply and interest rates, such as reserve requirements, discount rates, and bond purchases. Fiscal policy uses government spending and taxes to stabilize the economy. Both have advantages like flexibility but also disadvantages such as potential ineffectiveness or unsustainable debt.

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    Demand-Side Policies

    Uploaded by

    André Qian
    17 views6 pages
    Monetary policy conducted by central banks aims to influence aggregate demand and achieve economic goals like price stability and employment. It works through tools that impact money supply and interest rates, such as reserve requirements, discount rates, and bond purchases. Fiscal policy uses government spending and taxes to stabilize the economy. Both have advantages like flexibility but also disadvantages such as potential ineffectiveness or unsustainable debt.

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    Demand-Side policies

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    Monetary policy conducted by central banks aims to influence aggregate demand and achieve economic goals like price stability and employment. It works through tools that impact money supply and interest rates, such as reserve requirements, discount rates, and bond purchases. Fiscal policy uses government spending and taxes to stabilize the economy. Both have advantages like flexibility but also disadvantages such as potential ineffectiveness or unsustainable debt.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    17 views6 pages

    Demand-Side Policies

    Uploaded by

    André Qian
    Monetary policy conducted by central banks aims to influence aggregate demand and achieve economic goals like price stability and employment. It works through tools that impact money supply and interest rates, such as reserve requirements, discount rates, and bond purchases. Fiscal policy uses government spending and taxes to stabilize the economy. Both have advantages like flexibility but also disadvantages such as potential ineffectiveness or unsustainable debt.

    Copyright:

    © All Rights Reserved
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    Download as pdf or txt
    of 6

    Demand-Side

    policies
    Monetary policies

    Monetary policy is a demand-side policy that is conducted by the central bank of a country. Monetary policy
    refers to changes in the money supply, and so interest rates, in order to affect aggregate demand.

    The goals of monetary policy are to:

    • achieve and maintain price stability

    • achieve high levels of employment

    • stabilize economic activity

    • promote a stable economic environment favourable


    to investment

    • influence the exchange rate and achieve external


    balance.
    Tools of monetary policy

    Tools of monetary policy include:

    • changes in the required reserve ratio (the


    proportion of deposits that cannot be lent out)

    • changes in the discount rate (the interest rate


    central banks charge commercial banks in need
    of reserves)

    • open market operations (purchases or sales of


    short-term government bonds that alter the
    reserves banks have)

    • quantitative easing: purchases of long-term


    bonds and other assets by the central bank.

    These actions are taken by the central banks


    Advantages and disadvantages of monetary policy

    Advantages
    Disadvantages
    • Monetary policy is flexible.
    • If confidence levels are low, monetary
    • It is incremental. policy may prove ineffective.

    • It is reversible. • When nominal interest rates are close to


    zero there is not much room to lower them
    • It is independent (typically) of the government. more (the ZLB problem).

    • It has shorter time lags than fiscal policy.


    Fiscal policies

    Fiscal policy refers to changes in the level of government expenditures (G) and/or in (direct)
    taxes (T) in order to affect aggregate demand and so real output (growth), the level of employment and inflation.
    This is done by the use of taxes, government spending, and government transfers to stabilize an economy; the
    word “fiscal” refers to tax revenue and government spending.

    • lift an economy from recession

    • lower (cyclical) unemployment

    • decrease inflation

    • promote a stable macroeconomic environment that accelerates growth

    • reduce business cycle fluctuations

    • decrease income inequality

    • decrease trade imbalances.


    Advantages and disadvantages of Fiscal policy

    Disadvantages
    Advantages • Politicians are responsible for fiscal
    • Fiscal policy affects aggregate demand directly. policy.
    • Fiscal policy can be targeted. • Fiscal policy is characterized by long time
    • Certain expenditures may also increase potential output. lags.
    • Under certain conditions fiscal policy can be scaled up • It may lead to unsustainable debt.
    significantly. • It may lead to inflation.
    • (HL) The multiplier renders fiscal policy powerful to • It may widen a trade deficit.
    fight a recession.
    • Tax cuts may not induce more spending.
    • (HL) Automatic stabilizers can be quick and sizable.
    • (HL) Fiscal policy may crowd out private
    investment.

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