Demand-side Policies
- Demand-side policies aim to influence the total demand in an economy
- The two demand-side policies are fiscal policy & monetary policy
- Any policy that increases consumption, investment, government spending or net exports is likely to cause an increase in real GDP
Examples Of Specific Types of Fiscal Policy Used to Boost Growth
Example |
Explanation |
Many taxes on imports (import tariffs) are eliminated |
Costs of production for firms are reduced & they can produce more goods/services at lower prices - which will increase total demand |
Subsidies are provided to manufacturers of electric cars |
Car manufacturers are able to produce their cars more cheaply & sell them at lower prices - which will increase total demand |
A government increases the level of unemployment benefits |
Unemployed workers have more income available & increase their consumption - which will increase total demand |
A government creates a free port zone |
Both multi-national & domestic companies are incentivised by the low/no tax promise & seek to invest in free port zones - which will increase total demand |
A government announces that it will build 14 new schools in the next financial year |
Building companies have to be employed & building materials consumed which is all paid for by the government - & will increase total demand |
Examples of Specific Types of Monetary Policy used to Boost Growth
Example |
Explanation |
The housing market is subdued & so the Central Bank lowers interest rates by 1% |
With cheaper loans now available, house buyers demand more loans to purchase properties & to renovate/furnish the properties - consumption increases & total demand increases |
The Central Bank intervenes in the exchange rate to depreciate it |
|
The Central Bank commits to a new Quantitative Easing program of $75bn a month |
Commercial banks, firms & private investors receive this money as the government purchases their bonds - they use some of it to invest & consume resulting in greater total demand |
- An evaluation of the pros & cons of fiscal/monetary policy is developed in Topic 4.3 & Topic 4.4
Exam Tip
When evaluating any demand-side policy, avoid generalisations & focus on the effects of the specific policy mentioned. To strengthen any response, fully develop how each policy will increase total demand as this is part of your 'chain of analysis'. Always conclude by explaining the different elements of GDP (C + I + G + X - M) , inflation & output (real GDP)