• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Discuss the strengths and weaknesses of demand-side policies (fiscal and monetary policy)

Extracts from this document...

Introduction

Discuss the strengths and weaknesses of demand-side policies (fiscal and monetary policy) [18] Demand-side policies are a government's attempts to influence the level of growth of aggregate demand and hence the levels of employment, real GDP, inflation, growth and balance of payments position. A government will do this by using fiscal and monetary policies. Fiscal policies involve the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment. Monetary policies involve the use of interest rates to control the level and rate of growth of aggregate demand in the economy. Different types of demand-side policies can be used depending on the position of inflation in an economy. Reflationary demand-side policies seek to increase aggregate demand and raise the level of planned expenditure at or near the level of potential GDP. ...read more.

Middle

Government spending would decrease due to the nature of fiscal policy. Exports would increase due to an exchange rate that makes goods appear relatively cheaper for foreign countries to import, and imports would decrease as foreign goods appear relatively more expensive than before. A diagram showing the effects of reflationary policy The other type of demand-side policy which may be used is deflationary policy, which is used to decrease the level of aggregate demand, for instance in a situation where aggregate demand is running ahead of aggregate supply and thus causing inflationary pressures. Deflationary policy is very much the opposite of inflationary policy, with increased taxes as part of fiscal policy, leading to decreased consumer demand and decreased investment and thus decreased aggregate demand, with the addition of increased interest rates, further decreasing consumer demand and increasing imports, decreasing exports. All of these factors add up to a total decrease in aggregate demand. ...read more.

Conclusion

an economy with an increase in real GDP, employment and economic growth, and a decrease in unemployment, for a relatively low increase in inflation. However a change from AD2 --> AD3 would not be beneficial for an economy due to the amount of inflation for a relatively small amount of increase in growth, GDP and employment. This leads us onto the strengths and weaknesses of demand-side policies, because the change from AD1 --> AD2 is a great positive to come out of demand-side policy however AD2 --> AD3 is highly negative, which shows the strengths and weaknesses of the Keynesian LRAS curve. However it seems that there are far more weaknesses when referring to demand-side policies than there are strengths. For example, there are significant inaccuracies with regards to economic data. More often than not, data is collected many months before it is available and so it becomes out-of-date and so actions are made on data from months previous. ?? ?? ?? ?? ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Markets & Managing the Economy section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Here's what a teacher thought of this essay

4 star(s)

****
The writer covers the main points but mixes up fiscal and monetary policy. It would have been better to have dealt with them separately. S/he should also explain the transmission mechanisms, ie how they affect aggregate demand, more clearly.

Marked by teacher Dennis Salter 04/10/2013

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Markets & Managing the Economy essays

  1. Marked by a teacher

    Explain and illustrate the roles played by profit in allocating scarce resources within the ...

    5 star(s)

    However, not all firms seek to maximize profits and the assumption of profit maximization is not always applicable. Other objectives of firms include market dominance, survival, efficiency, revenue maximisation and satisfacing behavior depending on the type of market structure they are in.

  2. Marked by a teacher

    Essay: Discuss whether the Basic Economic Problem will ever be solved

    3 star(s)

    Advancing technology will play a big part in the future if we are to solve the Basic Economic Problem as it gives us more ideas and clues on our alternatives to the problem and help on how to solve them.

  1. Essay: 'Discuss how PPF theory, choice, scarcity and opportunity cost can be applied to ...

    in its economy to produce its operations at point 'A' then opportunity cost is happening as they are missing out on producing more 'heart' operations, this can be seen on the graph, where the points are lying on the curve.

  2. Using transport examples throughout, explain the impact of market structure on economic efficiency and ...

    Dynamic efficiency however could be experienced due to the abnormal profits being made, possibly being re-invested into the future of the firm and innovation. Using an example from the transport industry, the Virgin Trains service between Manchester and London is monopolistic, like many other mainline routes which are also franchised for a number of years.

  1. Discuss the policies that businesses might adopt to maintain sales when incomes are falling ...

    During a period falling real incomes, the firm would likely begin producing more inferior goods and fewer normal goods. This is because inferior goods have a negative value for their YED, thus as income falls, the demand for inferior goods rises.

  2. . . . the provision of speed cameras is a source of government failure ...

    Consequently, if speed cameras cause accidents, and the government knows about it, this emphasises that perhaps governments only install them to generate revenue source and one may question the mortality of this if lives are lost to only to raise revenue for the government.

  1. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers?

    However, in an article called 'The Benefits of Oligopolies,' Sam Vaknin ignores the effect of price signalling, saying it is easier to effect when there's only a Coke and a Pepsi, a Boeing and an Airbus in the market. He also ignores the problem of excessive political power, as large

  2. Discuss whether payment of government subsidies to farmers is a beneficial policy [12]

    reinvestments of profits back into the economy which further stimulates economic growth. Moreover, by allowing domestic producers to sell products at a similar price to foreign producers, exports are very likely to rise, thus helping improve the balance of trade, which can then help strengthen the currency, in turn incentivising

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work